Politicians like to talk about tax, but they’re silent when it comes to levies and duties that siphon billions of dollars out of policyholders’ pockets

By Bernice Han

New South Wales (NSW) may soon be the only jurisdiction in Australia that relies on levies heaped on insurance premiums to fund its fire and emergency services.

At present Tasmania is the only other state or territory to impose a fire services levy on top of premiums. Premier Jeremy Rockliff is expected to decide soon on whether the state’s fire services levy should stay or go when he tables his government’s 2023/24 Budget in May.

The case for removing insurance taxes in the guise of levies and stamp duties has never been more intense. Inflation is at its highest level in years as Australians struggle to stretch their dollars to pay for groceries and utilities. Mortgage repayments are rising in line with rising interest rates, with more increases likely.

In such an environment the taxes imposed on insurance premiums are being condemned by economists and ordinary citizens as an unwelcome and unnecessary burden on already stressed budgets.

Last year’s historic floods and other disasters have bolstered the case for ditching all forms of insurance taxes. The catastrophes exposed the severity of under-insurance, a trend that is only going to worsen as climate-fuelled weather patterns across Australia change. Many of the flood victims who didn’t have insurance cover or only had the bare minimum, said the premiums were too costly.

Yet governments remain wedded to insurance taxes in one form or another, despite overwhelming economic evidence against it. The Australian Capital Territory (ACT) is the only exception.

In states that no longer levy insurance policies to fund fire and emergency services, stamp duty of 9-11% – depending on the jurisdiction – is still being added to the cost of insurance.

Take Victoria as an example. The state accepted a recommendation of the 2009 Black Saturday bushfires royal commission to scrap its fire and emergency services levy on insurance premiums, and in July 2013 introduced a property rates-based system.

But general insurance policies in Victoria are still subject to stamp duty – 10% at present – and the total amount paid, like all other jurisdictions except the ACT – is calculated to reap the state the maximum amount possible.

The state calculates the GST payable – a flat rate of 10% is applicable to all insurance products sold across Australia – then adds stamp duty. Perhaps ironically, money raised through GST is collected by the Federal Government for redistribution to the states.

The Tasmanian premier has so far given little away about his government’s position other than issuing a statement in January to say that it will consider the proposed replacement – a property-based levy – or other alternatives during the Budget process.

The statement was responding to a consultation outcomes report on a review of the island-state’s Fire Service Act 1979 and a Treasury Options Paper.

The review’s report, published in late 2020, was chaired by retired Tasmanian auditor-general Mike Blake. It says the levy can have “unintended consequences” including under-insured properties and, in some cases, property holders paying more than one levy. This is because the levy, which varies from 2% to 28%, is only imposed on certain classes of business insurance and excludes policies issued by mutual insurers.

At the time of the review, the Insurance Council of Australia (ICA) estimated only 60% of Tasmanian businesses had building insurance. Effectively this means the uninsured 40% pay no insurance levy but still get access to fire services.

The review recommended that the levy be replaced with a property-based tax to support the Government’s goal towards achieving a “sustainable, stable, and equitable” funding system for fire and other appropriate emergency services.

Contacted by Insurance News, Mr Blake says Tasmania’s insurance levy “doesn’t meet the characteristics that the Government was looking for”.

“I had to come up with a funding mechanism that was fair and equitable, and I don’t think the insurance levy meets that requirement.”

Doing away with insurance taxes and duties should, in theory at least, be a no-brainer. Economists say they’re distortionary and unfair because they directly and indirectly hurt productivity and economic growth. Worse still, the present situation is affecting insurance take-up, especially in disaster-prone areas and among less well-off consumers who have the greatest need for need financial security.

Multiple independent reviews at federal and state levels going back more than a decade – most notably the 2010 inquiry led by former Treasury secretary Ken Henry – reached similar conclusions.

The Henry Review’s final report urged that “all specific taxes on insurance products, including the fire services levy, should be abolished”.

Even the Australian Competition and Consumer Commission (ACCC) weighed in on the matter as part of its three-year inquiry into insurance affordability issues affecting northern Australia. Its final report, published in December 2020, recommended axing stamp duty on home, contents and strata insurance products.

“It has been widely acknowledged that stamp duties on insurance products are an inefficient form of taxation,” the ACCC report says. It points out the GST-inclusive amount of a premium magnifies the effect of the tax.

The ACCC says its recommendation “is in line with recommendations from previous inquiries into insurance and taxation issues”.

Since that report insurance affordability has deteriorated considerably, and it’s not just consumers in the north who are feeling the pinch. A combination of uncontrollable factors has made it more prohibitive for households and businesses across the country to get cover.

