Medicare Levy in Australia

AU Medicare Levy

AU Medicare Levy

Australia Medicare Levy and Medicare Levy Surcharge Skill v2.3

Section 1 -- Quick reference

Read this whole section before computing anything.

Quick reference table

Field	Value
Country	Australia
Jurisdiction Code	AU
Primary Legislation	Medicare Levy Act 1986 (MLA 1986); A New Tax System (Medicare Levy Surcharge -- Fringe Benefits) Act 1999
Supporting Legislation	ITAA 1936 Part VIIB (Medicare levy); Medicare Levy Act 1986 ss 8B–8G (MLS); Health Insurance Act 1973; Private Health Insurance Act 2007
Tax Authority	Australian Taxation Office (ATO)
Tax Year	2025-26 (1 July 2025 -- 30 June 2026)
Standard Medicare Levy Rate	2% of taxable income
MLS Rates	1.0% / 1.25% / 1.5% (income-dependent, for those without appropriate PHI)
Return Items	Item M1 (Medicare levy reduction or exemption); Item M2 (Medicare levy surcharge)
Currency	AUD only
Contributor	Open Accountants
Validation Date	August 2026
Skill version	2.3
Confidence Coverage	Tier 1: standard levy, low-income reduction, surcharge tiers, family thresholds. Tier 2: half-year exemptions, part-year residents, PHI rebate tier selection. Tier 3: Norfolk Island transitional, diplomatic exemptions, prescribed overseas forces.

Low-income reduction thresholds (2025-26)

Category	Lower Threshold (no levy)	Upper Threshold (full levy)	Shade-in Rate
Single (general)	$28,011	$35,013	10 cents per $1
Single (SAPTO-entitled)	$44,268	$55,335	10 cents per $1
Family (general)	$47,238 (+ $4,338 per child)	$59,047 (+ $5,423 per child)	See Section 5
Family (SAPTO-entitled)	$61,623 (+ $4,338 per child)	$77,028 (+ $5,423 per child)	See Section 5

MLS thresholds (2025-26) -- singles

Tier	Income for MLS Purposes	MLS Rate
Base	$101,000 or less	0.0%
Tier 1	$101,001 -- $118,000	1.0%
Tier 2	$118,001 -- $158,000	1.25%
Tier 3	$158,001+	1.5%

MLS thresholds (2025-26) -- families

Tier	Family Income for MLS	MLS Rate
Base	$202,000 or less	0.0%
Tier 1	$202,001 -- $236,000	1.0%
Tier 2	$236,001 -- $316,000	1.25%
Tier 3	$316,001+	1.5%

• Family income threshold increase per additional child — The family income threshold increases by $1,500 for each MLS dependent child after the first child. AUD

PHI rebate tiers (2025-26) -- rates from 1 July 2025 to 31 March 2026

Tier	Singles Income	Families Income	Rebate (under 65)	Rebate (65-69)	Rebate (70+)
Base	$101,000 or less	$202,000 or less	24.288%	28.337%	32.385%
Tier 1	$101,001 -- $118,000	$202,001 -- $236,000	16.192%	20.240%	24.288%
Tier 2	$118,001 -- $158,000	$236,001 -- $316,000	8.095%	12.143%	16.192%
Tier 3	$158,001+	$316,001+	0.000%	0.000%	0.000%

The rebate adjustment factor applies each 1 April (a percentage of the CPI increase measured against the average premium increase), so within-year rebate percentages step down:

PHI rebate tiers (2025-26) -- rates from 1 April 2026 to 30 June 2026

Tier	Singles Income	Families Income	Rebate (under 65)	Rebate (65-69)	Rebate (70+)
Base	$101,000 or less	$202,000 or less	24.118%	28.139%	32.158%
Tier 1	$101,001 -- $118,000	$202,001 -- $236,000	16.079%	20.098%	24.118%
Tier 2	$118,001 -- $158,000	$236,001 -- $316,000	8.038%	12.058%	16.079%
Tier 3	$158,001+	$316,001+	0.000%	0.000%	0.000%

Conservative defaults

Ambiguity	Default
Unknown residency status	Australian resident (levy applies)
Unknown marital status	Single (use individual thresholds)
Unknown PHI status	No appropriate cover (MLS applies if income exceeds threshold)
Unknown SAPTO entitlement	Not entitled (use general thresholds)
Unknown MLS income components	Obtain the missing amounts; do not treat unknown reportable super, fringe benefits or losses as zero

