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Banging heads against a taxation brick wall, 17 March 2008

Despite the insurance industry’s best endeavours, there are few signs the NSW and Victorian governments are prepared to give up their addiction to insurance taxes without a long, bruising struggle.

The latest salvo north of the Murray was fired last December, when NIBA and ICA made strenuous submissions to a general review of NSW taxation.

ICA pointed out that NSW collects $1.2 billion in annual revenue from insurance taxes – about 7% of the state’s total tax take.

While all states remain firmly wedded to stamp duty where they can get away with it, NSW, Victoria and Tasmania are the last clinging on to the fire services levy (FSL). All other states fund their fire services via property rates.

Two months later and have legislators been listening to the industry’s reasoned arguments? No chance. As if to rub salt in insurers’ and brokers’ open wounds, commercial hikes on both sides of the Murray earlier this month took the FSL in country Victoria up three percentage points to 55% and NSW up two percentage points to 38%.

The increases confirm country Victoria as the highest-taxing jurisdiction in the world, with policyholders facing an extraordinary 87.5% markup on their premiums from the compounded effect of the FSL, stamp duty and GST (effectively a tax upon a tax upon a tax).

So why aren’t policyholders manning the barricades over this patently unfair tax? The lack of publicity doesn’t help. The mainstream media simply isn’t interested in the issue, responding only when government ministers gripe and moan about greedy insurers.

State governments are fond of admonishing the industry over rates of non-insurance and underinsurance. But they happily ignore the proven link between the cost of policies and levels of insurance. As ICA’s comprehensive report stated: “Rates of non-insurance are found to be closely correlated with insurance taxes”.

Independent audits found WA’s removal of the FSL in 2003 led directly to a fall in premiums and in the level of non-insurance, while rates climbed elsewhere.

The ICA report’s conclusions are unambiguous. “States with higher tax rates on insurance premiums have higher rates of non-insurance for both building and contents insurance. There is a notable gap between rates of non-insurance in these states [NSW and Victoria] and those that do not have such a levy.”

Both NSW and Victoria’s more recent reviews – conducted three and five years ago respectively – were anaemic, internal affairs that ended up rubber-stamping the status quo.

The 2003 Victorian review – which critics found flawed because it was conducted inside the Victorian Treasury – found contributions from insurers remained the most effective way of funding the fire services, and rejected a property levy on the grounds of administration costs and risk management concerns.

Why the entrenched opposition? Ranged against the industry are a host of vested interests led by a coalition of local government, property owners and the fire services, according to a senior insurance industry source.

“Larger property owners in NSW think they may end up paying more,” the source told

“In Victoria the local governments are opposed to it. In NSW, local councils took a different view and said they would be happy to collect it but thought they should be remunerated.

“And there’s very little incentive for the fire services themselves to change. It’s three-quarters of their budget and they don’t have to justify it.”

Take away the FSL, and the fire services would have to justify their expenditure against other vital infrastructure, such as hospitals. This way, they can benefit from regular injections of cash, no questions asked.