Private ruling: Net medical expense tax offset and private health insurance rebate income test
Published: January 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is your de facto's adjusted taxable income taken into account when determining whether the net medical expenses rebate, higher phase-in limit applies to your situation? | A1: Yes. | Q2: Are you entitled to claim eligible medical expenses paid in relation to your dependants for the purposes of the net medical expenses tax offset? | A2: Yes. | Q3: Is your de facto's adjusted taxable income taken into account when calculating the tax offset for a premium you have paid under a private health insurance policy? | A3: Yes.

Relevant facts and circumstances: You were in a de facto relationship on the last day of the 2012-13 income year. Your dependant resides in a nursing home. You pay for your dependants nursing home fees and support them financially. You and your dependant are covered by a joint private health insurance policy. Your de facto holds a separate private health insurance policy for the 2012-13 income year. You and your de facto's combined adjusted taxable income was greater than $168,000 for the 2012-13 income year.

Relevant legislative provisions: Income Tax Assessment Act 1936, Section 159P | Income Tax Assessment Act 1936, Subsection 159P(3AA) | Income Tax Assessment Act 1936, Subsection 159P(4) | Income Tax Assessment Act 1936, Section 159Q | Income Tax Assessment Act 1936, Subsection 159Q(1) | Income Tax Assessment Act 1936, Subsection 159Q(5) | Income Tax Assessment Act 1997, Section 998-1(1) | Income Tax Assessment Act 1997, Subdivision 61-G | Income Tax Assessment Act 1997, Section 61-210

Reasons for decision: Detailed Reasoning - NET MEDICAL EXPENSES REBATE FOR THE 2012-13 INCOME YEAR: For the 2012-13 income year, a resident taxpayer who pays certain net medical expenses in respect of himself or herself or a resident dependant may be entitled to a rebate under section 159P of the Income Tax Assessment Act 1936 (ITAA 1936), subject to certain conditions. Subsection 159P(3AA) of the ITAA 1936 states the amount of the rebate is: a) if the medical expense rebate higher phase-in limit applies - 10% of the amount by which the total of the rebatable medical expense amount exceeds the medical expense rebate higher phase-in limit, or b) otherwise - 20% of the amount by which the total of the rebatable medical expense amount exceeds the medical expense rebate lower phase-in limit. The higher and lower phase-in limits are dealt with in section 159Q of the ITAA 1936. In regards to the higher phase-in limit, item 1 of the table in subsection 159Q(1) of the ITAA 1936 states: | Detailed Reasoning - Column 3 Threshold: 1 on the last day of the year, the principal individual is married (within the meaning of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 ). the total of: (a) the principal individual's adjusted taxable income for rebates for the year; and (b) the adjusted taxable income for rebates for the year of the individual to whom the principal individual is married the principal individual's family tier 1 threshold for the year The amount of the higher phase-in limit is $5,000 (subsection 159Q(5) of the ITAA 1936) and the family tier 1 threshold is $168,000 increased by $1,500 for every dependent child after the first (in-line with Medicare levy surcharge thresholds). Therefore, for example, a taxpayer who is married and has a combined adjusted taxable income of $168,000 or more, will have a rebate of 10% of the amount by which the rebatable medical expense amount exceeds $5,000. | Detailed Reasoning - Definition of married: Item 1 of the table in subsection 159Q(1) of the ITAA 1936 applies to a taxpayer who is married within the meaning of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999. Section 7 of A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 provides that this Act applies to two persons as if they were married to each other for a period if: a) their relationship is registered for the period under a law of State or Territory, or b) they lived together in a relationship as a couple on a genuine domestic basis for the period, although not legally married to each other, i.e. a de facto relationship. However, if, during the period, either or both of the persons was legally married to another person, the Act applies as if the person or persons were not legally married to the other person. In other words, the de facto relationship prevails. The section also provides that persons living separately are not taken to be married. | Detailed Reasoning - Application to your circumstances: On the last day of the 2012-13 income year, you were in a de facto relationship. Accordingly, it is considered you are married to your de facto for the purpose of item 1 of the table in subsection 159Q(1) of the ITAA 1936. As the total of you and your de facto's adjusted taxable income is greater than the family tier 1 threshold of $168,000, the net medical expenses rebate will be 10% of the amount by which the rebatable medical expense amount exceeds $5,000 (subsection 159P(3AA) and section 159Q of the ITAA 1936). | Detailed Reasoning - Claiming medical expenses: The net medical expenses rebate is available to a resident taxpayer who during the income year pays certain net medical expenses in respect of himself or herself or a resident dependant. Dependent is defined at subsection 159P(4) of the ITAA 1936 as including 'the spouse of the taxpayer….' Spouse is defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as including: a) another individual with whom the individual is in a relationship that is registered under a State or Territory law, and b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple, i.e. a de facto relationship. | Detailed Reasoning - Application to your circumstances: You are in a de facto relationship and you are entitled to claim the net medical expenses rebate for eligible medical expenses paid in respect of your dependants. | Detailed Reasoning - PRIVATE HEALTH INSURANCE REBATE FOR THE 2012-13 INCOME YEAR: For the 2012-13 income year, Subdivision 61-G of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer can choose to claim a tax offset for a premium paid under a private health insurance policy, rather than having a health insurance premium reduced under the Private Health Insurance Act 2007 (PHIA 2007), subject to certain conditions. Section 61-210 of the ITAA 1997 provides that the amount of the tax offset is the taxpayer's share of the Private Health Insurance Incentive (PHII) benefit in respect of the premium, reduced by any PHII benefit already received under the PHIA 2007, such as through a reduction in premiums. A taxpayer's share of the PHII benefit is defined in section 22-15 of the PHIA 2007 as being 30%, 35% or 40% of the amount of the premium, depending on certain age conditions. However, the offset is reduced if one of the private health insurance tiers applies. Subsection 22-30 of the PHIA 2007 deals with the various tiers. The family tiers apply in circumstances where 'on the last day of the financial year, the person is married (within the meaning of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999)….' They are calculated as follows: a) Tier 1 - couples/families whose income for surcharge purposes is from $168,001 to $194,000 in the 2012-13 income year, who hold a complying private health insurance policy, will have their private health insurance rebate reduced by 10 percentage points. b) Tier 2 - couples/families whose income for surcharge purposes is from $194,001 to $260,000 in the 2012-13 income year who hold a complying private health insurance policy, will have their private health insurance rebate reduced by 20 percentage points. c) Tier 3 - couples/families whose income for surcharge purposes is $260,001 and over in the 2012-13 income year who hold a complying private health insurance policy, will no longer receive any private health insurance rebate. The thresholds are increased by $1,500 for each dependent child after the first. Note that income for surcharge purposes (used for private health insurance rebate purposes) is different to income for Medicare levy surcharge purposes (used for net medical expenses rebate purposes). | Detailed Reasoning - Application to your circumstances: The amount of a taxpayer's private health insurance tax offset is based on the tier in which he or she is assessed. Under section 22-30 of the PHIA 2007, the family tiers apply in circumstances where on the last day of the income year, the taxpayer is married within the meaning of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999. On the last day of the 2012-13 income year, you were in a de facto relationship. Accordingly, it is considered that you are married to your de facto for the purpose of section 22-30 of the PHIA 2007. You and your de facto had a combined adjusted taxable income of greater than $168,000 for the 2012-13 income year. Although adjustable taxable income is different to income for surcharge purposes, the amounts are often similar. Therefore, if your income for the purposes the amount of your private health insurance rebate entitlement is reduced by 10 or 20 percentage points, or you are not entitled to the offset at all, depending on how much your income exceeds the family threshold of $168,000.