The government has introduced legislation from 1 July 2012 to means test an individual’s entitlement to the rebate on their private health insurance premiums.
Prior to 1 July 2012, individuals who had a complying health insurance policy with a registered health insurer were entitled to a minimum tax offset of 30% and a maximum of 40% (depending on the age of the eldest member of the policy), which is claimed by way of one of the following three methods:
- Claiming a lump sum from Medicare;
- A reduction in health insurance premiums; or
- Claiming the rebate as a refundable tax offset in the income tax return.
The new means test will reduce the rebate amount available to individuals, depending on their personal and/or family income levels.
Who will it affect for 2012/13?
Generally, the means testing will not affect singles who earn less than $84,000 per annum or couples/family with a combined income of less than $168,000. Individuals whose income levels are above these thresholds will fall into one of three income-based tiers. Each tier will lower the rebates available to the taxpayer. The rebate will be phased out completely to singles earning more than $130,000 or couples/family earning more than $260,000.
Please note that the reference to income throughout this Client Alert refers to Medicare Levy Surcharge Income (follow this link for details) and is a variation from your taxable income to add on items such as reportable fringe benefit amounts, reportable superannuation contributions and total net investment losses.
How will it be regulated?
We understand that some health funds have already corresponded with their policy holders to suggest nominating their income tiers to them so that an appropriate rebate percentage can be reflected in their premium instalment payments from 1 July 2012.
At the time of issue of this Client Alert, the Tax Office and Medicare have not released any information as to how they will handle the new legislation. However we expect that individuals who nominated themselves in a Tier offering a higher rebate than what they were entitled to would have to pay back the shortfall through their next Income Tax Return.
How could prepaying premiums prior to 30 June 2012 preserve your rebate in light of the new legislation?
There have been numerous articles in the media that have circulated suggesting those who could have a lower or no rebate due to their income levels, prepay their premiums in advance prior to 30 June 2012 to be entitled to the full rebate for the full 2013 income year (and possibly longer).
The ATO issued an Interpretative Decision back in 2004 indicating that taxpayers could preserve their entitlement to the full rebate amount when prepaying a premium in a previous income year, despite the fact that the coverage period relates to the following income year.
Prepayment options differ from one Private Health Insurance provider to another, but some Funds are offering the ability for taxpayers to prepay their premiums for up to 30 months in advance.
The ATO Interpretative Decision does not give any indication of the maximum prepayment period to secure the rebate in the year of payment.
If you believe that you may be affected by this legislation, we suggest that you get in touch with your Private Health Insurance provider to establish if they will accept a prepayment, for what period and if they will allow the full rebate as a reduction in the prepaid premium.
If you have any queries in respect to this matter, please do not hesitate to contact your Blaze Acumen adviser.