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A tax on a tax…
NIBA Backgrounder, January 2006

If you were asked to pay income tax, and then pay another income tax on the second amount, you’d see it as very unfair. However, as an insurance policyholder this is exactly what you are being forced to do by state governments.

Each of the governments has been charging what amounts to a tax on another tax on basic insurance premiums.

There are already a large number of taxes applied to insurance premiums, but the ones you may not notice are the indirect taxes such as fire services levy (FSL), stamp duty and goods and services tax (GST) that are a real burden.

Businesses in Victoria already pay up to 82.5% tax on their insurance premiums, identified as the highest insurance tax rates in the world by a recent report by the Centre for International Economics.

This compares with taxes of 22% in South Australia, 21% in Western Australia and 18% in Queensland, all states with which Victoria competes for business investment.

It’s understandable if the business sector – medium and large businesses – is annoyed with these additional taxes on insurance, because some of them are higher than those applied to alcohol and cigarettes in some states.

It is well known that the FSL is an unfair impost on an insurance buyer when those who don’t purchase insurance also benefit from fire services.

But it is also flawed because of the lack of cohesion with the various state governments’ approach to the administration of the levy. As a result it has been abolished in some states, to be replaced by charges based on property rates.

South Australia, Western Australia and Queensland have replaced the FSL with a property-based system by owners and the ACT and Northern Territory fund their fire brigade services from consolidated revenue. But Victoria, NSW and Tasmania persevere with the levy on insurance buyers.

It has also been argued that the various state government stamp duties are inefficient.

In September last year the NSW Government increased its stamp duty rate of 5% on premiums up to 9%.

Policyholders should ask themselves whether this was necessary considering the new NSW tax will boost the state’s stamp duty revenue on premiums from $415 million to $541 million – a 30% increase.

At the same time the Victoria Government decided to introduce a new State Emergency Services Act which includes a hidden tax. This was done with barely any consultation with the insurance industry.

The new Act will slug self-insured businesses millions more in taxes each year.

The tax is likely to be most unpopular with big business and as a result the introduction of the Act has been delayed to next year – after the Victorian state election.

But the Government says its delay is due to the complexity of working out a way to calculate the “notional premium” for companies that have deductibles of $10,000 or more in their property insurance policies.

The Act will require brokers and insurers to come up with a FSL calculation for the self-insured portion of any property insurance.

Either way, property owners will be the hardest hit, because the state government already charges stamp duty on top of the FSL and GST.

Australians were extremely concerned about the introduction of a 10% GST in 2000. But in some parts of Victoria, policyholders have an 80% tax on their insurance!

Most people would expect a GST to be added to the final sum of taxes charged with an insurance premium.

This is not the case with the state government taxes being charged to insurance premiums throughout Australia. Usually the stamp duty is calculated after the GST.