The Insurance Council of Australia (ICA) has pounced on the fact GST revenue to the states will rise by $2.3 billion in 2006/07 and called on the state and federal governments to take a fresh look at abolishing inequitable taxes on general insurance.

New ICA CEO Kerrie Kelly says that despite its importance to the economy, general insurance is taxed as a luxury item with tax treatment at the same level as alcohol, gambling and tobacco.

“A ‘tax on tax’ effect applies because state stamp duty is imposed on top of GST on insurance policies,” she said. “And as long as this continues, it will affect the affordability of insurance and exacerbate the problems of underinsurance and non-insurance in the community.

“For policyholders in NSW and Victoria, the situation is even worse. With the addition of a fire services levy (FSL) there is in fact a ‘tax on tax on tax’ effect which, in Victoria, is as high as 81.5% on property insurance.”

Nothing new in all that, except that it was being said. Ms Kelly seems to be sharpening ICA’s focus on the premium taxes issue. The association dropped the issue down the priority list through last year, but it has begun to reappear in ICA strategic speeches this year.

Ms Kelly says the effect of underinsurance and non-insurance has been evident in communities hit by natural disasters, such as those in Queensland after Cyclone Larry, and in Canberra after the 2003 bushfires.

“Governments need to be looking at ways to encourage individuals and businesses to take out insurance to protect themselves.”

A report by the Centre for International Economics, commissioned by ICA, found taxes on insurance to be relatively inefficient. Reducing or replacing them with almost any others that governments have at their disposal would lead to large gains in economic welfare.

The report confirmed Australia leads the world in levels of taxation on household and commercial property insurance, due to the existence of an FSL in NSW and Victoria, and stamp duty levied by all state and territory governments.

Ms Kelly says because state insurance taxes were not included in the original Intergovernmental Agreement (IGA) that led to the GST revenue deal, ordinary Australians are being penalised for being prudent enough to protect themselves and their property with insurance.

She says most jurisdictions are moving into revenue-positive positions following the introduction of the GST, and the implementation of the IGA on state tax reform is well advanced. So it is timely for the Federal Government to start developing a new IGA on tax reform through the Council of Australian Governments.