Insurance against tax: tax-happy states that charge like wounded bulls to develop a cash cow may bring about nationwide underinsurance
Insurance & Risk Professional, October 2005
Insurance protects people from financial hardship, so it is understandable that the industry is fed up with taxes – some of which can be higher than those applied to alcohol and cigarettes. Several taxes are applied to insurance, including the 30% company tax rate, but it is indirect tax such as the fire services levy (FSL), stamp duty and GST that causes the industry grief.
The HIH Royal Commission recommended abolishing stamp duty on general insurance, and this year’s Productivity Commission inquiry into first home ownership had something to say on the inefficiency of stamp duty.
Furthermore the recent OECD economic survey of Australia commented on the need for progress in tax reform, stating that the different rates of stamp duty and possible applicability of the FSL between states and within states (in the case of Victoria) increase compliance costs for businesses.
South Australia, Western Australia and Queensland have replaced the FSL with a property-based system applied to owners and the Australian Capital Territory and Northern Territory fund their fire brigade services from consolidated revenue.
In 2003 the New South Wales Treasury submission to the Review of Fire Services Funding argued that FSL had several deficiencies that outweighed any positives in simplicity of government administration.
Despite the clear inequities of the FSL, they continue to be imposed in NSW, Victoria and Tasmania.
The industry’s battle against insurance taxes has been long and persistent. Despite the best lobbying efforts of the Insurance Council of Australia (ICA), the stamp duty in NSW recently increased from 5% to 9% and the Victorian Government introduced an Emergency Services Bill that includes a hidden tax.
There was no consultation with the industry before the new law was put into effect. Critics say it shows a poor understanding of insurance practice and will hit self-insured businesses for millions of dollars more in taxes each year.
Victorians are already the highest-taxed policyholders in the world, paying up to 82.5% on their base premiums for property insurance.
The new tax will require brokers and insurers to come up with an FSL calculation for the self-insured portion of any property insurance. It’s based on a “notional premium” for companies that have deductibles of $10,000 or more in their property insurance policies.
But, unlike premiums, there is no agreed value or commercial value applicable to deductibles and there is no calculation method that would apply to deductibles.
Industry commentators say the Victorian Government doesn’t understand that although deductibles are an essential insurance mechanism they are not insurance as such, because there is no transfer of risk.
NIBA Chief Executive Noel Pettersen wrote to Victorian Premier Steve Bracks stating that escalating state insurance taxes could not be ignored any longer and there should have been proper consultation.
The letter asked: “Why did the Government avoid consulting with those insurance buyers who have now been directly disadvantaged by this flawed legislation?”
However, despite the efforts of ICA, NIBA and various other industry stakeholders, state governments continue with their inequitable imposts.
Even Assistant Federal Treasurer Mal Brough has been vocal on the new NSW tax, which will boost the state’s stamp duty revenue on premiums from $415 million to $541 million – a 30% increase.
Mr Brough told Insurance & Risk Professional the tax had been imposed by a greedy Labor Government, increasing what was already a tax on a tax and undermining the positive work to put downward pressure on insurance premiums through sensible reforms.
He says more should be done by Liberal and National Party oppositions in the states, and new NSW Opposition Leader Peter Debnam should take the lead on tax reform and look carefully at the impost on insurance.
Mr Brough says Victorian Opposition Leader Robert Doyle has not been active enough on tax reform. “I make no bones about it. Regional Victoria is paying 80 cents in tax for every $1 in premium. That’s totally unreasonable, and there’s no justification for it.”
ICA Executive Director Alan Mason says property owners will be hardest hit by the new tax, because the state already charges stamp duty on top of the FSL and GST.
Mr Mason says the high tax impost on policyholders is a significant cause of underinsurance and non-insurance. “This in turn has adverse effects on the economy and drives more people to demand government assistance in times of disaster.”
When asked what the Federal Government can do to help the insurance industry achieve more tax reform, Mr Brough was circumspect. “Well it’s a difficult one, given that NSW and WA haven’t even put an offer on the table about meeting their 2000 commitment on getting rid of stamp duty. That is something practical we’re working on. Other states have put an offer on the table and we’re evaluating that.”
For the insurance industry to gain more support from politicians, Mr Brough says, it should reinforce the message to businesses about how much they are paying.
“When statements go out insurers should ask: ‘Are you aware you’re paying $2600 and $900 of that is going to the XYZ state government in the form of taxes? We as insurers don’t think that’s good enough and we need your support to make this an issue.’”
Insurance & Risk Professional asked Mr Brough whether a PR campaign would be useful in getting people to understand they are being overcharged. “Well, the community is being dudded. I think we should call it what it is. I think the public does need to know what it’s paying. People were so concerned about having a 10% GST being applied and yet you have an 80% tax in some parts of Victoria on insurance.
“Every Australian will be affected by the cost of insurance, whether they have it indirectly or directly. If it becomes unaffordable, people won’t take it out – and the ramifications of that don’t bear thinking about.”