Victoria agrees to drop the fire services levy, but NSW will prove a much harder nut to crack – and then there’s stamp duty…

By Ben Oliver and Terry McMullan

ON AUGUST 27 VICTORIAN PREMIER John Brumby agreed to abolish the state’s controversial fire services levy (FSL). It was a remarkable change of direction for the man who in 10 years as state treasurer and then premier had fought to retain all insurance taxes.

It’s easy enough to see why he didn’t want change: insurance taxes will return the state $1.478 billion in the current financial year; that’s 10% of state tax revenue.

Victoria’s decision to move to a property-based levy system now isolates New South Wales, the only other mainland state to retain the fire services levy. (Tasmania also has a limited levy system, but the drain on policyholders’ pockets is considerably less.)

The New South Wales Government will be a harder nut to crack than the Victorians. While Mr Brumby’s hand has been forced by political reality, there is no such pressure on the deeply unpopular ALP government of Premier Kristina Keneally or the coalition of Opposition Leader Barry O’Farrell.

Mr Brumby hopes dropping the levy will ease rural voter angst. For Ms Keneally the issue is far more complex.

In NSW, insurance on residential properties attracts a 20% fire services levy, while business pays 36%, before the addition of GST and stamp duty. The levy is expected to collect more than $620 million for the NSW Government this financial year.

While academic support for a property-based levy has been evident in NSW since 2003, political momentum has never hit top gear.

The closest the NSW Government has come to removing the levy was in 2008, after a report by the NSW Independent Pricing and Regulatory Tribunal (IPART) supported its removal.

Then Treasurer Michael Costa agreed to review the levy system, but was stymied by the Local Government and Shires Association, which argued that council rates would need to rise 20-40% to cover the funding shortfall left by the levy.

A report in the Sydney Morning Herald in July 2008 stated that removing the insurance premium-based levy would cost ratepayers an extra $200 a year. Political will to junk the levy was soon found wanting.

Perhaps sensing the lack of political traction, a spokesman for Mr O’Farrell told Insurance News last month “no announcements have been made on the fire services levy”.

When asked for the NSW Government’s stance on the levy after Victoria’s announcement of its abolition, Emergency Services Minister Steve Whan was adamant – the levy will remain, as will the $39 million a year levy also imposed on insurance-buyers to help fund the State Emergency Service.

Mr Whan says a 2004 parliamentary inquiry failed to find sufficient evidence against the FSL – conveniently ignoring the findings of his government’s own IPART report and the benchmark for tax reform, the Henry Review.

In June NSW abolished the infamous protection tax imposed on insurers since 2001 to fund losses following the collapse of HIH. Insurers were prohibited from passing on the $69 million annual cost of the tax to policyholders. But no further attention on insurance taxes is likely.

Without the levy issue having any profile in NSW, there is no electoral groundswell forcing the political parties to sit up and take notice, as was the case in Victoria.

Mr Brumby was forced to act by the final report of the Victorian Bushfires Royal Commission, which examined the fire services levy system in detail and found it inequitable and lacking in transparency.

The world-record insurance taxes Victoria imposes on property insurance premiums – rural business are paying 122% more than the premium in added-on taxes – have forced people in rural areas to deliberately underinsure or not insure at all, and that was an issue at royal commission hearings.

After a decade of Labor Government, voters are being asked to give Mr Brumby and his colleagues another four years in government when they go to the polls on November 27. And the voters who gave him the power are the same ones who are now poised to take it away: the rural constituency.

Despite accounting for just 10% of Australia’s total population – 5% in Victoria – regional voters hold considerable power in politics. Country independents carried Labor to an indecisive victory at the federal level and the regional vote in Victoria will once again be pivotal.

Mounting anger over the Brumby Government’s handling of the 2009 bushfires threatened a rural backlash akin to that unleashed upon Jeff Kennett 10 years earlier, when the popular premier was swept from power by the rural electorates.

Mr Brumby’s decision to abolish the fire services levy – a property-based system will replace it on July 1 2012 – was as swift as it was unexpected.

He had given no prior indication that the bushfires royal commission’s recommendation 64 would be accepted. In fact, with yet another government inquiry into the levy system already at work, he had the perfect alibi for stalling once again.

That’s why, after nearly 10 years of rejections, denials, anti-insurer hostility and internal government “inquiries”, Mr Brumby’s announcement that the levy will be replaced by mid-2012 came as such a shock.

In all things political there’s a need for spin, and Mr Brumby’s political conversion certainly deserved a good bit of it. Treasurer John Lenders provided plenty with a statement following Mr Brumby’s announcement that he would accept all but one of the royal commission’s recommendations.

“The Brumby Labor Government is taking the tough decisions and doing the hard work to keep Victoria fire-ready and safe,” Mr Lenders said. “This reform will ensure that our fire services are funded more sustainably while also taking the squeeze off the cost of property insurance.

“However, the royal commission was silent on the fine details of how the levy would operate and our government will work through how such a levy would be applied.

“We want to ensure that the necessary funds are raised to sustain our crucial fire services.

“This reform will ensure that everyone who has a property protected by our world-renowned firefighters contributes to their budgets.”

Volume II, Part II of the 2009 Victorian Bushfires Royal Commission’s final report runs for 429 pages. Only five pages directly cover the subject of the fire services levy. The “evidence” Mr Lenders relies on to justify his leader’s about-face is simply a patchwork of previous findings.

The royal commission notes that several reports, including the 2003 HIH Royal Commission, 2008 NSW tax review and 2001 Victorian tax review, have already called for the levy’s abolition.

The levy issue is but a tiny speck in the royal commission’s spectrum. But regardless of the rationale, Victoria now joins Queensland, South Australia, Western Australia and the Australian Capital Territory in adopting a land-based property levy.

But while campaigners are delighted at winning the long battle in Victoria, there’s still a long way to go before Australia joins most of the western world in restricting insurance taxes to encourage blanket take-up.

Leading abolition campaigner Allan Manning put it in perspective best in a statement praising Mr Brumby’s “leadership and statesmanship”.

“Hopefully, the state governments of New South Wales and Tasmania will follow [Victoria],” he said. “The fight will go on until all Australian states – and New Zealand – drop their unfair taxes on insureds.”

Dr Manning, the Chief Executive of loss management consultancy LMI Group, sees the abolition of the levy as a battle won, with the war on insurance taxes still to be fought and won.

That’s because all Australian state and territory governments still add GST to the cost of the premium, and then add stamp duty.

These “cascading” taxes are designed to maximise the governments’ total tax on insurance.

Having rid itself of a major irritation in the form of Victoria’s inequitable and opaque fire services levy, there are therefore still plenty of tax-related issues left to address.

Mr Brumby would probably have been aware of the impending release of a report into state government taxation and debt by the powerful state parliamentary Economic Development and Infrastructure Committee.

The committee’s inquiry results, released on September 16, call for, among other things, consideration of ways “state taxes on insurance may be minimised or abolished over the long term”.

It also calls for the minimisation of cascading taxes, noting that where they are applied to insurance premiums they are literally “a tax on a tax on a tax”.

The Victorian Government’s change of stance over the fire services levy proves that change is possible where the arguments and the electoral environment are right. If politicians can recognise that the insurance taxes which remain are disincentives to adequately insure, there’s hope that more change can eventuate. The industry still has a long way to go before the last illogical tax on insurance is abolished.