Once again, the most magical day of the year has come around for any Australian finance whiz or political nut. But for your average joe, the Australian Federal Budget usually leaves us with more questions than answers. The Tuesday night announcement of the budget was, however, only the first Bill to be debated and finally passed in the Senate before it becomes law. This year we saw lower HECs debt repayment thresholds, higher tertiary education fees, an opportunity to salary sacrifice into your super for a first home buyer deposit, and a new tax for Australia’s five biggest banks.
Possibly the most widespread change to the budget is the Medicare Levy tax increase. If you have trouble fully grasping the finance jargon our Treasurer, Scott Morrison, blabbed out on your TV screens on Tuesday night, here’s our breakdown and some tips to help tackle it and end up saving more every year!
What exactly is the Medicare Levy?
The Australian Medicare Levy is a nationwide tax that is deducted from your taxable income to give Australian residents access to health care. The partial funding comes from taxpayers who originally paid 2% of their taxable income.
As always, there are reductions for low income earners, seniors, and pensioners. Exemptions are also allowed for people who meet certain medical requirements, are a foreigner or Norfolk Island resident, or you are not entitled to Medicare benefits. In light of this, there is also an additional tax if you are a high-income earner who does not have private hospital health insurance called the Medicare Levy Surcharge.
Both these taxes and any reductions are calculated from the information provided on your tax return.
So, what's the increase?
Firstly, don’t go shaking in your boots too soon. The increase is only 0.5% of your pre-tax income making the annual levy 2.5%. Also, the higher tax will not be rolled out until mid-2019 if it is passed in the Senate, so you have plenty of time to stress less about the increase.
Who does it affect?
Every taxpayer will be required to pay the Medicare Levy, however there are always exceptions to the rule. Lower income earners, seniors, and pensioners see a reduction and others are exempt entirely from the tax. However, to put this tax into perspective, a person earning a taxable income of $42,000 p.a. would usually pay $840 on the 2% levy. This is increased to $1050 p.a. once the higher tax comes into effect.
For one, Australia has one of the best healthcare systems in the world and what is to complain about subsidised healthcare services? In addition, this tax hike should give you the warm and fuzzies as the increase is budgeted to help fund the National Disability Insurance Scheme. The increase is expected to raise $8.2 billion dollars over the budget period and help many of those in need.
Match it for your loan
Seeing as the 0.5% spike will mean you are paying more tax, you could use this as an incentive to work out how much you are paying in your Medicare Levy and match it to put towards extra savings. At the end of the financial year when the tax man comes knocking, you could then put the money towards debts after gaining interest on it. For example, you could make an additional payment on your vehicle loan to knock down the remaining balance. If you save an extra $20.20 a week on a salary of $42,000, you will be able to match your increased Medicare Levy and pay $1050 to your financier at tax time.
Now you’ve got your breakdown, you can go away and start saving to decrease your repayments and pay off your car loan quicker should your financier allow it. Keeping in line with your schedule will make sure you don’t fall behind and keep you in check with your savings should the taxman ask for a little more this year than expected!
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