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The state taxes quandary
By Walter Spratt, a researcher and writer specialising in the insurance industry, December 2005

Three Australian states inflict higher insurance premium taxes on property policyholders than the Federal Government imposes on wine and spirits. Not content with having the highest premium taxes in the world, Victoria has passed legislation that, among other things, provides for fire services levies to be applied to “phantom” premiums and non-existent brokerage and commission.

National and global corporations that have invested in Victoria will soon suffer the consequences – a fourth tax on their property premiums. Act No 51 received royal assent on August 24, 2005. Its damaging provisions, hidden in a welter of words, are being introduced progressively. However, the Victorian Government will first have to accept the impractical and damaging nature of its proposals.

Meanwhile, the New South Wales Government, with the second-highest insurance premium taxes in the world, is hovering in the wings. In September 2004 it released a public accounts committee report entitled Review of Fire Services Funding. This ensured the retention of three layers of tax on insurance premiums.

NSW obviously sees policyholders as cash cows, for it hasn’t been idle. While awaiting developments in Victoria it increased the stamp duty on policies from 5% to 9%. That is an increase of 80%.

However, most businesses are unaware that stamp duty of 9% produces an effective rate of 11.4% because stamp duty is applied to the premium, fire services levy and the GST – all compounding.

Tasmania, with the third-highest property premium taxes in the world, is the only other state with a tax triumvirate, which applies to business premiums. Household insurance premiums attract only two layers – the GST and state stamp duty.

Creating an image

Australia’s financial services sector is one of the most advanced in the world. Its reputation has been hard earned, culminating in the rigorous reform reflected in the Financial Services Reform Act, which became effective in March 2004.

Direct financial services reform is but one part of the mosaic. The industry has also benefited from tort reform, privacy laws, and strict and extensive corporate governance requirements. Then there are the onerous demands of the new-look, no-nonsense industry disciplinarians: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC).

Thus the Australian Government has been progressively creating a platform of reform to ensure that the country’s heightened performance endures, attracts an increasing inflow of overseas investment and helps establish Australia as a financial services centre in the Asia-Pacific region.

Destroying an image

Contrast the Federal Government strategy with the perception conveyed to global corporations by three states, resulting from a determination to cling to a discredited fire services funding system and harvest huge taxes from the prudent – that is, those who fully insure. Those who don’t insure, or don’t fully insure, are often repelled by the cost.

Australia is unique. Where else in the world will one find a tax on a tax on a tax on insurance premiums? But worse is to follow. The Victorian Government’s new legislation has effectively created a fourth property premium tax, albeit on a selective basis. The victims will be big corporate property owners, including multinationals that have invested heavily in Victoria. The State Government has been unable to quantify the financial effect. Indeed, the proposed arrangements are likely to be impractical and unworkable.

The manufacturing plants of global corporations operating outside Melbourne, such as Ford, Alcoa, Shell, and Mars (of confectionery fame) – and indeed all global and local businesses – are subjected to a formidable trio of taxes. The result? Every $1 million of premium paid for insurance cover now attracts an extra $815,000 for the privilege. Who knows how much extra will be added to the bill if (or when) the fourth tax becomes operative.

Perhaps the Victorian Government is determined to have its moment of glory by featuring in the Guinness Book of Records. It issued the media release “Invest Victoria” on November 8, 2005, in which it stated it was a leader in tax reform.

The “fame” of Victoria, NSW and Tasmania is spreading in overseas investment markets. An article appeared in an Asian financial services industry journal in September 2005 dealing with premium taxes in those states. The recipients? Corporate subscribers in Japan, South Korea, China, Vietnam, Malaysia, Hong Kong, Singapore, India, Taiwan, et al.

The Queensland, South Australian, Western Australian and ACT governments have tried premium-based systems but abandoned them because they allowed taxpayers to escape their obligations via underinsurance and non-insurance. The three enlightened states, with the ACT and Northern Territory, have reformed the old unfair systems and put their fire services funding requirements on sound foundations – largely property-based, with collections made by local councils. Policyholders in those jurisdictions don’t pay GST or state stamp duty on fire services levies.