Insurance & Risk Professional, August 2006
Australian insurance-buyers are learning for the first time about the levels of “hidden” taxes they are paying on insurance. Early data from the NIBA taxes campaign indicates that clients are following up brokers’ invitation to learn more about the size and extent of the tax bills attached to premiums by state and territory governments.
The campaign, which uses a simple “post-it note” attached to each client’s renewal paperwork, is directing clients to NIBA’s special taxes information website. The “hits” recorded so far indicate a significant take-up rate.
The campaign is receiving good support in regional areas of New South Wales and Victoria, where rural residents are also having to absorb rocketing fuel prices. The growing realisation that insurance premiums are being artificially inflated due to state taxes is adding to rural resentment.
Country residents are among the most prolific users of the internet, and brokers say the NIBA website’s background information section is proving an excellent resource.
Following the HIH Royal Commission in 2003, recommendations 55 and 56 proposed that states and territories abolish stamp duty on general insurance products and the fire services levy (FSL). Justice Neville Owen used the phrase “tax on tax”, and another recommendation said state and territory governments should exclude the GST for the purposes of calculating stamp duties or any other levies on insurance premiums – if they did continue to be applied.
Currently policyholders are paying a number of taxes on their insurance premiums which equate to “taxes on taxes”. For instance, a policyholder might pay a base premium of $100, up to $50 for a fire services levy in NSW, Victoria and Tasmania, then 10% GST calculated on that total, with state stamp duty of between 7.5% and 11% added on the combined premium-FSL-GST.
To make matters worse, the NSW Government has just increased the FSL for commercial fire, industrial special risks and consequential loss – as well as contractors’ all risks – by two percentage points to 36%. Domestic FSL rates are unchanged at 22%. In the past 12 months the NSW FSL has gone from 24% to 30% then 34% and 36%.
The situation in Victoria is even worse. The FSL and taxes applied by Victoria add as much as 81.5% to the insurance premium for rural properties.
Given that GST is returned to state and territory governments – and this revenue will rise by $2.3 billion in 2006/07 – there has never been a better time to lobby against these multiple taxes.
When the GST was introduced, state insurance taxes were not included in the original Intergovernmental Agreement (IGA) following a deal struck with the Democrats. Six years on, the states are showing healthy revenue and the implementation of the IGA is well advanced.
NIBA and the Insurance Council of Australia (ICA) have campaigned strongly on this issue. In recent years South Australia and Western Australia have dropped the FSL system – but like all the other states and territories have retained stamp duty on insurance transactions.
The latest NIBA campaign is based around the relationship between brokers and their clients. After all, brokers are the representatives of the insurance-buyer.
During the first four weeks of the campaign, the NIBA tax website had more than 28,000 hits. NIBA is also targeting trade and mainstream publications with media releases on the FSL, the effect of tax on business, the inconsistencies between states and territories on tax issues and the implications for non-insurance and underinsurance.
NIBA Chief Executive Noel Pettersen says the tax burden on policyholders is not just an industry problem; it is a community problem.
“Educating policyholders on the issue is paramount,” he said. “That’s why we are encouraging members to be more involved in promoting this matter, and get policyholders more involved, too.”
Many of the brokers Insurance & Risk Professional spoke to in preparing this report had already contacted their local MP about this issue.
The two states with the highest taxes on insurance are in election mode. The Victorian election is in November and NSW will go to the polls in March next year. There can be no better time to lobby on this issue than in the lead-up to an election.
NIBA’s basic argument is that taxes on insurance are much the same as those levied on gambling and alcohol. It says policyholders should not be penalised for being prudent enough to insure.
ICA has also been lobbying for the removal of insurance taxes.
Former ICA Executive Director Alan Mason said it was also important to push for the removal of the NSW Insurance Protection Tax, which was put in place after the HIH collapse.
His successor, Kerrie Kelly, has been just as insistent. She says it is now almost two years since an inquiry by the Public Accounts Committee of the NSW Parliament found that the current FSL system was flawed.
“Yet the Government has not undertaken any legislative reforms to improve the way fire services are funded,” she said. “The people of NSW deserve better.”
NSW Shadow Treasurer Peta Seaton told Insurance & Risk Professional there is no doubt people are sensitive about insurance prices.
Ms Seaton says she has asked NSW Treasurer Andrew Refshauge how he can justify slugging families with numerous tax increases on insurance for houses, travel, mortgages and public liability.
“NSW is the highest-taxed state in Australia,” she said. “We need to know from the State Government when it’s going to stop.”
Ms Seaton says she has raised the issue during question time and the Government has never given a proper answer.