Section 2 -- Required inputs and refusal catalogue

Required inputs

• Required inputs before computing Medicare levy — Before computing any Medicare levy figure, you MUST know: 1. Residency status for tax purposes -- Australian resident, foreign resident, or temporary resident; 2. Taxable income for the year -- Medicare levy is calculated on taxable income; 3. Marital/family status -- single, married/de facto, with or without dependent children; 4. Number of dependent children -- affects family threshold; 5. Spouse's taxable income -- affects family threshold eligibility and MLS; 6. Private health insurance status -- does the client (and family) hold appropriate private patient hospital cover for the full year?; 7. Any days of exemption? -- foreign resident days, specific medical condition categories; 8. Entitlement to SAPTO? -- seniors and pensioners get higher Medicare levy reduction thresholds ((s 6); s 8)); s 8)); s 6); s 8))

Refusal catalogue

• R-AU-ML-1 — Diplomatic or prescribed overseas forces exemption. Trigger: client claims exemption on diplomatic or overseas forces grounds. Message: "Diplomatic and prescribed overseas forces Medicare levy exemptions require verification of eligibility that is outside this skill's scope. Please escalate to a qualified tax agent."
• R-AU-ML-2 — Norfolk Island transitional provisions. Trigger: client is a Norfolk Island resident claiming transitional provisions. Message: "Norfolk Island transitional Medicare levy provisions are outside this skill's scope. Please escalate to a qualified tax agent."
• R-AU-ML-3 — Complex partial-year residency with multiple visa changes. Trigger: client has more than two residency status changes during the income year. Message: "Multiple residency status changes during the year require detailed analysis of each period. Please escalate to a qualified tax agent for pro-rata computation."

Section 3 -- Payment pattern library

This is the deterministic pre-classifier for bank statement entries related to Medicare levy. Match by case-insensitive substring on the counterparty name or transaction description.

3.1 ATO assessment payments (levy is embedded in tax assessment)

ATO assessment payments patterns

Pattern	Treatment	Notes
ATO, AUSTRALIAN TAXATION OFFICE	ASSESSMENT COMPONENT	Medicare levy is not paid separately; it is included in the ATO assessment. The levy line appears on the Notice of Assessment.
ATO INTEGRATED CLIENT ACCOUNT	ASSESSMENT COMPONENT	PAYG instalment or tax payment that includes Medicare levy component
REFUND - ATO, TAX REFUND	ASSESSMENT COMPONENT	Refund may include overpaid Medicare levy

3.2 Private health insurance premium payments (PHI rebate interaction)

PHI premium payment patterns

Pattern	Treatment	Notes
MEDIBANK, MEDIBANK PRIVATE	PHI PREMIUM	Premium reduces MLS exposure; check rebate tier
BUPA, BUPA HI PTY	PHI PREMIUM	Same
HCF, HOSPITALS CONTRIBUTION FUND	PHI PREMIUM	Same
NIB, NIB HEALTH FUNDS	PHI PREMIUM	Same
HBF, HBF HEALTH	PHI PREMIUM	Same
AHSA, AHM, AUSTRALIAN HEALTH	PHI PREMIUM	Same
TEACHERS HEALTH, DEFENCE HEALTH	PHI PREMIUM	Same
FRANK HEALTH, GMHBA	PHI PREMIUM	Same
HEALTH INSURANCE, PRIVATE HOSPITAL	PHI PREMIUM	Generic match -- confirm cover is "appropriate" (excess no more than $750 singles / $1,500 families)

3.3 Medicare Safety Net and PBS co-payments (not levy-related)

Non-levy patterns to exclude

Pattern	Treatment	Notes
MEDICARE, SERVICES AUSTRALIA	EXCLUDE from levy calculation	Medicare benefit payment or Safety Net threshold -- not a levy transaction
PBS, PHARMACEUTICAL BENEFITS	EXCLUDE	Co-payment, not levy
BULK BILL, MEDICAL CENTRE	EXCLUDE	Healthcare payment, not levy

Section 4 -- Levy computation rules

4.1 Standard Medicare Levy (Tier 1)

• Standard Medicare levy formula — Medicare levy = taxable income x 2% (Medicare Levy Act 1986 s 6)
• Basis of calculation — The Medicare levy is calculated on taxable income (not gross income, not adjusted taxable income). It is applied automatically by the ATO when the tax return is assessed. (Medicare Levy Act 1986 s 6)

