License article

The loophole that lets you keep the health rebate

Prompt action will secure your health cover rebate.

It's T-minus 55 days until a new tax year begins. Which means you have that much time to beat means testing of the health insurance rebate.

It took the government three attempts to get it through Parliament but come July 1, the current 30 per cent tax rebate will phase out for singles between incomes of $84,001 and $130,001 and for couples between $168,001 and $260,001 (see table).

The average single can expect to pay up to $400 more in premiums annually, while couples might be out of pocket double that amount.

But if this has you tempted to drop cover, I can give you three reasons not to.

First, you'll pay anyway - and possibly even more than you're already forking out for premiums. As the sweetener shrinks so the surcharge swells.

The 1 per cent Medicare levy surcharge (MLS) that applies once you hit the incomes above if you don't have qualifying hospital cover is ratcheting up to 1.25 per cent from $97,001 and $194,001 (singles and couples) and to 1.5 per cent above $130,000 and $260,000.


In other words, the more you earn, the bigger the tax penalty. For example, make even $1 more than the upper limit for singles ($130,000) and your MLS will jump from $1290 today (2011-12 thresholds) to $1950 on July 1.

That amount of money can buy you some pretty decent health insurance.

To the second reason to keep cover: for one year at least, despite the government's best efforts, it's actually possible to pay less for it.

This is a lovely little loophole where you prepay next year's premium as soon as possible and lock in both the rebate and potentially a discount for paying annually.

Regardless of whether you are eligible after July 1, you will retain the full rebate for an additional year.

And you'll avoid any loading levied on monthly premiums if that's how you currently pay.

Adviser to the advisers, Strategy Steps, has crunched the savings for me using quoted rates from the HBF website for a sample case study of a single female in NSW.

For hospital-only cover, the annual cost is $1567, for which a $470 rebate would be paid this year. Pay monthly and it's about 4 per cent or $62 more.

 A person who expects to earn $130,000 in 2012-13 (so will not qualify for any rebate) comes out $532 ahead by prepaying - retaining the full 30 per cent and securing the quoted premium saving.

 A person who will make $97,001-$130,000 (so still qualify for 10 per cent of the rebate) is better off by $313 (rebate) plus $55 (premium discount), or $368 in total.

 A person on $84,001-$97,000 (so who still qualifies for 20 per cent of the rebate) saves $157 plus $49, or $206.

The more you earn the bigger the incentive to act. And if you add extras (at an annual cost from HBF of $1871; $561 rebate, $75 annual payment discount), the prepay benefit on the above scenarios jumps to $636, $442 and $247 respectively.

While the ATO has yet to rubber stamp the strategy, it's full steam ahead as far as insurers are concerned. Some are even letting you pay more than 12 months in advance - mine allows 13; it simply comes down to what their systems can handle. They say you'll lock in the rebate for that entire time.

And remember that the rate climbs to 35 per cent from age 65 and to 40 per cent from 70, so earners of these ages stand to save more again.

Need a third reason to stick with private health? You could probably cut the cost far further. A different provider could well give you more cover for less cost. And be aware there are no waiting periods if you already qualify for treatment with your existing insurer.

Means test or not, health cover is by no means created equal. Use the July 1 deadline to, quite literally, give yours a health check.

Nicole is also the editor of Smart Investor magazine. Follow her on Twitter at @NicolePedMcK.