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Taken IPART: NSW economic regulator calls for insurance tax cuts
Insurance & Risk Professional, August 2008

Insurance taxes are the “least efficient” taxes in New South Wales and the fire services levy (FSL) should be abolished, the state’s economic regulator has concluded in a draft report.

The NSW Independent Pricing and Regulatory Tribunal (IPART) released a draft report into its review of state taxation in June. It found the NSW tax system needs improvement to meet future funding requirements.

Among the recommendations is the reduction and possible abolition of inefficient and distorted state taxes, including insurance stamp duty and the FSL.

The NSW economic regulator says insurance taxes punish right-thinking consumers and identifies “a strong case for abolishing them entirely”.

“These revenue sources penalise those who are prudent enough to take out insurance, and so encourage underinsurance and non-insurance,” IPART states.

NSW, Victoria and Tasmania are the only states that continue to charge an FSL on insurance premiums. The impost contributes $1.2 billion to the NSW Government’s annual tax take.

Insurance stamp duty ranges from 7.5% to 11%, and the FSL is as high as 58% of the premium.

IPART says the FSL inflates insurance premiums and deters consumers.

“The effect on consumer and business behaviour is amplified because the duty is applied on top of the embedded fire services funding contributions and the GST.”

IPART says the levy is unfair because uninsured residents benefit from the fire services but do not contribute to the cost through buying insurance policies.

In the short term, IPART recommends the replacement of insurer contributions to the fire service by increasing the tax take from local councils, through a staggered increase in property rates.

The regulator also proposes a cut in the standard rate of stamp duty for general insurance from 9% to 6%.

The NSW Government can fund those cuts by ending certain tax exemptions, IPART claims. Stamp duty on third party motor vehicle personal injury insurance is one example.

Long term, the regulator calls on the NSW Government to reduce its reliance on insurance tax revenue.

“There is a compelling case for abolishing stamp duty on insurance and making up the revenue forgone from consolidated revenue or other sources,” the report states. “However, there are severe constraints on the state’s fiscal capacity to do this in the short term.”

Figures from the Australian Bureau of Statistics show insurance taxes nationally contribute about $3.7 billion a year to government coffers.

The main types of state taxation include payroll and gambling taxes, stamp duties on property and insurance, land tax and environmental levies. NSW will this year count on about $17.6 billion in revenue from these sources.

The Federal Government provides the bulk of state revenue through income tax, the GST, and excise and customs duty.

Insurers and brokers have welcomed the IPART report. The industry has long argued that insurance taxes inflate premiums and deter consumers from buying adequate cover.

NIBA Chief Executive Noel Pettersen says the recommendations are consistent with suggestions put forward by the association.

He says the proposal to move to a rates-based FSL is a fairer system for NSW and consistent with policy in some other states.

Insurance Council of Australia Chief Executive Kerrie Kelly also concurs with the recommendations.

“Today’s recommendations by IPART are a significant first step in the crucial area of tax reform of insurance products – if adopted in their entirety by the NSW Government they will provide major benefits to consumers,” she said.

NIBA regulation consultant John Hanks is on the same page.

“It’s a good start,” he said. “It is great that IPART has recognised the inequities present in insurance taxes, but it is early days.”

Mr Hanks is concerned the abolition of certain exemptions could simply shift the tax burden rather than remove it.

“There is a danger the same amount of money could be sourced from other areas of insurance,” he told Insurance & Risk Professional. “We’ll be looking at that carefully.”

However, the IPART recommendations haven’t met with unanimous approval. The proposals have been heavily criticised by the NSW fire service unions, which say abolishing the FSL would unfairly burden ratepayers.

Public submissions to the draft report closed on July 11 and IPART will submit a final report to the state treasurer by August 31.