Why Salary Sacrifice Doesn't Reduce Your MLS
How it works
The Medicare Levy Surcharge is calculated on your income for MLS purposes, not your taxable income. The ATO defines MLS income as:
MLS income = taxable income + reportable fringe benefits + reportable super contributions + net investment losses
When you salary sacrifice into superannuation, two things happen simultaneously:
- Your taxable income decreases by the amount you sacrifice
- The sacrificed amount appears as a reportable super contribution on your income statement
Because both components feed into the MLS income formula, the decrease in taxable income is exactly offset by the increase in reportable super contributions. Your MLS income — and therefore your MLS tier and surcharge — remains completely unchanged.
This is by deliberate design. The ATO introduced the MLS income test specifically to prevent high-income earners from using salary sacrifice, negative gearing, or fringe benefits to artificially reduce their income below the MLS thresholds. The formula adds back all the common income-reduction strategies to arrive at your true economic income.
When to use this calculator
- You've been told that salary sacrifice can reduce or eliminate your MLS and want to verify this claim
- You're considering salary sacrifice and want to understand which taxes it actually reduces (income tax yes, MLS no)
- You're advising someone who believes they can avoid MLS through super contributions
- You want to see a clear, side-by-side breakdown of how MLS income is calculated before and after salary sacrifice
- You're comparing strategies to legitimately reduce your MLS liability (the only way is private hospital cover or reducing your actual economic income)
Key concepts
- MLS income
- The income figure used to determine your MLS liability. It includes taxable income, reportable fringe benefits, reportable super contributions, and net investment losses. It is deliberately broader than taxable income to prevent avoidance strategies.
- Reportable super contributions (RSC)
- Super contributions made through salary sacrifice or personal deductible contributions that exceed the compulsory employer guarantee. These appear on your income statement and are added back to your MLS income. The employer's compulsory SG contributions are not reportable.
- Salary sacrifice
- An arrangement where you agree to forgo part of your pre-tax salary in exchange for your employer contributing that amount to your super fund. The sacrificed amount is taxed at 15% inside super (instead of your marginal rate), saving income tax — but it becomes a reportable super contribution.
- The only way to avoid MLS
- There are only two legitimate ways to reduce or eliminate your MLS: (1) hold qualifying private hospital cover for the full financial year, or (2) have your actual economic income (including all MLS income components) fall below the MLS threshold. No salary packaging or sacrifice arrangement can achieve the latter — you would need to genuinely earn less.
Worked example — $130,000 salary with $20,000 sacrifice
Alex earns $130,000 and is considering sacrificing $20,000 into super to avoid the MLS. Here's what actually happens (2025–26 thresholds):
Without salary sacrifice:
| Component | Amount |
|---|---|
| Taxable income | $130,000 |
| Reportable super contributions | $0 |
| MLS income | $130,000 |
| MLS tier | Tier 1 (1.0%) |
| Annual MLS | $1,300 |
With $20,000 salary sacrifice:
| Component | Amount |
|---|---|
| Taxable income | $110,000 |
| Reportable super contributions | $20,000 |
| MLS income | $130,000 |
| MLS tier | Tier 1 (1.0%) |
| Annual MLS | $1,300 |
Alex's MLS is exactly the same in both scenarios — $1,300/yr. The salary sacrifice did save approximately $3,650 in income tax (at the 32.5% + 2% Medicare levy marginal rate), but the MLS is unchanged because the $20,000 appears as a reportable super contribution. Alex's only option to avoid the $1,300 MLS is to take out private hospital cover.
Frequently Asked Questions
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