Why You Might Owe More at Tax Time If You Have A Private Health Fund
You’ve lodged your tax return and you’re expecting a nice refund. Then your Notice of Assessment (NOA) arrives showing you have an amount payable for private health insurance. So what happened?
In most cases it comes down to one thing: the income estimate you gave your private health fund at the beginning of the year has turned out to be too low. Here’s how the private health insurance rebate works, and how to avoid a nasty surprise next time you lodge.
What is the private health insurance rebate?
The private health insurance rebate is money the government contributes towards the cost of your private health premiums. How much you get depends on two things:
- Your income (and your partner’s [if applicable])
- The age of the oldest person covered by your policy
Most people claim the rebate upfront as a discount on their private health premiums. When you take out a new policy, or renew your current policy, your private health fund asks you to nominate your income “tier”. If you fall into an eligible rebate tier, they apply the rebate directly to reduce your premium, based on the income you’ve estimated.
The catch is: your income tier is your estimate. The ATO checks it against your actualised income at the end of the relevant financial year. So if you’ve underestimated your income and you end up rolling over to the next rebate tier, you could actually end up owing money back to the ATO in overpaid rebates.
How do the private health income tiers work?
The higher your income, the lower your rebate. If the oldest person on your policy is 65-69, your rebate rate gets higher. Your rebate then increases again when the oldest person on the policy reaches 70.
If your income exceeds a certain amount ($164,001 for singles and $328,001 for families), you’re ineligible for the private health rebate.
Below is a breakdown of the thresholds for the current 2026-27 financial year:
| Tier | Income (singles) | Income (families) | Rebate (>65) | Rebate (65-69) | Rebate (70+) |
|---|---|---|---|---|---|
| Base tier | $105,000 or less | $210,000 or less | 24.118% | 28.139% | 32.158% |
| Tier 1 | $105,001 to $123,000 | $210,001 to $246,000 | 16.079% | 20.098% | 24.118% |
| Tier 2 | $123,001 to $164,000 | $246,001 to $328,000 | 8.038% | 12.058% | 16.079% |
| Tier 3 | $164,001 or more | $328,001 or more | 0% | 0% | 0% |
The private health fund rebate rates are adjusted at 1 April ever year and are higher if the oldest person on the policy is 65 or over.
A few things worth knowing:
- Family policies are tested on combined income: If you have a household partner as at 30 June, your combined income is measured.
- More kids, higher threshold: The family threshold goes up by $1,500 for each dependent child after the first.
- Your partner status on 30 June decides your income: Even if you only partnered up in May, the family thresholds (and your combined income) apply for the whole year.
The income thresholds change most financial years, so it always pays to double-check the tier you’ve estimated each July.
How is my income tier verified?
Your private health fund reports the rebate you received straight to the ATO. When you lodge your tax return, the ATO works out your actual income for the year and compares the rebate you should have received with the rebate you did receive.
If you received a lesser rebate than you were entitled to, the difference will be applied to your return as a tax offset, either reducing your amount payable or increasing your refund.
If you received a higher rebate than you were entitled to, you will have to pay the difference back. This shows on your Notice of Assessment (NOA) as a private health insurance amount payable, and will either be taken out of your refund, or added to your tax bill.
Note: if you receive a higher rebate than you were entitled to and are required to pay it back, this isn’t a fine or a penalty.
Why does underestimating my income lead to a tax bill?
If your income ends up higher than the tier you chose, it means you’ve been getting a bigger discount than you’re entitled to all year. Common reasons why your income may actualise higher than you estimated could be:
- You received a pay rise, promotion or new job
- You worked overtime, bonuses or extra shifts
- Your partner moved in or started earning more (for families)
- You picked a tier once and haven’t updated it in line with threshold and wage changes.
The ATO doesn’t just look at your wages. It uses your Income for Surcharge Purposes (ISP), which can include things like reportable fringe benefits, salary sacrificed super and net losses on investments, including negatively-geared rental properties. So, even if your employment salary sits under the threshold, these extras can push you into a higher tier.
Example:
Sam is 40, single and estimated her income would stay under $101,000 for 2025-26, so she chose the base tier. Midway through the year she was promoted, and her ISP finished at $112,000 at the end of the financial year, which pushed her into Tier 1.
Her policy costs her $3,000 for the year before the rebate. Because she received the base tier discount (about 24%) instead of the Tier 1 rate that she finished the year at (about 16%), she was over-rebated by approximately $240 more than she was entitled to. That $240 will appear on her NOA as an amount payable.
How to avoid underestimating
Here are a few ways to avoid underestimating your income to your private health fund:
- Check your income tier every year: Log in to your private health fund’s app or website and make sure your income tier matches what you expect to earn this year.
- Update your tier when circumstances change: New job, pay rise or household partner? Let your fund know straight away.
- Be a little conservative: If you’re right on the edge of a threshold, choosing the next tier up means a smaller discount now but no bill later. Even if you overestimate, you’ll just get the difference back at tax time.
- Claim it at tax time instead: You can choose not to take the rebate as a premium discount at the time of reviewing your policy and instead claim the whole thing in your tax return. You’ll pay full premiums throughout the year, but there’s no risk of having to pay anything back if you’re over-rebated.
- Remember everyone on the policy: Each adult covered is tested on their own ISP, so check that both you and your partner have the right tiers nominated.
We’re here to help
Not sure which tier you should be on, or want us to check an amount on your notice of assessment? Get in touch with the BIS Cosgrove team. We can take a look at your income for the year ahead, help you pick the right tier and avoid a nasty surprise at tax time.
Have a question about private health rebates? Contact us or call our Palm Beach office on (07) 5598 3800 or our Brookwater office on (07) 3333 2510.
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The material and contents provided in this publication are general and informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