4.2 Low-income reduction -- singles (Tier 1)

• Low-income reduction formula for singles — If taxable_income <= $28,011: Medicare levy = $0. If $28,011 < taxable_income <= $35,013: Medicare levy = (taxable_income - $28,011) x 10%. If taxable_income > $35,013: Medicare levy = taxable_income x 2%. (Medicare Levy Act 1986 s 7; s 7)); s 7)))
• Shade-in rate explanation — The shade-in rate of 10% means the levy increases by 10 cents for every dollar earned above the lower threshold, until the reduced levy equals the standard 2% levy (which occurs at the upper threshold). (Medicare Levy Act 1986 s 7; s 7))
• SAPTO substitution for singles — For SAPTO-entitled singles: substitute $44,268 for $28,011, and $55,335 for $35,013. (Medicare Levy Act 1986 s 7)

4.3 Low-income reduction -- families (Tier 1)

• Family threshold formula — Family threshold = $47,238 + ($4,338 x number_of_dependent_children) (Medicare Levy Act 1986 s 8)
• SAPTO family threshold formula — For SAPTO-entitled families: Family threshold = $61,623 + ($4,338 x number_of_dependent_children)
• Family upper threshold (full levy) — The reduction phases out entirely at the upper family income threshold: $59,047 (+ $5,423 per dependent child), or $77,028 (+ $5,423 per child) when SAPTO-entitled. Above it the full 2% levy applies. (Medicare Levy Act 1986 s 8)
• Family threshold effect — Family income at or below the family threshold: no Medicare levy payable for either spouse. Family income above the family threshold: each spouse pays their individual share, subject to individual reduction rules. (Medicare Levy Act 1986 s 8)
• Family income for ordinary Medicare levy — Start with the spouses’ combined taxable incomes, applying the statutory adjustments for this calculation. Do not add reportable super contributions or net investment losses merely because they enter the MLS threshold calculation. Calculate each person’s levy reduction under s 8. (Medicare Levy Act 1986 s 8)

MLS computation base

• MLS computation base — Select the tier using income for surcharge purposes, including the relevant family threshold. Compute each person’s surcharge on their statutory base: taxable income, reportable fringe benefits and relevant family-trust distribution amounts, subject to applicable exclusions. Do not add reportable super or net investment losses to that base merely because they affect the tier. Apply the individual low-income exemption and covered/exempt days: base × rate × liable days / days in year. (ATO MLS income and rates)

4.4 Medicare Levy Surcharge (Tier 1)

• MLS overview — The MLS is a separate levy on top of the standard 2% Medicare levy. It applies to taxpayers who do NOT hold appropriate private patient hospital cover and whose income exceeds the MLS threshold. (Medicare Levy Act 1986 ss 8B–8G)
• Income for MLS threshold purposes — Start with taxable income and add reportable fringe benefits, reportable super contributions, total net financial-investment and rental losses, and relevant family-trust distribution amounts. Apply the statutory exclusions, including relevant super lump-sum and FHSS amounts, without counting taxable amounts twice. Child support paid is not a general deduction from this measure. Establish each spouse’s figures and family circumstances. (ATO MLS income and rates)
• MLS pro-ration and appropriate cover definition — MLS is pro-rated for each day the client (and/or dependants) do not have appropriate private hospital cover. Appropriate cover means private patient hospital cover with an excess of no more than $750 for singles or $1,500 for families/couples. (Medicare Levy Act 1986 ss 8B–8G)
• Family threshold applies regardless of spouse income — If married/de facto, the family threshold applies regardless of whether the spouse earns income. (Medicare Levy Act 1986 ss 8B–8G)

4.5 PHI rebate interaction (Tier 1)

• PHI rebate vs MLS purposes — The PHI rebate and the MLS use the same income tiers but serve opposite purposes. PHI rebate is a government subsidy for holding private health insurance (reduces with higher income). MLS is a penalty for NOT holding private health insurance (increases with higher income). (Private Health Insurance Act 2007 Part 2-2; ITAA 1997 Div 61)

Planning note: For clients in Tier 1 or Tier 2 MLS, holding private hospital cover eliminates the MLS AND provides the PHI rebate. The cost of private cover is often less than the MLS, making it financially beneficial.

Section 5 -- Exemptions and special categories

5.1 Full exemption categories (Tier 1)

Full exemption categories table

Category	Exemption
Foreign residents (for the full year)	Full exemption from Medicare levy for the entire year
Temporary residents not entitled to Medicare	Obtain the Medicare Entitlement Statement for the dates claimed and apply dependent/full/half exemption conditions; a visa and non-enrolment alone do not establish entitlement

5.2 Half or partial exemption categories (Tier 2)

Half or partial exemption categories table

Category	Exemption
Part-year residents	Pro-rata exemption for non-resident days. Flag for reviewer.
Medical exemption category	Verify the prescribed condition and dependent rules before determining full or half exemption; blindness alone does not settle every family case
Specific medical conditions (Category 2)	Persons in specified care -- partial or full exemption depending on circumstances. Flag for reviewer.

