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NSW fire services levy: rising from the ashes?

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Reforms to the NSW emergency services levy on insurance were officially “dead, buried and cremated” after last year’s highly controversial decision to scrap them.

But a new report, following a parliamentary inquiry by the State Parliament’s Legal Affairs Committee, says a resurrection is likely.

What form this will take is not known, but one thing is for certain: greater care must be taken next time.

The report pulls no punches when assessing the lack of consultation and last-minute deferral of the last effort.

The State Government’s “failed implementation” of the reform was “a poor public policy decision”, committee chairman Robert Borsak says. The late deferral also “caused significant and avoidable costs to local government and the insurance industry”.

To fully understand the issue, and what may happen next, we must start at the beginning.

Before the reform (and now, after the deferral), fire and emergency services were funded through three sources: a levy on insurers, a levy on local councils, and general revenue.

About 73.7% is recovered from insurers and 11.7% from local councils.

The system is unfair because it focuses solely on landholders who insure. It also lacks transparency, and the insurance industry has long argued that taxes on insurance increase problems with affordability and underinsurance.

In December 2015 the NSW Government announced its intention to move away from the insurance-based levy to a property-based levy, bringing it into line with every other state except Tasmania, but especially following the example of Victoria after the 2009 Black Saturday bushfires.

In April last year the Fire and Emergency Services Bill received assent. It introduced the new property-based levy, known as the fire and emergency services levy (FESL), which was to start on July 1.

However, after concerns were raised that some people would be worse off, on May 30 last year the NSW Government deferred its introduction – just one month before it was due.

The Government said the new scheme failed to meet the desired policy outcomes, placing an “excessive funding burden” on a small number of property owners.

As a result, the previous set-up and levy on insurance remains in place.

The insurance industry – which was not consulted before the backflip – was left fuming. Confusion reigned as the old levy, which had been removed, needed to be reinstated.

The cost to the industry is estimated at $40 million, and the NSW Government spent a further $25 million on the exercise.

In June last year the NSW Legal Affairs Committee began an inquiry into the consequences of repealing the reform, and potential alternative models. The inquiry received dozens of submissions and held hearings earlier this year, and has now filed its final report.

“The committee understands that while [last year’s] FESL is ‘dead, buried and cremated’, the NSW Government is likely to introduce a new property-based levy should it be re-elected [next year],” says Mr Borsak, who is a member of the fringe Shooters, Fishers and Farmers Party. “The committee has therefore made six recommendations in this report, which seek to ensure any new levy is fair, equitable and transparent.”

The recommendations are:

  • The Government provides greater oversight and accountability to ensure budgets for fire and emergency services agencies are appropriate
  • NSW Treasury conducts a full and transparent re-modelling of any new FESL
  • The Government considers making Revenue NSW responsible for administering any new FESL
  • There should be no future government moves to implement an FESL unless it considers use of capital-improved value of land for calculation of the levy; differential levy rates, fixed charges, discounts and caps; better aligned land classifications between council and the FESL; inclusion of motor vehicles; the removal of the 11.7% contribution by councils; and addressing the impact of the levy on poorer households that are unable to afford building and contents insurance
  • The Government ensures appropriate consultation with key stakeholders
  • The state revisits the role and funding arrangements for the Emergency Services Levy Insurance Monitor, to ensure that, if the FESL is re-introduced, the monitor’s role continues past June 2020.

The report takes issue with the insurance industry’s argument that removing the levy on insurance will encourage more people to take out cover. It says only the poorest 5% of households lack building insurance, and they are struggling to make ends meet.

“The ability of these households to meet a new FESL, that will be on average about $250 a year, as well as take out insurance they were unable previously to afford, is close to zero.”

It also sides with insurance monitor Allan Fels’ view that insurers cannot be trusted to pass on savings to consumers.

“The committee recognises that the insurance monitor plays an important role in holding insurance companies to account,” the report says. “This role will need to continue if the FESL is re-introduced.

“The committee acknowledges that if the current [levy] is removed from insurance premiums, there is no guarantee the premiums will reduce accordingly.”

The Insurance Council of Australia (ICA) says it is vital that the reform progresses, despite last year’s “setback”.

“This is a regressive and unfair tax on households and small businesses that do the right thing by insuring their assets,” spokesman Campbell Fuller said. “The setback in NSW should not see the levy remain indefinitely.”

ICA says the levy, GST and insurance stamp duties mean NSW residents insuring homes and contents are paying about 45% tax.

“ICA urges the Government and the Labor Opposition to reconsider removal of the levy and find a better method.”

While it’s uncompromising in its mistrust of the insurance industry, the committee saves its most cutting criticism for the Government.

“It is unclear why the NSW Government chose to pursue the FESL in its 2017 form when it was clearly not going to meet its policy objectives,” it says.

“It was an unnecessary waste of millions of dollars that could have been used to fund hospitals, schools or fire and emergency services.”

The State Government will respond to the report by the end of February. To see the report in full, click here.