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Tax battle goes public. The industry has been pushing insurance tax reform for many years, but this time NIBA is taking the bull by the horns
Insurance & Risk Professional, June 2006

Australians pay the highest insurance taxes in the world. It’s an issue that state and territory governments have ignored for years, but a new intensive campaign by NIBA might just make politicians sit up and pay attention.

The industry has tried many times to deal with the matter, but NIBA’s new campaign takes a new approach – public education and involvement.

Many policyholders are not aware that insurance is subject to a “sin tax”, with rates equal to those on gambling and alcohol. And when it comes to insurance, Victoria is the highest tax region in the world.

Policyholders are even slugged with taxes on taxes. For example, a country policyholder might pay a base premium of $100, then 10% stamp duty, 10% GST and up to 50% for a fire services levy (FSL). Because taxes are calculated on top of each other, some policyholders pay almost as much in tax as in base premium.

GST is then returned to state and territory governments, which also collect the stamp duty.

NIBA Chief Executive Noel Pettersen says the imposition of a tax on a tax breaks a fundamental principle of good taxation policy. He has written to all state and territory treasurers to express brokers’ concerns about the excessive and inequitable taxation of insurance in Australia.

Mr Pettersen wants governments to acknowledge the problem and work with the industry to come up with a workable solution.

“The high rate of stamp duty payable on insurance adds to the cost of doing business in the state and discourages people from protecting themselves and their property from catastrophes and disasters,” he wrote.

“Not only is the rate of tax payable on insurance high in Australia but also the taxing arrangements are inefficient and inequitable.”

Rather than deal with the tax-on-tax issue, last year the New South Wales Government increased stamp duty from 5% to 9% in its budget.

“Governments need to stop viewing the insurance industry as cash cows,” Mr Pettersen said.

There have been several state and territory government reviews into insurance taxes, the most recent being the NSW and Victorian reviews of the FSL. Both recommended keeping FSL systems.

But not all reviews have produced negative results. A 2001 Victorian Government review of state business taxes stated: “Stamp duties and transaction taxes are among the most distortionary of all taxes available to the states. The committee believes that… abolishing them now would nurture business activity and growth.”

The Federal Government has been relatively open to the principle of insurance tax reform in the past, but it has always put the onus back on state and territory governments to reduce taxes.

One factor that makes tax reform particularly hard to achieve is that 2006 is an election year for NSW and Victoria.

The HIH Royal Commission report released in 2003 recommended that state and territory governments abolish taxes on insurance products. Commissioner Justice Neville Owen specifically mentioned the tax on tax.

To highlight the matter to policyholders, NIBA will issue members with books of stick-on notes carrying the message:

“Taxes on your premium are a significant part of the total invoice. With the various state and federal taxes accumulating, you are paying several levels of tax. For more information – and how you can help do something about it – go to”

Members are encouraged to stick one of the notes on all correspondence with policyholders.

NIBA will also focus on trade and mainstream publications and issue media releases with information on the FSL, the effect of tax on businesses, the inconsistencies between states and territories on tax issues and the ramifications of non-insurance and underinsurance.

In May the Federal Government announced that GST revenue to the states and territories would increase by $2.3 billion, a move the Insurance Council of Australia (ICA) says should encourage state and territory governments to reduce taxation on insurance.

Chief Executive Kerrie Kelly says that as long as “tax on tax” situations exist, they will affect the affordability of insurance “and exacerbate the problems of underinsurance and non-insurance in the community”.

She says governments need to look at ways to encourage individuals and businesses to take out insurance to protect themselves, rather than inflicting taxes on insurance equivalent to those charged on gambling and alcohol.

“The impact of underinsurance and non-insurance has been evident in communities hit by natural diasters such as those in North Queensland after Cyclone Larry, and in Canberra after the 2003 bushfires,” she said.

Ms Kelly says research commissioned by ICA and conducted by the Centre of International Economics shows taxes on insurance are “relatively inefficient”.

“Reducing these taxes or replacing them with almost any of the others that government have at their disposal would lead to large gains in economic welfare,” the survey says.

ICA believes the time has come for governments to drop the inefficient taxes charged on insurance.

“Because state insurance taxes were not included in the original intergovernmental agreement [which framed the arrangements for GST], it means ordinary Australians are being penalised for being prudent enough to protect themselves and their property with insurance,” Ms Kelly said.

“With most states and territories moving into revenue positions following the introduction of the GST, and with the implementation of the intergovernmental agreement on state tax reform well advanced, it is timely for the Federal Government to start developing a new agreement on tax reform through the Council of Australian Governments.”

Delay on FSL legislation

The Victorian Government has not appointed an actuary to help with the details of its State Emergency Service Act, which is set to be implemented on July 1 next year. The Act was to be introduced in July this year, and industry sources say the delay is due to the likely unfavourable response from big business.

In effect, the Act means a new tax will be imposed on commercial insureds. Sources say the move would not have been popular in the months leading up to the Victorian election scheduled for November 25.

The Government contends the delay is due to the complexity of the Act. The legislation requires insurers to report the notional premium for property policies with deductibles of $10,000 or more.

The legislation is in limbo until a formula for calculating the notional premium has been developed. An actuary has still not been appointed to prepare the calculation method. At the beginning of this year the recruitment target date was the end of March.

A government spokesman told Insurance & Risk Professional the process of appointing an actuary is under way.