Overview
The Victorian Government has unveiled its intention to gradually eliminate business insurance duty within a span of 10 years, aiming to stimulate economic growth. According to the State Budget released on 23 May 2023, insurance taxes have the potential to distort business decision-making and result in inadequate or no insurance coverage. This, in turn, costs the Victorian state economy more than $100 million annually and contributes to a lower survival rate for businesses facing economic setbacks such as those caused by COVID-19 and natural disasters.
The gradual abolition of business insurance duty will commence from the fiscal year 2024/25. Starting from 1 July 2024, business insurance duties will be gradually abolished over 10 years and this abolition process will be completed by 2033. The current rate of duty, set at 10 per cent, will be reduced by 1 percentage point each year from 1 July 2024. The duty applies to various types of insurance, including public and product liability, professional indemnity, employers' liability, fire, and industrial special risks, as well as marine and aviation insurance.
The Budget documents presented by Treasurer Tim Pallas state, "To promote entrepreneurial spirit in Victoria's economy, the state will be the first in Australia to eliminate the business insurance duty over a 10-year period. This measure is expected to yield significant savings for businesses, with potential cumulative savings of approximately $3,200 for professional indemnity insurance and $2,400 for fire and other special risk insurance over the specified timeframe. In the initial three years alone, businesses will collectively save more than $275 million."
Industry perspective
Numerous reviews, including the Henry review, Thodey Review of Federal Financial Relations, and the Australian Competition and Consumer Commission Northern Australia Insurance Inquiry, have criticised the detrimental effects of insurance taxes. The reviews mentioned, highlighted the drawbacks and inefficiencies associated with insurance duty.
The Henry review, conducted by the Australian government's Future Tax System Review in 2010, emphasised the negative impact of taxes on insurance. It argued that insurance taxes can distort business decision-making processes and hinder the uptake of appropriate insurance coverage. The review suggested that such taxes could lead to underinsurance or non-insurance, ultimately costing the economy significant amounts of money.
The Thodey Review, which examined Australia's federal financial relations in 2020, also recognised the detrimental effects of insurance taxes. It identified these taxes as potential contributors to distorted business decision making and inadequate insurance coverage. The review indicated that these factors can have severe consequences, such as reduced business resilience in the face of economic challenges like the COVID-19 pandemic and natural disasters.
In summary, these reviews collectively highlighted the negative impacts of insurance duty, including its potential to distort decision-making, lead to underinsurance or non-insurance, and increase costs for businesses and consumers.
The Australian Competition and Consumer Commission (ACCC) Northern Australia Insurance Inquiry: The ACCC conducted an inquiry into the insurance market in Northern Australia, focusing on issues specific to that region. The inquiry, which concluded in 2015, raised concerns about the affordability and availability of insurance in the area. It recognised that taxes and charges imposed on insurance premiums, including insurance duty, can inflate costs and hinder accessibility to insurance for businesses and individuals.
The Insurance Council of Australia (ICA) and other bodies have actively advocated for federal and state actions to eliminate these taxes and enhance the accessibility and affordability of insurance. Further, the industry have expressed their support for the Victorian Government's decision to abolish business insurance duty.
Below is a summary of the current rates of insurance duty for business insurance in each of the Australian states and territories:
|
State/Territory |
Insurance Duty Rate for Business Insurance |
|
New South Wales* |
9% |
|
Victoria |
10% |
|
Queensland |
9% |
|
Western Australia |
10% |
|
South Australia |
11% |
|
Tasmania |
10% |
|
Australian Capital Territory |
0% |
|
Northern Territory |
10% |
*For completeness we note that in NSW certain types of general insurance receive an exemption from duty, but this exemption is applicable only if the insured individual qualifies as a capital gains tax (CGT) small business. If the insured person meets the criteria of being a CGT small business, the exemption will be applicable to the following types of insurance:
- Commercial vehicle insurance
- Commercial aviation insurance
- Occupational indemnity insurance
- Product and public liability insurance.
In cases where an insurance policy covers multiple types of insurance, the insurer is obligated to allocate the policy's premium proportionately among the different types of insurance. The duty will not be calculated based on the premiums associated with the exempt types of insurance.
BDO commends the Victorian Government’s abolition of insurance duty
The abolition of insurance duty in Victoria is a welcome relief for insurers and policy holders. The Victorian Government's commitment to gradually abolish the business insurance duty over a 10-year period will go some way in helping to reduce the costs of insurance on policy holders. Whilst the announced changes do not appear to currently impact consumer policies (such as home and motor vehicle), we are encouraged to see governments starting to eliminate inefficient taxes and levies on business insurance policies reducing the financial burden. It will be interesting to see how other states and territories might react to the move by Victoria. Presently, Victoria imposes a 10 per cent duty on both commercial and personal insurance policies, in addition to the goods and services tax and any commission fees. The Australian Capital Territory (ACT) is the sole jurisdiction in the country that has eliminated insurance taxes as part of its ongoing tax reform program, initiated in 2012 and spanning 20 years.
Questions? Contact us.
To find out more about our services and how we can best help you, see our Insurance services or contact your local adviser.