Playing the long game
Calls for tax reform have for years fallen on deaf ears. Is there finally hope for a breakthrough?
By Bernice Han
Governments have been quick to roll out financial support measures for Australians enduring one of the worst cost-of-living crises in recent memory.
There are electricity rebates, tax cuts, road toll relief and, in Queensland, even help for aspiring homebuyers, who will not have to pay stamp duty on new builds from May.
Yet little has been done at federal and state levels to help households and businesses with insurance.
Instead, politicians have been quick to hit out at insurers, warning of consequences if the industry is caught “ripping off” customers.
Insurers found themselves in the firing line once more after Ex-Tropical Cyclone Alfred hit southeast Queensland and north New South Wales.
Prime Minister Anthony Albanese and other politicians repeated accusations that the industry is to blame for pricing and availability woes in catastrophe-prone areas.
But if they are genuinely concerned about people cutting back on insurance – or in extreme cases doing without it – then tax reform can no longer be ignored.
State and territory insurance taxes in 2023-24
Never has the case for removing insurance tax been more pressing. Extreme weather risks have intensified, and not just in regional communities: urbanites are increasingly exposed to the same climate-linked natural perils.
The Insurance Council of Australia says the taxes are punitive and unfair because they are levied in proportion to the cost of the premium, so they penalise most those who face the greatest extreme weather risk and pay higher insurance prices.
ICA CEO Andrew Hall says it is time to “push past [the] politicking. There’s a way forward … we’ve got to do something about the fact that insurance products are heavily taxed and that people who don’t live in flood zones are currently paying more in their insurance premiums because we’re constantly getting battered by these large-scale flood events on the east coast of Australia.”
Insurance News last examined insurance taxes levied by states and territories in 2023, when inflation was running rampant. Changes since have been few and far between.
Victoria cut business insurance duty from 10% to 9% on July 1 last year as part of a 10-year program to phase out the levy, cutting by 1 percentage point every year. This will save businesses more than $516 million over the first four years, according to the Victorian government.
For all other general insurance products, the state still has a 10% stamp duty in place.
Asked to justify the 10% duty, a spokesperson for the government tells Insurance News: “The Victorian government carefully considers Victoria’s tax settings and always looks to keep insurance duty rates as low as is practical, balanced with the need to raise revenue in support of essential services.
“Victoria’s economy remains strong, but we know that cost of living is hitting families – and we’ll continue to provide real support where it’s needed most.”
Virgin territory
The Australian Capital Territory remains the only jurisdiction to have fully cut all forms of insurance levy, a move it made in 2016 as part of a 20-year overhaul of its taxation system. The only duty ACT residents pay for buying insurance is the 10% GST, which applies to most goods and services.
There was opposition to the tax reforms, ACT Chief Minster Andrew Barr recalls.
“Political will is important,” he tells Insurance News. “However, as a territory the advantage we had when reforming stamp duty [on] insurance was due to the ACT performing both municipal and state-based functions.
“Other state jurisdictions would need to reach an agreement with local government to undertake the sort of reform that we did. It is a more complex process at a state level.
“The ACT has demonstrated what is possible and it will result in a better economic outcome, but we acknowledge that it is a harder proposition to implement at a state level.”
Looking back, he says there’s no regret. “Insurance duty was a very inefficient tax, creating incentives for consumers and businesses to underinsure or not to insure at all.”
In addition to GST, other states and territories impose stamp duties of 2.5%-11% on insurance policies. In New South Wales and Tasmania, residents and businesses pay another tax charged on insurance products to fund emergency services.
NSW is taking another crack at removing its emergency services levy, but it is far from certain the charge will be axed. The state previously moved to dump the ESL – and had done all the work to switch to a broad-based property tax – only to abort the plan at the last minute.
Last year, the Tasmanian government put a hold on plans to replace its fire services levy on business insurance with a property-based model.
