The Federal Government has ignored a recommendation to axe insurance taxes in its initial response to the Henry tax review.

Prime Minister Kevin Rudd and Treasurer Wayne Swan released the much-awaited Australia’s Future Tax System report chaired by Treasury Secretary Ken Henry yesterday.

They also announced the Government’s initial policy response, which centres mainly on superannuation and company tax reforms.

The response makes no mention of plans to address the issue of insurance taxes, despite the review’s recommendation that all specific taxes on insurance products, including the fire services levy, should be abolished.

Recommendation 79 – one of 138 recommendations made in the report – states: “Insurance products should be treated like most other services consumed within Australia and be subject to only one broad-based tax on consumption.”

The Insurance Council of Australia, National Insurance Brokers Association (NIBA) and major insurer IAG issued media releases shortly after the report’s release welcoming the recommendation.

But there are also fears the Government has no plans to address the issue of insurance taxes, despite evidence indicating they deter Australians from taking out adequate insurance cover.

The Government claims its initial measures are the first steps in a 10-year tax reform agenda, and another recommendation, No 55, gives some hope that future action could be taken to abolish insurance taxes and replace them with a more broadly based tax.

Recommendation 55 states: “Over time, a broad-based cash flow tax – applied on a destination basis – could be used to finance the abolition of other taxes, including payroll tax and inefficient state consumption taxes, such as insurance taxes. Such a tax would also provide a sustainable revenue base to finance future spending needs.”

Deloitte Insurance Tax partner Phil Lee criticised the Government for failing to immediately act on the Recommendation 79.

“The real disappointment is that Henry recognised how Australian insurance taxes are leading to underinsurance or non-insurance, but the Government has not made a response to Henry’s recommendation,” he said.

“The reality is that the Government has neither strengthened, simplified, nor made the insurance industry fairer. We believe it is a real missed opportunity.”

The Henry review panel’s recommendation follows similar conclusions reached by earlier reviews such as the HIH Royal Commission and the NSW Independent Pricing and Regulatory Tribunal. Both failed to result in changes to the existing insurance tax system.