Treasury’s proposed tax changes to controlled foreign company rules could push captive insurance costs up by as much as 48%, according to some submissions from leading brokers.

The Federal Government is proposing to change how income from offshore companies is taxed, saying Australia has the right to tax income from offshore subsidiaries of locally based parents.

Draft legislation on the tax changes is not expected until the early part of next year.

The brokers’ submissions argue that as many of the captive insurers used by Australian companies are based offshore – with many in Singapore – this will push up the cost of insurance.

Marsh argues the proposed changes will treat captive insurance unfairly as it does not look at the risks incurred by the insurer.

“The proposed changes will ultimately result in the Australian-based taxpayer incurring a larger expense to finance its risk and so potentially be an unfair penalty to those larger corporations who have captives,” Marsh said in its submission to Federal Treasury.

It sees the loss of an Australian tax deduction and withholding tax on the cost of risk in the captive insurance vehicle increasing costs by up to 48%.

Marsh wants Treasury to exempt an offshore captive insurer from the proposed “integrity rule” when it can demonstrate there is no profit shifting from Australia to a region with a lower tax regime.

This would include the insurer showing evidence of the commercial process for buying risk cover and how it costed premium rates.

Willis supports the view that Australian companies with captive insurers will be forced to buy more expensive insurance cover through traditional means, as the proposed tax changes will make that more attractive.

“It is essential that Australian taxpayers are not any worse off under the new proposed rules than under the current ‘controlled foreign companies’ rules,” Willis said in its submission.

“We suggest that the proposed integrity rule should not be applied if premiums paid to offshore controlled foreign companies’ captives have already been taxed [in Australia].”

Aon also argues the proposed rule needs to be changed as it will unfairly disadvantage companies looking to optimise their risk financing structures.

“This runs counter to the main stated objective in modernising the controlled foreign companies rules,” Aon said in its submission.

“For Australian owners of offshore captives, the proposed integrity rule is problematic as it would likely hamper the competitiveness of Australian enterprises, especially when the stakeholders are not partaking in any inappropriate income tax shifting or deferral.”