A spokesperson for Tasmania’s Department of Treasury and Finance tells Insurance News: “Insurance duty is an important source of revenue that enables the Tasmanian government to provide essential services such as hospitals, police and emergency services, schools and roads.
“The government has consistently strived to strike a balance between revenues required to fund essential public services and infrastructure, and taxation arrangements that are fair and equitable for Tasmanians.”
In Queensland, general insurance products come with a 9% stamp duty. A state spokesperson tells Insurance News: “The Crisafulli government is delivering structural cost-of-living relief for Queenslanders.
“This includes a focus on betterment by investing in mitigation measures, home resilience initiatives and building stronger infrastructure to put downward pressure on insurance premiums and drive down costs in the long term.”
An NT Treasury and Finance Department spokesperson says the territory’s “policy position is in line with all other states other than ACT. The … government continually reviews its tax policy settings to ensure they are fair for consumers and competitive for insurers while aligning with the government’s fiscal strategy.”
ICA says that depending on the state or territory, government taxes such as stamp duty, GST and emergency services levies can add 20%-40% on top of premiums.
In 2022-23, states collected $7.6 billion from insurance customers, which was $3 billion more than insurers made in profit that year, according to the peak body in its federal election platform.
“In a cost-of-living crisis … we cannot wait for mitigation and risk reduction programs to offer the critical protection and price relief needed,” ICA says.
“Immediate action is also essential – with tax and regulatory reform offering the best opportunity to ease cost pressure on insurance premiums in the near term.”
ICA has long campaigned for insurance tax reforms. And its message about the taxes’ unfairness and how they discourage insurance take-up has been shared by independent reviews and studies.
The Australian Competition and Consumer Commission’s premium affordability study in 2020 recommended axing insurance stamp duty, and last year, the Senate inquiry into the impact of climate risk on insurance premiums made a similar proposal.
Governments have mostly been deaf to these calls. Still, there is a glimmer of hope.
The debate goes on
Victoria University economist Jason Nassios tells Insurance News: “While reform won’t happen overnight, there is consensus that shifting away from insurance
taxes will lead to a more efficient system of taxation.
“Whether other states follow the ACT’s lead remains to be seen, but the debate around insurance affordability and economic efficiency suggests this issue will remain on the agenda.”
Professor Nassios says the ACT’s tax overhaul and Victoria’s move to phase out business insurance stamp duty shows “there is certainly potential for reform”.
He has analysed ACT reform outcomes and says the jurisdiction is an outlier because of a few factors.
“One key advantage is political stability. The ACT has had a Labor government for nearly 25 years, providing consistency in its long-term policy direction … This kind of policy continuity has been harder to achieve in other jurisdictions, where election cycles and political shifts often make long-term reforms more challenging.”
He says insurance tax reforms in other jurisdictions have proved more difficult.
“While some states have explored reducing or eliminating stamp duties on insurance, competing fiscal priorities and stakeholder concerns often slow or stall reform efforts.”
Professor Nassios says NSW’s ESL reform backflip in 2017 and Tasmania’s decision to pause its fire services levy overhaul “are examples that highlight the difficulties in balancing budgetary needs with industry and community expectations, making comprehensive reform difficult to achieve”.
Not everyone is convinced that scrapping insurance taxes will resolve premium affordability challenges.
Margaret McKenzie, chief economist at think tank Per Capita, says: “Insurance companies see stamp duties as low-hanging fruit in their bid to gain subsidies/reduce taxes on them. However, this is opportunistic as a strategy to address the inherent market failures in the insurance cycle.
“The insurance cycle is where the insurers coast along taking rents (excess profits), particularly with lack of competition in the industry, during periods of few claims and lack of insurance incidents, and then find themselves unwilling or unable to meet the insurance payouts in times of insurance events.
“The government is also subsidising insurance companies by payments and subsidies to the victims of natural disasters, thereby limiting the responsibilities of insurers, yet they complain about funding for example fire services.”
