Help with medical expenses through the tax system to end

Help with medical expenses through the tax system to end

In this, my last column for this year, I thought I would look at an issue that goes to the hip-pocket nerve of us all – medical expenses.

For many years, the government has used the tax system to help people with the cost of their medical expenses e.g. doctors’ fees, chemist bills for prescriptions, dental fees, hospital fees, etc. This has been done via the medical expenses tax offset (previously known as a tax rebate). It gives taxpayers a tax offset (i.e. it reduces their tax payable) for their net out-of-pocket medical expenses (i.e. after rebate from their health fund) over a certain threshold level. 

The offset became means tested with effect from 1 July 2012. In 2012-13, the offset was 20% of net medical expenses over $2120 for single taxpayers with adjusted taxable income of $84,000 or less, and families with a combined adjusted taxable income of $168,000 or less. For taxpayers with adjusted taxable income over these income thresholds, the offset was 10% of net medical expenses over $5000.

Currently, there is no monetary limit to the total offset a taxpayer is eligible for, but the amount of offset received is limited by the taxpayer’s tax liability. That is, a taxpayer cannot receive a greater amount of offset than their basic income tax liability.

Medical expenses are a growing cost for many in the community as well as for the government itself. However, the tax offset is set to end over the next six years.

The government recently released draft legislation to implement the Labor government’s 2013-14 budget announcement to phase-out the net medical expenses tax offset. The government announced that it would proceed with the measure as part of the 18 announced but not yet enacted measures that would proceed. This measure would amend the tax law to phase out the offset by the end of the 2018-19 income year, i.e. by 30 June 2019.

The government says the offset is being phased out as it has a number of shortcomings:

  • as it can only be claimed at the end of the financial year, it does not provide financial assistance when the medical expense is incurred;
  • only taxpayers who have a tax liability receive a benefit from the offset;
  • individuals with high out-of-pocket medical expenses and little or no tax liability gain no benefit from this offset as it is not refundable.

The government said it would continue to provide a range of subsidies for medical expenses via the Medicare Safety Net as the primary support mechanism, supplemented by Medicare, the National Disability Insurance Scheme and other benefits, rebates and safety nets through the health care system.

During the phase-out period, there will be two sets of transitional arrangements in place:

  • Category A transitional arrangements: The tax offset will continue to be available for out-of-pocket medical expenses from the 2012-13 income year until the end of the 2018-19 income year (ie from 1 July 2013 to 30 June 2019), but only for those medical expenses relating to disability aids, attendant care or aged care. For example, a person bed-ridden with a disability has a particular sensitivity to heat (that is unrelated to the disability) and purchases an air conditioner for their house. Even though the air conditioner would help the person and relieve discomfort, it is not a disability aid as it does not alleviate the effect of the disability and is not manufactured as, distributed as, or generally recognised to be, an aid to the function or capacity of a person with a disability. The cost would not qualify for the offset.
  • Category B transitional arrangements: Taxpayers who receive an amount of the tax offset for the 2012-13 income year will be eligible to claim the full range of medical expenses for the 2013-14 income year. Taxpayers who receive an amount of the offset for both the 2012-13 and 2013-14 income years will then also be eligible to claim the full range of medical expenses (as defined currently) for the 2014-15 income year. That is, the Category B arrangements will apply from 1 July 2013 to 30 June 2015.

People are facing rising health costs in several ways – higher charges by doctors, hospitals, etc, higher private health insurance premiums, the Medicare levy due to increase from 1.5% to 2% from 1 July 2014, and now the phasing out of the medical expenses tax offset.

It might be wise to make a New Year resolution to try to stay as healthy as possible! Could that be in the back of the government’s mind? Although this week’s MYEFO statement points to major spending cuts by the government and maybe even tax increases down the track. Less spending on the tax offset for medical expenses probably fits the government’s bill right now.

I would like to take this opportunity to wish all SmartCompany readers a very (very) healthy and Happy Christmas and a (fingers crossed) prosperous New Year. I have no doubt next year will see plenty of tax changes to write about – it was ever thus!


Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.


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