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Insurance & Risk Professional, December 2008
The NSW Government ignores its own experts to load yet another levy on premiums. But the industry is pushing ahead with its campaign for reform
Given the New South Wales economic watchdog’s outright condemnation of insurance taxes in October, the insurance industry was staggered when the State Government imposed a new $39 million levy on insurance premiums less than a month later.
The levy was announced in a state mini-budget by Treasurer Eric Roozendahl, and mirrors the controversial fire services levy by forcing insurers to contribute towards the upkeep of the State Emergency Service (SES).
NIBA Chief Executive Noel Pettersen says the NSW Government imposed the levy in the knowledge that it was contrary to the advice of the Independent Pricing and Regulatory Tribunal (IPART), which it had commissioned to report to it on tax reform.
NSW Emergency Services Minister Tony Kelly said the new levy on insurance premiums – which will come into effect on July 1 next year – will provide an estimated $39 million in the first year, reducing the burden on the state budget.
The local government sector’s contribution to emergency services funding has been reduced to 11.7% while the Federal Government contribution increases to 14.6%.
Insurance Council of Australia (ICA) Chief Executive Kerrie Kelly attacked the decision.
“In a classic case of cost-shifting, the NSW Government has handed down a Budget whereby the cost of running the State Emergency Service will be picked up by general insurance consumers,” she said.
“Instead of taking advice from the IPART Review, which the current NSW Government established, the NSW Treasurer has chosen to introduce another highly inefficient tax to plug the NSW Budget black hole.”
The move has doused rising hopes in the industry that the fire services levy may be on the way out in NSW. In its’ final report on state taxation in October, IPART recommended the levy be scrapped in favour of a more equitable system based on property taxes.
Only NSW, Victoria and Tasmania still retain the fire services levy. Elsewhere, fire services are funded through different means, usually using property-based levies so all property-owners pay for the maintenance of the emergency services.
IPART’s final report also recommends an immediate cut in stamp duty on insurance from 9% to 5%, although it acknowledges that severe constraints on the state’s fiscal capacity would prevent complete removal of stamp duty in the short term.
Stamp duty is charged on the cumulative totals of premium, fire services levy and GST, and is seen as a major factor in raising the price of insurance. For example, the new SES levy will also attract extra revenue through additional GST and stamp duty.
“Insurance duty is a highly inefficient tax that creates disincentives for appropriate insurance,” the report said. “This suggests that the state should seek to reduce its reliance on this duty over the longer term.”
IPART says the fire services levy creates disincentives for the purchase of appropriate insurance. “On this basis, its removal should be a priority.”
Industry lobbyists still hope the report’s unequivocal rejection of insurance taxes might have some influence on the wider Federal Government tax review.
The report says a number of existing NSW tax exemptions and concessions currently place a disproportionate burden on non-concessional taxpayers, and the removal of these concessions will help fund the four percentage point cut to stamp duty, the tribunal argued.
IPART claims tax reform will bring about efficiency gains and a bigger slice of the federal tax pie. It suggests NSW could gain a greater share of national GST because the state is currently assessed as having an above-average capacity to collect revenue from fire service levies. These user charges result in a redistribution of GST revenue from NSW to other states.
The report also says the removal of existing stamp duty exemptions on third party motor vehicle personal injury insurance could yield more than $150 million in annual revenue alone. This wouldn’t discourage the take-up rate because the policy is compulsory.
In its condemnation of the fire services levy, IPART pulls no punches. It says general insurers currently add a surcharge on premiums to cover the cost of the levy, meaning only those residents prudent enough to buy insurance are forced to pay the levy. This has been an ongoing thorn in the side for insurers, brokers and affected consumers.
The report has won the predictable support of insurance industry advocates.
ICA says the recommendations fall largely into line with its own submissions to IPART and the wider federal review of Australia’s Future Tax System.
Karl Sullivan, General Manager for Policy in ICA’s Risk and Disaster Directorate, is especially pleased with the recommended reform of the fire services levy.
“[It] is a significant reform and one that will lead to a more equitable and effective funding of fire services in NSW,” he said. “The IPART final report represents a significant breakthrough in relieving insurance policyholders from the burden of insurance taxation.”
ICA General Manager of the Economics and Taxation Directorate Alex Sanchez has also backed the findings.
Mr Sanchez, who within a few days of the new SES levy being announced would find himself embroiled in media reports claiming he was threatened by Minister Kelly while discussing the IPART report, told Insurance & Risk Professional insurance stamp duties remain one of the most inefficient state taxes and the evidence is clear on that.
“State tax reform can deliver major efficiency gains for the economy,” he said. “Removing these deadweight costs [boosts] growth and improved living standards.” Statutory fire services contributions in NSW currently flow from the insurance industry, local councils, and the NSW Consolidated Fund, with insurers contributing the most.
The insurance take is based on the market share of insurance companies that issue policies for fire, industrial-specific risks, contractors, home and vehicle policies.
Extensive research by NIBA, ICA and other organisations has shown that NSW policyholders pay more taxes on their premiums than any other place in the world, with the exception of the neighbouring state of Victoria.
While NSW business customers currently pay 38% in taxes on top of their premium, rural business customers in Victoria are levied an additional 58% of their premium for the fire services, while the rate for urban businesses is 48%.
For homeowners, Victorian insurance buyers are levied 24% in the country and 20% in town while in NSW all homeowners pay a 20% levy.
In Tasmania most commercial policyholders pay a 28% levy while homeowners are exempt from the scheme.
The IPART report recommends local councils in NSW should administer a property-based levy charged separately from property rates to ensure all ratepayers contribute to the cost of the fire services.
The state governments of Queensland, South Australia and the Australian Capital Territory already operate a property-based fire services levy, while Western Australia operates a new levy that varies by property type and region.
NIBA’s submission to the Federal Government’s tax review says the community at large should be encouraged to have appropriate insurance in place. “This would be more likely to happen if the existing heavy burden of taxes on insurance were to be lifted.”
ICA’s submission says tax reform would yield gains to real household consumption of almost $2.6 billion, with the net cost of abolishing general insurance stamp duty estimated at $1.7 billion.
“There is now an emerging consensus that reform of general insurance taxation is desirable and timely,” ICA says in the submission, which cites the IPART report as one example.
The industry is pushing hard for insurance taxes to come under the close scrutiny of the Federal Government review after the 2000 Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA) largely ignored general insurance tax.
The Federal Government ratification of that agreement eliminated a clutch of inefficient taxes but the insurance industry missed the boat.
“The failure to include a program of insurance tax reform in the original 2000 IGA represents a significant anomaly in the history of national tax reform and in this regard, the [latest] review provides a unique pathway to redress this situation,” ICA says in its submission.
The federal review panel is due to release a consultation paper in December and there will be more opportunities for meetings and submissions ahead of the final report due to be submitted to Federal Treasurer Wayne Swan in December 2009.