Aussies have been issued a stark warning this tax time, after an accountant noticed an unusual rise in clients being hit with ATO debts.
A little-known tax return detail is seeing an increasing number of people hit with unexpected bills this year, with Australians warned that even past returns could come under scrutiny.
Melbourne-based accountant, Michael Fox, first encountered this issue a few months ago, when he received a notice from the Australian Taxation Office (ATO)
The message related to a review of the private health insurance information provided in one of his client’s past returns, stating that client now owed money to the ATO.
The tax bill was a result of the Medicare Levy Surcharge (MLS) being retroactively applied, despite the client believing they did not have to pay it at the time.
The MLS is paid by Australian tax payers who do not have private hospital cover and who earn above a certain income.
The aim of the surcharge is to encourage individuals to take out private hospital cover in order to reduce the demand on the public Medicare system.
Since receiving this first notice, Mr Fox, the Principal of Michael Fox Arts Accountant & Valuer, is now dealing with about 20 cases all relating to this same issue.
“We’re just getting these random notices, like, ‘Oh, we’ve looked through your private health insurance information for the 2022 financial year, and we, we reckon you owe us $2000’. We get these notices and we’re like, ‘what the hell?’” Mr Fox told news.com.au
The accountant said people are getting “trapped”, with the issue arising when clients either get married or enter a defacto relationship and are required to include their “spouse” on their tax return.
For tax purposes, this not only includes legally married couples but also those who live together in a domestic relationship.
Mr Fox said this can “cause a complication” in situations where couples are not under a private health insurance family plan.
To avoid the surcharge, every person in the household has to have an “appropriate level” of private patient health cover.
“Quite often, what happens is that one might not be insured, the other one is insured, and all of a sudden, bingo, you’ve got a Medicare Levy surcharge problem,” he said.
He believes the reason there has been a sudden influx in people being stung by the MLS is due to the ATO’s increased use of sophisticated data matching programs.
Data matching allows the ATO to retrieve data from a variety of third-party sources, including banks, financial institutions and other government agencies.
In a recent blog post, Mr Fox claimed there are situations where both you and your spouse may have your own singles comprehensive private health insurance policies, and still trigger the surcharge.
“With sophisticated data matching by the ATO, they can now discover that you and your spouse both have singles cover and not family cover and issue amendments to prior year returns,” he said
When it comes to the MLS, the threshold to trigger for the surcharge changes depending on your circumstances, with the rate varying between 1 per cent, 1.25 per cent or 1.5 per cent.
For the 2015-26 income year, the MLS is triggered for a single person when they reach an income of $101,001 or more.
For a family, it is triggered by an income of $202,001, with this threshold increasing by $1500 for each MLS dependent child after the first child.
In a statement to news.com.au, an ATO spokesperson said that if your spouse and any dependants have an appropriate level of private patient hospital cover for the whole financial year, then “it doesn’t matter whether that private patient hospital cover is provided by a family or singles cover”.
“As couples do not necessarily lodge at the same time, our data matching programs will review returns after they have been lodged,” the spokesperson said.
“This review is to ensure the taxpayer, spouse and any dependants have the appropriate cover, including if this is through family or singles cover.
“The same data matching processes will occur when a taxpayer has lodged an amended tax return.”
The spokesperson said there are some instances where the ATO has difficulty matching an individual taxpayer to a health insurance policy, with this often due a mismatch with the data provided to the health fund by the client or from the fund to the ATO.
“If the ATO is unable to match a health insurance policy to an ATO account, the individual may appear to not have appropriate cover,” the spokesperson said.
Many of Mr Fox’s clients who have encounted this issue surcharge issue have young families.
One of those clients, Guy, who lives in Adelaide with his partner and two young children, copped a $2500 bill from the ATO this year.
Shortly after lodging his return this year, he received a notice from the ATO that his 2022/23 tax return had been amended and he now had to pay the MLS, as his children were not covered by his private health insurance policy.
Speaking to news.com.au, the 43-year-old explained that he and his partner have their own individual health covers and his children have been using the Medicare system.
“The system for kids is so good, so we just haven’t seen the need for private health insurance (for them),” he said.
Guy’s children are aged 3 and 6 and, up until now, this has never been flagged as an issue when completing his tax returns, saying “this is the first I have heard of it”.
While he has received tax bills in the past given he runs his own business, this one left Guy “surprised and disappointed”.
“It felt like they were scraping the bottom of the barrel,” he said.
“I think it was just that sort of feeling of like, with the cost of living being what it is, for the ATO then come and just put the their hand out for another pay out historically, and then having to factor that into a family budget.”
Mr Fox noted that, as the ATO is going back through old returns, people are likely going to cop multiple bills.
“If you go back to 2022, they are going to be trapped for three years and that could be three times $2000 or $3000. That’s a lot of money,” he said, adding there is now “nothing (people) can do” as they weren’t aware of the discrepancy at the time.
Mr Fox said the “fair thing to do” would be for the government to give an amnesty period for a year to allow people to get their affairs in order.
“I just don’t think it’s fair that they are going back using AI data matching to basically trap people,” he said.
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