Reportable fringe benefits and the Medicare levy surcharge

Why packaged income comes back for the surcharge

Income tax and the Medicare levy surcharge do not look at the same number. Income tax starts from taxable income, which a salary packaging arrangement reduces. The surcharge starts from a wider figure, income for MLS purposes, which the ATO builds by adding several amounts back to taxable income. Reportable fringe benefits are one of them. The others are reportable super contributions, net investment losses and amounts on which family trust distribution tax has been paid, and the income for MLS purposes page goes through each line of the worksheet.

The reason a fringe benefit matters more than the other add-backs is the second step. Once the tier is known, the ATO applies its rate to taxable income, total reportable fringe benefits and any amount taxed as a family trust distribution. Super contributions and investment losses are left out of that base. Fringe benefits are not. A packaged benefit is therefore treated, for the surcharge, almost exactly like salary.

How fringe benefits move the tier

The table holds taxable income at $95,000 for a single person without hospital cover and raises the reportable fringe benefits amount. Every figure comes from the 2026-27 thresholds read on ato.gov.au.

With no packaged benefits, this person is $10,000 under the threshold and owes $0. A packaging arrangement that reports $20,000 of benefits takes the same person to $1,150 of surcharge if they hold no hospital cover. The surcharge is then charged on the whole of the taxable income plus the benefits, not only on the part above the threshold.

The grossed-up figure, not the cash value

The amount that counts is the reportable fringe benefits amount your employer reports, the grossed-up figure, not what the benefit would cost you in cash. The M2 instructions of the tax return take it from question IT1, labels N and W, where the reportable amounts from your income statements are recorded. If you had two employers that packaged benefits during the year, add both.

When the employer also pays the premium

Some packages include private health insurance itself. The ATO is clear that whoever pays the premium, each adult on the policy is income tested for the rebate, and an employee whose employer pays the premium generally receives the rebate as a reduced premium. The test uses the same income for surcharge purposes, fringe benefits included, so a packaged policy can lower your rebate percentage. In 2026-27, a single person under 65 with $95,000 of income for surcharge purposes receives 24.118 %; at $115,000 the rebate falls to 16.079 %.

Couples on packaged salaries

For a couple or a family, the tier comes from the combined income for MLS purposes of both partners, and each one adds their own fringe benefits to it. Each partner then pays the rate of the household tier on their own taxable income and reportable fringe benefits, for the days they lacked cover. A packaged salary on one side can therefore move both partners into the surcharge even when the other partner's income is modest. The couples page has the full calculation.

What packaging cannot do

Salary packaging does not create an exemption from the surcharge, and no amount of restructuring a package changes the test: an income over the threshold without an appropriate level of hospital cover leads to the surcharge for the days concerned. The only ways out are a policy that avoids it, an exemption category, or an income for MLS purposes at or under the threshold. The cover or surcharge comparison shows which of the first two costs less for you.