ATO Interpretative Decision

ATO ID 2010/122 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance relating to the issue addressed in this ATO ID can be found in Private health insurance rebate (QC 49962).
  This document has changed over time. View its history.

Issue

Is a co-payment payable by a taxpayer under a complying health insurance policy (CHIP) that covers hospital treatment taken into account in calculating the excess payable in respect of benefits under the policy for the purposes of paragraph 3(5)(b) of the Medicare Levy Act 1986 (MLA)?

Decision

No. A co-payment payable by a taxpayer under a CHIP that covers hospital treatment is not taken into account in calculating the excess payable in respect of the benefits under the policy for the purposes of paragraph 3(5)(b) of the MLA.

Facts

The taxpayer's income for surcharge purposes and the combined income for surcharge purposes of the taxpayer and their spouse exceed the relevant Medicare levy surcharge thresholds.

The taxpayer and their spouse have hospital treatment cover under a CHIP within the meaning of the Private Health Insurance Act 2007.

The excess payable in respect of benefits under the policy is less than the amount specified in paragraph 3(5)(b)of the MLA in any 12 month period.

The taxpayer is also required to pay a co-payment, calculated as a fixed daily amount or as a percentage of the cost of a treatment or service.

Neither the taxpayer nor their spouse is a prescribed person as defined in section 251U of the Income Tax Assessment Act 1936 (ITAA 1936).

Reasons for Decision

Section 8D of the MLA provides that the amount of Medicare levy payable by a married person is increased by 1% of the person's taxable income (the surcharge) if:

•

the sum of their income and the income of their spouse for surcharge purposes exceeds the family surcharge threshold;

•

their income for surcharge purposes exceeds the amount specified in paragraph 8D(3)(c) of the MLA;

•

they, or at least one of their dependants, are not covered by an insurance policy that provides private patient hospital cover; and

•

they are not a prescribed person as defined in section 251U of the ITAA 1936.

For the purposes of the MLA, a person is covered by a private health insurance policy if the policy is a CHIP that covers hospital treatment and any excess payable by the person in respect of benefits under the policy is less than the amounts specified in paragraph 3(5)(b) of the MLA.

The term excess is not defined in the Acts administered by the Commissioner. Excess is also not defined in the Private Health Insurance Act 2007, which determines whether a private health insurance policy is a CHIP. However, the Explanatory Memorandum to the Bills that introduced the private health insurance legislative framework (refer to Other References) contains a Glossary which considers the meaning of the term and provides a useful guide. An excess is the specified amount the policy holder agrees to pay towards the total cost of a hospital treatment before health fund benefits are payable.

In contrast, a co-payment is an amount the contributor agrees to pay in relation to a particular treatment or service which is part of the overall hospital treatment: that is, that part paid by the contributor of the cost of a treatment or service provided during a hospital stay as part of the hospital treatment. It can be calculated as a fixed daily amount or as a percentage of the cost of the treatment or service.

An excess is therefore different from and does not include a co-payment. This distinction was also drawn in the Supplementary Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2000 when the terms front-end deductible and excess were used synonymously and contrasted with the term co-payment:

A co-payment, which is an out of pocket expense dependent on the cost of hospital treatment, is not a front-end deductible. A co-payment arises due to the difference between the amount the health fund is prepared to pay, as specified in the applicable benefits arrangement, and the cost of treatment determined by the hospital.

A co-payment is not taken into account under paragraph 3(5)(b) of the MLA in determining whether a person is covered by an insurance policy that provides private patient hospital cover for the purposes of the Medicare levy surcharge provisions.

As the taxpayer is covered by a CHIP that covers hospital treatment and any excess payable under the policy is no more than the threshold specified in paragraph 3(5)(b) of the MLA, the taxpayer is not subject to the Medicare levy surcharge under section 8D of the MLA.

Year of income:  Year ended 30 June 2009

Legislative References:
A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999
   Division 4
   subsection 4(1)

ATO Interpretative Decisions overturned by this decision
ATO ID 2003/130

Other References:
Explanatory Memorandum to the Private Health Insurance Bill 2006
Private Health Insurance (Transitional Provisions and Consequential Amendments) Bill 2006
Private Health Insurance (Prosthesis Application and Listing Fees) Bill 2006
Private Health Insurance (Collapsed Organization Levy) Amendment Bill 2006
Private Health Insurance Complaints Levy Amendment Bill 2006
Private Health Insurance (Council Administration Levy) Amendment Bill 2006
Private Health Insurance (Reinsurance Trust Fund Levy) Amendment Bill 2006
Supplementary Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2000

Keywords
Medicare levy surcharge

Business Line:  Small Business/Individual Taxpayers

Date of publication:  4 June 2010

ISSN: 1445-2782