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All fired up: A Federal Government tax review is urged to consider the imposts on insurance
Insurance & Risk Professional, August 2008

The Federal Government’s biggest tax review in 50 years has prompted industry calls for cuts to insurance taxes. Treasurer Wayne Swan said in his Budget night announcement the Government’s 18-month “root and branch” review is committed to an examination of tax at all levels.

It was essentially the night’s only point of note for the general insurance industry.

With the review comes hope of cuts to insurance stamp duty and abolition of the fire services levy (FSL), which exists on premiums sold in New South Wales, Victoria and Tasmania.

The impetus for the review came from the 2020 Summit in April. Among wider ideals for shaping the nation’s future was the comparatively sober suggestion that Australia look towards a more efficient and harmonised system of taxation.

Mr Swan acknowledges it’s not before time.

“Globalisation, climate change, population ageing and the internet are transforming the way Australians live and do business,” he said.

“There is stronger pressure than ever for a tax system that works in the fairest, simplest and most efficient way.”

The review panel is chaired by Secretary to the Treasury Ken Henry, who is joined by academics and senior officials from government departments. The panel will also draw on a Treasury working group.

An initial discussion paper was due by August and a final report will be submitted to the Treasurer by the end of 2009.

If the Federal Government hopes to deliver on its lofty aims, it could do worse than subject insurance taxes to some rigorous analysis.

Insurers and brokers have long argued that taxes inflate the price of insurance premiums and discourage consumers from taking out necessary cover, leading to underinsurance and non-insurance.

The NSW economic regulator Independent Pricing and Regulatory Tribunal (IPART) came out swinging against insurance taxes in June in its draft report into the state’s taxation.

Describing stamp duty and the fire services levy as the least efficient taxes, the regulator recommended a 33% cut in stamp duty and proposed the fire services levy be phased out altogether.

IPART’s conclusions brought warm praise from NIBA and the Insurance Council of Australia.

NIBA Chief Executive Noel Pettersen says the IPART report reiterates brokers’ belief that stamp duty and the FSL contribute to underinsurance and non-insurance in Australia.

“The inequality that applies to the taxation of insurance is a view consistently held by NIBA,” he said.

Insurers say the reforms will bring efficiency gains through lower premiums and lower rates of underinsurance.

Insurance Council of Australia (ICA) Chief Executive Kerrie Kelly says ICA will continue to pursue the issue on a state basis and also federally through the concurrent federal taxation review.

But if the Federal Government review draws the same conclusions, the states are going to take some convincing.

Australian Bureau of Statistics figures reveal state government stamp duty on insurance was a collective $2.86 billion in 2006/07.

The figure is $3.7 billion when the fire services levy is included, so it should come as no surprise to discover that state governments have over the years stoutly defended the revenue.

NSW collects $1.44 billion in total from insurers in the form of the FSL and stamp duty, and Victoria takes in $1.1 billion.

Compare the tax revenue in NSW and Victoria with that of states without an FSL. Queensland takes in $421 million from insurance stamp duty and Western Australia collects $335 million.

Even allowing for the greater population, it is clear the NSW and Victorian governments get a substantial proportion of their revenue from insurance companies.

Insurers may remain optimistic, given the federal review’s terms of reference, which include an intention to examine the interaction between federal, state and local government taxes.

The Federal Government has also pledged to reduce inefficient taxes and study the effect of tax on consumption. Insurance taxes represent a compelling case study on both counts.

Considering that due to taxes a commercial customer in rural Victoria pays $191 for $100 of premium – including $58 in fire services levy – it’s not hard to understand the link between taxes and underinsurance.

And on July 1, the FSL for Victorian householders increased to 24% in the country and 20% in urban areas. In NSW, the levy remains at 20%.

Those homeowners are likely to be the government’s principal focus, Mr Brookes says, and personal lines and life insurance are expected to take priority.

“The Government’s concern is more likely to be on the cost of insurance to mums and dads – that’s the vote winner and where the priority for the Labor Party probably lies.”

Perhaps predictably, state government bookkeepers may favour the status quo. Victorian Treasurer John Lenders defended the FSL when Insurance & Risk Professional suggested that a levy based on property rates would be a superior instrument.

“As the insurance industry is a beneficiary of the services provided by the fire brigades, it is reasonable that they bear some cost of this service,” he wrote.

Mr Lenders says high-risk properties pay a higher FSL based on the price of the insurance premium, ensuring a fair distribution of cost.

Under a rates-based levy, “properties of similar value but very different fire risks – for example, a petroleum refinery and office block – would pay similar amounts despite the variance in risk”.

He also counters the belief that the FSL gives the uninsured a free ride, pointing out that legislation exists to allow fire service costs to be recovered from uninsured residents.

Stamp duty and the FSL are obscure taxes concealed in the pricing of an insurance premium.

A levy based on property rates is a highly obvious component, and rates are a sensitive issue with voters.

In NSW, for example, the Property Council is strongly opposed to the proposal to abolish the FSL in favour of a rates-based system, because it would shift the payment to its members.

Mr Swan says Australian taxpayers are entitled to a fair and efficient tax system. The initial discussion paper due by August may indicate whether this review will deliver.