5.3 Reciprocal Health Care Agreements (Tier 2)

• Reciprocal health care agreements — Australia has reciprocal health care agreements with several countries (UK, Ireland, New Zealand, Sweden, Netherlands, Belgium, Finland, Italy, Norway, Slovenia, Malta). Residents of these countries visiting Australia may be entitled to Medicare and therefore NOT exempt from the levy. Flag for reviewer to confirm coverage.
• Foreign-resident exemption and M1 — Establish tax residency and the exempt days under the applicable category. Reciprocal-agreement status or enrolment is not an extra condition on the full-year foreign-resident tax exemption. Complete M1 and relevant spouse/dependent details using the year’s instructions.

Section 6 -- Completing the tax return

6.1 Item M1 -- Medicare levy reduction or exemption

• When to complete M1 — Complete M1 if: taxable income is within the low-income shade-in range; you are claiming a full or half exemption; you had a spouse during the year.

6.2 Item M2 -- Medicare levy surcharge

• When to complete M2 — Complete the compulsory question, including the full-year hospital-cover answer and required days, even if the surcharge is nil. Verify the taxpayer’s and dependants’ appropriate cover. (ATO M2 instructions)

Calculation checks for distinct MLS income measures

• Single, full-year liable, no appropriate cover: taxable income $100,000 plus $10,000 reportable super gives threshold income $110,000 but a $100,000 surcharge base. At the 2025–26 1% tier, MLS is $1,000.
• Single, full-year liable, no cover: taxable income $110,000 plus $15,000 reportable super gives threshold income $125,000 and base $110,000. The 1.25% tier gives $1,375.
• A combined family threshold income alone does not determine the family’s dollar liability. Calculate each spouse separately using their base, exemption and liable days.

ATO MLS income and rates.

Section 7 -- Edge case registry

EC1 -- Part-year resident (Tier 2)

Situation: Client was a foreign resident for 3 months then became an Australian resident for the remaining 9 months. Resolution: Medicare levy is calculated on the full year's taxable income, but a pro-rata exemption applies for the non-resident period. The exemption is calculated as: (exempt days / total days in year) x total Medicare levy. Flag for reviewer -- residency determination is complex.

EC2 -- Couple where one spouse has PHI and the other does not (Tier 2)

Situation: Client has private hospital cover but their spouse does not. Resolution: The MLS applies to BOTH spouses unless ALL family members (including dependants) hold appropriate cover. If the spouse is not covered, MLS is payable by both on their respective taxable incomes. Flag for reviewer.

EC3 -- Client earns just above the low-income threshold (Tier 1)

Situation: Single client with taxable income of $29,000. Resolution: Shade-in applies. Medicare levy = ($29,000 - $28,011) x 10% = $98.90. This is less than the full 2% levy of $580.00.

EC4 -- Client has net investment losses inflating MLS income (Tier 2)

Situation: Client's taxable income is $90,000 but has a net rental property loss of $15,000 (deducted from taxable income). Income for MLS purposes = $90,000 + $15,000 = $105,000. Resolution: Even though taxable income is below $101,000, income for MLS purposes exceeds $101,000 and MLS applies at 1.0% if no private hospital cover is held. Flag for reviewer -- confirm MLS income calculation.

EC5 -- SAPTO-entitled pensioner with low income (Tier 1)

Situation: Pensioner aged 68, taxable income $45,000, entitled to SAPTO. Resolution: SAPTO singles threshold is $44,268 (lower) and $55,335 (upper). At $45,000, the shade-in applies: ($45,000 - $44,268) x 10% = $73.20. Full 2% levy would be $900.00. The reduced amount of $73.20 applies.

EC6 -- Family with 4 dependent children (Tier 1)

Situation: Family with 4 dependent children, combined family income $55,000. Resolution: Family threshold = $47,238 + ($4,338 x 4) = $64,590. Family income of $55,000 is below the threshold. No Medicare levy payable.

EC7 -- MLS with private hospital cover held for part of year (Tier 2)

Situation: Client held appropriate PHI for 200 days of the year, no cover for 165 days. Single, taxable income, threshold income and surcharge base each $120,000; no other adjustments or exemptions. Resolution: MLS is pro-rated for the 165 uncovered days. MLS = $120,000 x 1.25% x (165/365) = $678.08 (approximately). Flag for reviewer -- confirm exact uncovered days.

