Act now to save on private health cover

Co-founder of the Switzer Report
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This has nothing to do with super. However, as it is a one-off opportunity that will affect many of you, and you only have 26 days or less to act, I trust you will forgive this deviation from the norm. I saved over a $1,000 by pre-paying my private health insurance for next year and accessing the tax rebate (offset) now – and many of you will be in the same position.

I was pretty sceptical when I first heard about this some weeks ago and I didn’t give it too much more thought. However, now that I’ve checked with my health insurer, paid the lower premium, and established the basis that makes this possible, it is time to go into print.

What are you saving?

The basis goes back to an ATO Interpretative Decision (ATO ID 2004/713) that says a taxpayer is entitled to the 30% private insurance tax offset for premiums paid that cover the taxpayer for an income year other than the current year. The tax offset is being abolished for many taxpayers from 1 July, so this means that you can prepay next year’s private health insurance now and apply the offset to effect a reduced premium – potentially a saving of up to 30%!

The changes

The private health insurance rebate is being means tested from 1 July, which means eligibility will depend on your income and age. The following table sets out the new rebates:

Private Health Insurance Rebates – from 1 July 2012

 * The family thresholds increase by $1,500 for the second and each additional dependent child.

The definition of income

As always, ‘income’ is not straightforward. Income for the rebate is your taxable income, plus reportable fringe benefits, plus reportable super contributions (amounts your employer pays in excess of the 9% and salary sacrifice amounts, or if self employed, amounts you claim as a tax deduction) plus net investment losses. The latter includes losses on borrowing money to invest in shares, or from investing in negatively geared properties.

For example, if you are single and your taxable income is $100,000, you salary sacrifice $15,000 into super, and you make a loss of $20,000 on an investment property, your ‘income’ for calculating eligibility to the rebate is $135,000 – you aren’t eligible!

And the Medicare Levy Surcharge

If you don’t have private hospital cover, you may be liable to pay the Medicare levy surcharge. Again, ‘eligibility’ is based on income, using the same definition above. The thresholds are:

* The family thresholds increase by $1,500 for the second and each additional dependent child.

Note: while eligibility to pay the levy is based on the broader definition of income described above, the actual levy is only applied to your taxable income and reportable fringe benefits. That said, in addition to any health benefits, it will still make financial sense for most moderate to high-income earners to hold private health insurance.

How to prepay your health insurance

You need to act quickly because the Health Insurance Funds may impose early cut-offs. Contact your fund.

The starting point for me was to complete and return an ‘Application to receive the Federal Government’s 30% Rebate as a reduced premium’ form, obtain a quote, and then make the payment. There is a little bit of a process, however, I’m not complaining – over $1,000 saved give or take a bit of foregone interest is worth doing. I won’t have this opportunity next year.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Any individual should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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