Review of Australia's Future Tax System

The Insurance Council of Australia submits that reform of general insurance taxes should be a priority for the Review of Australia’s Future Tax System (AFTS). As the Treasury report “Architecture of Australia’s tax and transfer system” succinctly stated:

“The narrow base of many transaction taxes and their interaction with other taxes can have an impact on resource allocation in the economy. For example, insurance products are subject to GST, insurance taxes and, in some states, insurance companies can also be required to contribute directly to the funding of fire services. The interaction of these taxes increases the costs of premiums relative to other products, which may encourage people to take up less insurance than otherwise”.1

The Insurance Council supports the remarks in the Treasury paper and contends that the abolition of general insurance taxation will generate substantial gains to national economic welfare.

The Insurance Council submits that:

· Reform of general insurance taxes will yield gains to real household consumption of around 0.48% or a little under $2.6 billion ensuring that the gains to economic welfare from general insurance tax reform equate with those achieved from microeconomic reform efforts of the past.

· That the net cost of abolishing stamp duties on general insurance is $1.7 billion after allowing for second round effects and revenue claw backs to the States from efficiency gains. The net cost of such reform is comparable to the hitherto cost of previous State tax reform in financial services such as the removal of FID and Debits taxes.

· The gains from the removal of all State transaction taxes are extremely large, with gains to household consumption of between 1.1% and 1.8%.

· There is now an emerging consensus that reform of general insurance taxation is desirable and timely. For example, His Honour Justice Owen recommended reform of general insurance taxation in his Royal Commission into the collapse of HIH. More recently, the NSW Independent Pricing & Regulatory Tribunal (IPART) recommended reform of general insurance taxation and in particular, fire services levies and stamp duties. 2

· Although the immediate emphasis of the Commonwealth State reform project rests with reform of service delivery, considerable gains can also be secured to national well being from reform of Commonwealth State taxation arrangements. Moreover, the model of the 2000 Intergovernmental Agreement between the Commonwealth and the States provides a proven platform under which future taxation reform efforts can be launched.

· The AFTS provides a rare and historic opportunity to correct the absence of general insurance tax reform from the 2000 IGA. 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 AFTS Review provides a unique pathway to redress this situation.

1 See Australian Treasury (2008) “Architecture of Australia’s tax and transfer system” at page 203.

2 See Royal Commission into HIH (2003) “Volume 1: A Corporate Collapse and its lessons” and NSW Independent Pricing & Regulatory

(June 2008) “Review of State Taxation: Report to the Treasurer”

For a PDF copy of the full submission please click here.

Further Information

For further information on the financial inclusion project at the Insurance Council please

contact Alex Sanchez, General Manager, Economics and Taxation Directorate on 02 9253 5130 or email asanchez@insurancecouncil.com.au