Stamp duty on insurance: An issue that won’t go away

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26 March 2012

The House of Representatives committee investigating strata insurance in Far North Queensland has called for the Queensland Government to freeze stamp duty on strata premiums north of the Tropic of Capricorn for at least a year.

The recommendation is one of a number aimed at making skyrocketing strata premiums more affordable. And because stamp duty is calculated after GST, the stamp duty component for unit and apartment-dwellers in places like Cairns is very significant.

The committee wants the stamp duty moratorium to remain as long as strata premiums continue to rise at a higher rate than the average for general insurance.

In the context of an inquiry into an isolated issue in a small part of Australia it’s a fair enough call, and perhaps the newly elected Queensland Government really “can do” what no other Australian state or territory has had the fortitude to do.

The Insurance Council of Australia (ICA) supports the committee’s call, but says this should be the first step in abolishing all stamp duties and levies across the country.

The problem with stamp duties is that even thought they’re an incredibly inefficient form of taxation, they’re also a big source of revenue for state governments. As insuranceNEWS.com.au reported last year, NSW alone expects to raise $754 million in stamp duty from insurance contracts in the current financial year, and $852 million by 2014/15.

A click through our archives reveals dozens of official and industry-commissioned reports over the past 10 years that all recommend the elimination or reduction of taxes on insurance. Only one – the call by the royal commission into the 2009 Victorian bushfires to eliminate fire services levies – has resulted in a positive response. And that was more about political expediency than economic common sense.

But just because this latest parliamentary committee recommendation is probably doomed to suffer the same fate of so many that have gone before it, a re-examination of the wider stamp duty issue is worthwhile, if for no other reason than to keep the issue fresh in the mind of industry professionals and to educate those who came in late.

The most recent failed attempt at reforming insurance taxes – and stamp duty in particular – was the 2008 Review of Australia’s Future Tax system, which recommended the abolition of all insurance taxes.

The Insurance Council’s two submissions were among the most thorough and thoughtful presented to the review.

ICA commissioned a study from Access Economics that showed reform of general insurance taxes would yield gains to real household consumption of around 0.48%, or a little under $2.6 billion, while the net cost of abolishing stamp duties on general insurance would cost the states $1.7 billion.

It said the gains from the removal of all state transaction taxes “are extremely large, with gains to household consumption of between 1.1% and 1.8%”.

The council recommended a gradual reduction in insurance stamp duty rates “as a possible short-term pathway to… eventual abandonment of all state stamp duties on general insurance”.

That went nowhere, but the submissions present a compelling and persuasive basis for reform.

Last month ICA wrote to the Federal Government pointing out that Victoria’s impending abandonment of fire services levies and NSW’s renewed interest in following suit mean state insurance stamp duties “would amount to little more than $3.5 billion Australia-wide, or less than 6% of all state taxes”.

“Accordingly, ICA contends that [abolition of] insurance taxes is clearly achievable by governments and an immediate target to do so should be pursued. ”

The council wants a “clear and unambiguous target date” for abolition of 2014/15 or 2015/16 at the latest, saying a deadline “would serve to obligate state and Commonwealth governments to arrive at alternate revenue or expense measures”.

It’s unlikely ICA’s latest submission will prompt much beyond polite interest in Canberra, but the industry’s leaders long ago accepted that all it can do is keep prosecuting its case for abolition.

Just as the Victorian Government finally found itself trapped between the rock of a looming election and the hard place of unpopular fire services levies, the day may eventually come when the environment for reform of stamp duty on insurance is just right.