By Ben Oliver

The insurance industry scored an important win when the Victorian Government relented over changes to its fire services levy.

After decades of frustration, the insurance industry is becoming better acquainted with winning against state governments, particularly when it comes to insurance taxes. The fire services levy ("FSL") has been disappearing across the nation, starting with South Australia in 1999, Western Australia in 2002 and the latest triumph – the dumping of controversial changes to Victoria’s FSL.

American author Louis L’Amour wrote that victory is won not in miles but in inches. "Win a little now, hold your ground, and later win a little more." Sensing its chance, the insurance industry is marshalling forces for another tilt at removing the FSL and replacing it with a broader-based tax.

The mooted change involved an increase in the FSL on property policies with a total insured valued ("TN") greater than $50 million. The idea was to redistribute the tax burden so those with a greater fire risk contributed more towards fire services. It was said, perhaps ironically, the changes would produce a more equitable system. The Victorian Government argued that policyholders with a higher TN are under-contributing to the scheme because their fire risk comprises a higher portion of the building’s total risk. The changes would have redistributed about $20 million over 10 years, while costing the industry about $5.8 million in implementation and running costs.

But the changes never went ahead. In May, Emergency Services Minister Bob Cameron instructed the Department of Justice to dump the legislative changes, first rushed through Parliament in 2005 as a tax on deductibles. Members of the Government’s consultative committee – including NIBA consultant John Hanks – later received a "very simple" letter stating Mr Cameron had decided not to proceed with the changes. The letter reaffirmed that the country and metropolitan fire contribution legislation would expire in mid-2009 and a review would take place.

A Department of Justice spokesman said the decision was reached after extensive consultation with stakeholders. "As a result of this consultation, a decision has been made that this is the fairest system in place to ensure Victorians have the best possible emergency response to protect their homes and families."

Mr Hanks says the result was a move towards commonsense. "There was no point going ahead with it on a cost-benefit basis. There would have been difficulty for the insurance industry and few, if any, benefits."

The decision by the State Government was unexpected, considering the industry’s furious lobbying in the past only seemed to strengthen its resolve. Industry insiders say the appointment of Mr Cameron as Police & Emergency Services Minister last November, replacing Tim Holding, was a factor in the Government’s change of direction. However, a conclusion that the amendments would not be as effective as previously thought is just as likely an explanation. But whether Mr Cameron, the third politician to hold the portfolio in 2 years, is prepared to revisit the FSL is up for debate.

Mr Hanks says the reasons for retaining the FSL are more political than practical. "There are some political issues the Government has hidden from. It’s much easier to hit the insurance industry for cash than apply a broader tax. The fire services people find it easier also. When 70% of their brigade is funded by the insurance industry, they don’t have to go cap in hand to the Government every time they need money."

Regardless of the reasoning, the decision was immediately hailed by NIBA Chief Executive Noel Pettersen. NIBA consistently argued that the proposed changes to the FSL were cosmetic, costly and of little overall benefit. "Instead of continually tweaking a fire brigade funding system that is outmoded and flawed, the Victorian Government should adopt the recommendations of its own 2001 business tax review, as well as the HIH Royal Commission, and abolish the fire services levy system altogether," Mr Pettersen said. "Victoria has a new opportunity to review its fire brigade funding system and remove the enormous level of cascading taxes on premiums that have made its property insurance the most expensive in the world."

ICA, which argued against the deductibles policy but supported taxes on higher TNs, has welcomed the change to a simpler and more workable approach to the recovery of fire services levies for large commercial properties.

Victoria is increasingly isolated in retaining the FSL – only New South Wales and Tasmania retain the decades-old tax ­ and the decision to backtrack has again raised the issue of how the Government investigated fire services funding in the past.

The final decision to retain the FSL as it stands comes 4 years after the review into fire services funding that many derided as shallow and inadequate.

The Department of Treasury & Finance report, ‘Review of Victorian Fire Services Funding Arrangements’, was released in July 2003 and recommended Victoria retain a tax on insurance as the best way of funding the metropolitan and country fire brigades.

Treasurer John Brumby said at the time the report did not provide compelling arguments for adopting an alternative funding model. "In fact it found that a property levy would lead to a major redistribution of funding, higher administrative costs and a disincentive," Mr Brumby said. "Recent surveys have over-estimated the level of household non-insurance by failing to take into account the high level of insurance of rental properties. The Bracks Government has rejected other possible alternative models used by some other States, including the introduction of a property-based levy and the levying of motor vehicles."

The outright rejection of a property tax also stoked speculation that effective lobbying by the Property Council of Australia ("PCA") had influenced the Government to retain the tax. But this widely held belief is up for contention, if the PCA’s submissions are anything to go by. Before the Government’s announcement that it was to investigate alternative funding mechanisms, the PCA had formed an alliance with business groups to lobby for changes to the levy.

After the Government’s 2003 announcement that it was sticking with the FSL, the PCA said it was disappointed that a more innovative, fairer system could not be adopted. Three months later in its submission to the NSW Government review into fire services funding, the PCA described the FSL as extremely inefficient and simply unfair. "We strongly support the shift from an insurance-based funding system to a levy on property and motor vehicle ownership on the basis that this reduces the burden on existing taxpayers," it wrote. "The compound effect of the levy combined with the GST and stamp duty means that commercial property owners currently pay taxes equivalent to half the cost of their actual insurance premium. "As is, the majority of funding for fire services is sourced only from those people who take out property insurance, regardless of the fact that fire services are a public good accessed by the entire community."

The PCA said a property levy was fair, equitable and simple – provided the total tax take did not increase. But its tune changed after the NSW Government decided to keep the FSL, with NSW Executive Director Ken Morrison applauding the decision as sensible. "(A property levy) would have just flowed to the 50,000 tenants who inhabit those buildings," he told the Sydney Morning Herald.

The PCA and the insurance industry may have lobbied for nought, based on criticisms of the Victorian Government’s handling of the review.

The Department of Treasury & Finance report was pilloried in the NSW Legislative Assembly in 2004. ICA, IAG and even the NSW Treasury criticised the findings. Former ICA Executive Director Alan Mason went further saying the report lacked thoroughness. "The real problem, which is greater in Victoria than in New South Wales, is that the future projections as to where the fire brigade funding needs are going in Victoria will become more and more onerous if it continues to be funded out of the insurance mechanism," Mr Mason said.

But the biggest criticisms were from the NSW Treasury. Revenue Strategy Branch Senior Director Michael Clark-Lewis told the review he did not accept the Victorian Government’s findings. "You could say they are looking at a half-empty glass; they see it half full and we see it half empty," Mr Clark-Lewis said. He said much of the report’s work was done purely at an aggregate level, where "they found a broader relationship or a moderate relationship (between costs and benefits). At the detailed level I do not think it holds up very well at all.