Insurers may be forced to raise premiums to offset costs under Treasury’s proposal to remove a “double tax benefit” arising with certain deductible liabilities held by an entity that joins a consolidated group.

In a submission on the plan, the Insurance Council of Australia (ICA) warns of the measure’s “detrimental impact” on the industry.

It says the exclusion of indirect claim settlement costs and liability adequacy test liabilities from calculation of the “allocable cost amount” (ACA) would result in a reduced ACA being allocated to the assets of a joining entity.

“This could inadvertently distort the allocated ACA to the underlying assets of a joining entity and give rise to unintended taxable gains on assets held to meet short-term insurance liabilities after its acquisition by the consolidated group,” ICA says.

General insurers hold most of their assets in cash and investments to support insurance liabilities.

“Indeed, any increased tax cost arising from the measure could ultimately be passed on to policyholders by way of higher insurance premiums, which would be inconsistent with the policy objectives of the bill,” the ICA says.

Treasury’s exposure draft legislation suggests amending the Income Tax Assessment Act 1997 by inserting an exclusion for deductible liability, to improve the integrity of the consolidation regime, which was introduced in 2002.

ICA says the exemption for certain general insurance liabilities to help limit distortions does not go far enough.

It says the exemption should be extended to include all general insurance-related liabilities such as indirect claim settlement costs, to comprehensively mitigate against inadvertent distortions and anomalous tax outcomes.