“The NSW Government in 2005/06 raised stamp duty from 5% to 9%. The revenue from NSW stamp duty was $521 million, and this year they’re forecasting $609 million.”
Ms Seaton says the Liberal Party’s policy is to reduce state taxes.
“We’ve guaranteed to reduce payroll tax, registered clubs tax and some concessionals on first home buyers. We’d like to reduce taxes generally, and we have the issue of taxes on insurance on our radar.”
Victorian National Party leader and member for Gippsland Peter Ryan says he is committed to the issue. He told Insurance & Risk Professional the party has always maintained the FSL is unsustainable, particularly for rural people.
Abolishing the FSL was party policy for the 2002 election, and it is again for this year’s campaign. Unfortunately, his Liberal coalition partners are less enthusiastic about reforming insurance taxes.
The Victorian Nationals favour a property-based system similar to that in Western Australia, with all property-owners contributing to fire services funding. The principle is to add a separate item to property-owners’ rates.
Mr Ryan says the Victorian Government would have to legislate for the levy and local governments would collect it, but they would be reimbursed for the cost involved.
“We’re against cost shifting, and we don’t think local government should incur the cost of collection of these funds,” he said. “When the fire alarm goes off, we shouldn’t have a situation where everyone benefits from the assistance from the fire brigade but some people don’t pay for it.
“The people who are prudent enough to insure shouldn’t be the ones who have to pay for everyone else.”
WHERE’S THE MONEY GOING?
Lloyd Walker is Managing Director of Lloyd Walker Insurance Brokers in Dubbo, New South Wales.
Mr Walker says the Federal Government and the states are playing games with each other on insurance taxes.
“The NSW Government says it isn’t getting a fair cut of the GST, and it offers this as the reason to have stamp duty – and the continual stamp duty increases,” he said.
“I think that’s rubbish. It’s like alcohol and cigarettes: the Government says it’s trying to protect people buying these things but it’s greedy.”
Lloyd Walker Insurance Brokers has been established for 11 years. With a staff of eight it services about 5000 clients. Mr Walker says of the $9 million a year the brokerage collects on policies, more than $1 million goes in stamp duty and FSL.
He has regular contact with farm and business clients, but each time the rates go up he personally contacts them.
“The cost of contacting 30 clients a week is not cheap, but I prefer to do it to keep them in the loop.”
He says clients think it is an unfair impost, made worse by the fact they are paying for people who don’t have insurance.
“They’re very cynical about it,” Mr Walker said.
“We’ve received sticky notes from NIBA and it’s a good idea. The best time to lobby the Government about it is when an election is coming up, and that’s obviously now.”
Mr Walker lives four kilometres from Dubbo and contributes to a small fire brigade to help keep it going.
“I don’t mind doing it. But considering the amount our office collects for FSL, I wonder where our money is going. The NSW Government certainly doesn’t seem to be putting it all back into funding.”
TOUGH TO GET RID OF THEM?
Dan Johansen of Johansen Insurance Brokers in Wangaratta says insurance brokers are more like tax collectors these days.
Mr Johansen’s Victorian brokerage was established in 1970 and has about 5000 clients.
“The state-based taxes take up an inch and a half on our clients’ invoices.”
He does not expect the NSW Government to win the election in March next year.
“Premier Iemma has stuffed up on the Snowy Hydro issue and workers’ comp. But Labor in Victoria has a strong enough lead to win a Melbourne Cup!
“We’re a voice in the wilderness, and because the imposts are a convenient revenue raiser it’s tough to get rid of them. Brokers are so tired of constantly fighting issues such as the FSL.
IT’S NOT FAIR
Peter Brown of Peter Brown and Associates is so incensed about FSL increases he recently visited his local MP.
However, Liberal member for Wagga Wagga Daryl Maguire says although the FSL issue is on the agenda in New South Wales the price of petrol is more annoying for rural people than their once-a-year insurance payment.
Mr Brown supports collecting the FSL through council rates and assessing them through ownership of land. He says one of the reasons many consumers are not aware of the extent of the burden is that taxes are camouflaged by falling insurance premiums.
“They are not getting the full benefit of the competitiveness of the market at the moment and we have to be the bearer of bad news.”
Mr Brown has more than 4000 clients and 21 staff in three offices in the Riverina region. He says the NIBA campaign to alert people to the taxes is important.
“I’ve started putting the sticky notes on renewals, but it’s necessary to spread the message further.”
“One of my commercial clients lives above the snowline and pays $20,000 a year FSL in his premium. Yet because he is 70km from the nearest fire service, the client would have to rely on his own resources to deal with a building fire. It’s not fair.”