Section 8 -- Reviewer escalation protocol

When a Tier 2 situation is identified:

REVIEWER FLAG
Tier: T2
Client: [name]
Situation: [description]
Issue: [what is ambiguous]
Options: [possible treatments]
Recommended: [most likely correct treatment and why]
Action Required: Qualified practitioner must confirm before advising client.

When a Tier 3 situation is identified:

ESCALATION REQUIRED
Tier: T3
Client: [name]
Situation: [description]
Issue: [outside skill scope]
Action Required: Do not advise. Refer to qualified practitioner. Document gap.

Section 9 -- Test suite

Test 1 -- Standard Medicare levy, no reduction

Input: Single, Australian resident, taxable income $80,000. Has PHI. Expected output: Medicare levy = $80,000 x 2% = $1,600.00. No MLS (has PHI).

Test 2 -- Low-income reduction (single)

Input: Single, taxable income $30,000. No spouse. Expected output: Shade-in applies. Levy = ($30,000 - $28,011) x 10% = $198.90.

Test 3 -- Below low-income threshold

Input: Single, taxable income $25,000. Expected output: Medicare levy = $0. Below $28,011 lower threshold.

Test 4 -- MLS Tier 1 (single, no PHI)

Input: Single, taxable income, threshold income and surcharge base each $105,000. No private hospital cover for the full year; no other adjustments or exemptions. Expected output: Medicare levy = $105,000 x 2% = $2,100.00. MLS = $105,000 x 1.0% = $1,050.00. Total Medicare-related charges = $3,150.00.

Test 5 -- MLS Tier 3 (single, no PHI)

Input: Single, taxable income, threshold income and surcharge base each $200,000. No private hospital cover for the full year; no other adjustments or exemptions. Expected output: Medicare levy = $200,000 x 2% = $4,000.00. MLS = $200,000 x 1.5% = $3,000.00. Total = $7,000.00.

Test 6 -- Family below family threshold

Input: Family, 2 dependent children, combined family income $50,000. Expected output: Family threshold = $47,238 + ($4,338 x 2) = $55,914. Family income $50,000 < $55,914. No Medicare levy payable.

Test 7 -- Foreign resident full exemption

Input: Foreign resident for the full year. Taxable income $60,000 (Australian-sourced). Expected output: Full Medicare levy exemption. Levy = $0. Must complete item M1.

Test 8 -- MLS family threshold with children

Input: Married couple with 3 dependent children. Each spouse has taxable income, threshold income and surcharge base of $105,000. Both lack appropriate cover all year, with no other adjustments or exemptions. Combined threshold income is $210,000. Expected output: Family MLS threshold = $202,000 + ($1,500 x 2 children after the first) = $205,000. Income $210,000 > $205,000. MLS Tier 1 = 1.0% applies, so each spouse pays $105,000 x 1.0% = $1,050, for a combined $2,100. This result depends on the stated separate bases and liability conditions.

Section 10 -- Prohibitions and disclaimer

Prohibitions

• Prohibitions list — - NEVER apply the Medicare levy to a confirmed full-year foreign resident - NEVER ignore the MLS income definition -- it is NOT the same as taxable income (includes reportable fringe benefits and net investment losses) - NEVER tell a client they avoid MLS simply because their taxable income is below $101,000 -- check income for MLS purposes - NEVER apply the general low-income threshold ($28,011) to a SAPTO-entitled senior -- use the SAPTO thresholds ($44,268 / $55,335) - NEVER assume PHI eliminates MLS unless the cover is "appropriate" (private patient hospital cover with excess no more than $750 singles / $1,500 families) - NEVER present Medicare levy figures as definitive -- always label as estimated and direct client to their ATO assessment for confirmation - NEVER advise on diplomatic or prescribed overseas forces exemptions -- escalate - NEVER confuse the Medicare levy (2% on taxable income) with the Medicare Levy Surcharge (1%–1.5% on the statutory surcharge base, with the tier selected using income for MLS purposes) -- they are separate charges

Disclaimer

This skill and its outputs are provided for informational and computational purposes only and do not constitute tax, legal, or financial advice. Open Accountants and its contributors accept no liability for any errors, omissions, or outcomes arising from the use of this skill. All outputs must be reviewed and signed off by a qualified professional (such as a CPA, CA, tax agent, or equivalent licensed practitioner in your jurisdiction) before filing or acting upon.