The Medicare Levy Surcharge is a separate charge from the base 2% Medicare Levy, layered on top of it rather than replacing it. It only applies once your income for MLS purposes clears a threshold, and only if you go without private hospital cover for the full income year. Cross that threshold with no cover and you're paying an extra 1%, 1.25%, or 1.5% depending on which tier you land in, calculated on your whole MLS income, not just the portion above the threshold.
"Income for MLS purposes" is deliberately wider than plain taxable income. The ATO adds back reportable fringe benefits, net investment losses (including negatively geared property), reportable super contributions beyond the compulsory Super Guarantee, and certain exempt foreign income. Someone who salary-sacrifices heavily into super or runs a negatively geared rental can end up with an MLS income noticeably higher than their taxable income line on their return.
The policy logic is straightforward: the government would rather higher earners take pressure off the public system by holding private hospital cover, so it makes going without cover cost more once you can reasonably afford a policy. That's why the practical decision usually comes down to a dollar comparison, what the surcharge would cost you versus what a qualifying hospital policy actually costs, which is exactly what the comparison in the calculator above is built to show.