The $5.81 billion NSW/Queensland floods in February/March last year – the country’s costliest insured disaster – floods that followed months later and other significant catastrophes in the past few years have pushed up the cost of premiums as insurers reconsider the risks.

To make matters worse, Australia’s worst inflation in years is seeing living costs outpace wage growth. Finding extra room in already tight budgets for home insurance is getting harder for many.

The arguments for a complete divorce from insurance taxes have never been stronger. Yet the silence from governments has been deafening.

Newly elected NSW Labor Premier Chris Minns barely mentioned the state’s punitive Emergency Services Levy (ESL) in the lead-up to the March 25 election, despite talking up efforts to ease the cost-of-living crisis.

NSW was set to dump the ESL in 2017 but aborted the move at the last minute after some businesses complained they would be worse off under the proposed replacement – a broad-based property tax.

A few weeks before the NSW election the Insurance Council of Australia (ICA) renewed its push for tax reform in the state, launching a campaign calling for the removal of the ESL.

It released a new report showing almost two-thirds of the state’s voters support replacing the tax with an alternative funding model for emergency services.

In the current financial year the levy will raise $1.2 billion from insurance policyholders to fund its fire and emergency services, according to figures from the NSW Budget Statement papers cited by ICA.

“Insurance duties are not just inefficient at their current level but given the other taxes we have available they are inefficient at any rate and should be removed.”

– Associate Professor Jason Nassios

It says the ESL adds around 18% to home insurance premiums and up to 40% to business cover. Abolition of the levy would see annual home insurance premium costs drop by around 15%.

The ACT is the only jurisdiction in Australia to have completely eliminated insurance taxes as part of its 20-year tax reform program that started in 2012. In July 2016 general and life insurance duties were scrapped. Before the change, a 10% duty applied to general insurance premiums and 5% to life insurance.

And the result? Victoria University’s Centre of Policy Studies was commissioned by the ACT Treasury to study its tax reforms, and found that about 75% of the economic benefits that materialised over the first six years of the reform program were attributable to insurance duty removal and also property duty reductions.

In October last year the centre went on to publish new research that showed removing insurance duties and property transfer duties nationally would deliver an economic dividend equivalent to an income boost of about $935 per Australian household.

“We’ve found really strong evidence that under a system where insurance duties are removed, and the revenues replaced with either a rise in the GST or a rise in personal income tax rates, economic welfare improves,” Associate Professor Jason Nassios, a co-author of the study, tells Insurance News.

“This provides strong evidence that insurance duties are not just inefficient at their current level but given the other taxes we have available, they are inefficient at any rate and should be removed.”

Less damaging taxes like a broad-based consumption tax, or the GST, have less distortionary impacts.

The report also draws attention to the fact that insurance taxes can be avoided by simply not buying cover, or opting for a policy that costs less. But the economists say the option of under-insurance or even non-insurance is, of course, no answer at all.

“Insurance duties are economically distortionary,” Associate Professor Nassios says. “If you have a tax levied upon the delivery of a good or a service and consumers make price-sensitive decisions on how much of that good or service to consume – and insurance falls in this category – we’re going to end up with an outcome where we’ve got lower levels of insurance coverage.”

He says the centre’s research has provided the evidence for “complete removal of insurance duties.”

“Insurance duties of all kinds, and they come in many forms, are collectively perhaps the top two or three targets for reforms that carry the best bang for buck,” he says.

“In Australia we have less damaging and less distortionary taxes available in our taxation arsenal, and economists have been drawing attention to this for a long time.”

Public policy think-tank the Grattan Institute, published a detailed report in 2018 that describes stamp duties and taxes as “economically destructive”.

It says scrapping existing insurance taxes would leave residents in NSW and Tasmania about $430 million better off. At the national level, such a move could reap a gain in excess of $17 billion.

The institute’s position has not changed since the report, Program Director Economic Policy Brendan Coates says.

“What you’re basically doing is you’re encouraging under-insurance,” he tells Insurance News. “That’s becoming increasingly problematic in a world with climate change. We’re seeing that with floods, fires and all kinds of natural disasters for both businesses and homeowners.”

Ordinary Australians are becoming more focused on the impact of so-called hidden taxes – “hidden” because people tend to not read their property policy invoices or bother to calculate how much of their premium is tax.

But while the issue is also gaining traction as the full human and economic costs of last year’s floods become more apparent, it’s not an issue that state and territory politicians want to consider, debate or even discuss, let alone reform. The revenue they collect from insurance premiums is a cash cow that makes property insurance premiums cost billions of dollars more than they should.

Australia is slowly waking up to the massive and unfair issue of insurance taxes. It’s time for politicians to also wake up to the damage being done, and to do something to fix the situation.