Medicare Levy Exemptions & Surcharge: Common ATO Audit Traps to Avoid

Each year, thousands of Australians incorrectly claim Medicare levy exemptions or under-report income for the Medicare Levy Surcharge (MLS) — leading to ATO audits, adjustments, and penalties.

Here’s what you need to know to stay compliant and avoid costly mistakes.

💡 What Are the Medicare Levy & MLS?

• The Medicare Levy is generally 2% of your taxable income, helping fund Australia’s public health system.
• The Medicare Levy Surcharge (MLS) is an extra 1–1.5% charged if:
• You earn above $93,000 (singles) or $186,000 (families), and
• You don’t have an appropriate level of private hospital insurance.

⚠️ Common Audit Traps & How to Avoid Them

🚩 Claiming a Full Medicare Levy Exemption Without Eligibility

Trap: Claiming an exemption because you “didn’t use Medicare” or were overseas temporarily.

✅ You can only claim an exemption if:

• You're a foreign resident, not entitled to Medicare.
• You're a temporary resident without Medicare rights.
• You have a Medicare entitlement statement from Services Australia.
• You meet specific low-income or special purpose criteria.

📌 The ATO checks these claims against Services Australia records.

🚩 Incorrect Family Threshold Claims for MLS

Trap: Failing to include your spouse's income or dependents, or misreporting private health coverage details.

✅ Remember:

• Family income includes your and your partner’s total income, not just taxable income.
• Children and dependents affect your MLS threshold.
• You must hold hospital cover (not extras-only) for the full financial year to avoid the surcharge.

📌 Even one day without compliant cover can trigger an MLS.

🚩 Not Reporting Adjusted Taxable Income (ATI) Properly

Trap: Underreporting income that affects your MLS, such as:

• Reportable fringe benefits
• Super contributions (salary sacrifice)
• Net investment losses (e.g. from rental properties)

✅ The ATO uses adjusted taxable income (ATI), not just your basic taxable income.

📁 Be Audit-Ready

To stay compliant:

• Keep your private health insurance policy statement for the full year.
• Don’t guess – check your Services Australia Medicare status.
• Declare all relevant income that affects the MLS threshold.
• Consult your tax adviser before claiming an exemption.

Medicare levy exemptions and surcharges are small boxes on your tax return — but big audit risks if misunderstood. Let us help you get it right the first time.

Disclaimer for External Distribution Purposes:

The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. The receiver of this document accepts that this publication may only be distributed for the purposes previously stipulated and agreed upon at subscription. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Falconbridge office or Luera office in Blue Mountains office to arrange a one-on-one consultation. Just Book Free Consulation up on the right to find the appointment options.

 Yan Qi CA

Mobile: 0403 050 779

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.