Life companies get double hit.
The series of changes circulating through the finance industry has be-come daunting. The implications of GST and the upcoming Ralph Re-port loom large for all concerned but particular emphasis has been paid to life companies and products.
The series of changes circulating through the finance industry has be-come daunting. The implications of GST and the upcoming Ralph Re-port loom large for all concerned but particular emphasis has been paid to life companies and products.
Jason Spits looks at how the changes will effect this area of the indus-try.
Surprising little criticism has been directed towards the Howard Govern-ment, Treasury and the Australian Tax Office in recent weeks in regards to the Ralph Report.
Much of this is the result of a lack of information coming from these bodies, probably the only criticism available, and this has caused a degree of hesitation in some industry players.
Some are unwilling to release their corporate approach to the Ralph Re-port since they feel it isn’t beneficial to do so while others said any real comment would still only be second guessing the government who ha-ven’t released anything further since February.
However until firmer guidelines are released real concerns remain.
Lynn Ralph Investment and Financial Services Association (IFSA) chief executive officer says the rate of corporate taxation is one issue which will need real work.
"The concept of taxing life companies at 36 per cent then claiming back down to15 per cent would be ludicrous."
Ralph states another problem is how to consider the profits of life compa-nies when moving from one regime to another.
"We accept changes will occur but want to know how it will work as life companies have long term contracts under old tax regime. There is no de-sire to go back and change the rules. Any retrospective tax would be un-fair," says Ralph.
Rod Atfield Mercantile Mutual managing director agrees and sees the need for a
reasonable transition period for existing business on the books.
"The financial services industry supported reform and wanted a simple system but we got this complexity instead. Why have complexity, on face of it the revenue is same on our figures, if stay with input taxed," Atfield says.
However Atfield and Ralph believe there may be a long term benefit but any change has to be eased in, if Australia wants to be a global financial centre.
However Anna Carey Greenwood and Freehills tax principal believes the law is putting the cart before the horse.
Carey argues that with the evolution of the industry over the years life companies are well aware of the complexities of the current tax regime.
Carey adds that the impact of the Ralph Report may only be absorbed by removing some products or restructuring others and thus creating disad-vantages for some life product suppliers.
"This means tax then sets the rules for commercial products instead of tax realising commercial realities which is a problem when changing mid-stream."
Ralph says: "The bottom line is a dramatic increased tax burden which will influence products and bottom line of companies and impact on shareholders."
"Other industries have had three to four year transition schemes and while people entered into the products and share holdings in good faith this is a heavy hit," Ralph states.
Philip Barlin chief tax counsel Citibank says the earlier versions of the Ralph Report suggest an extra $600 million was available to draw out of life companies.
"Governments being the avarice beasts they are just won’t go past that," Barlin says.
Rod Atfield Mercantile Mutual managing director agrees but also sees the need for restraint in pursuing funds in the life sector.
"Obviously the Government has added up the potential revenue source but should not touch the super vehicles within the life industry, they are the future of this country in retirement income and health cover," Atfield declares.
However Barlin believes this will happen via the mechanism of the GST which will cut into returns from super funds and the money available when people retire.
"The rate of return will be decreased by the GST and this is a fairly subtle raid on this pot of money." Barlin says.
Atfield believes with the GST legislation coming on the back of continu-ing Y2K issues and the Ralph Report other problems will emerge.
"The biggest problem will be the sheer complexity of the GST. When placed on financial services it will look at input taxes across the financial services industry but with a taxable status on insurance. This approach makes it very difficult," Atfield says.
Carey agrees and says though life products will be taxed some of these products contain more than just life cover elements.
"There has to be a way of dealing with products where part is input taxed and part taxable which is an issue for combinations of life and non life products, especially those spanning July 1st next year," Carey says.
Very fact are input taxed, still unaware of rate of RITC
Barlin agrees: "Treasury are still trying to grasp how the life industry works and some products will be input taxed. Asset managers, such as unit trusts and super funds are being turned upside down and annuities and underwriting profits will probably change."
LR
GST
Two main issues
1 are services in right category
2 what will RITC rate be
impact differs because products treated differently
life companies taxed two ways
risk products - fully taxed
investment products - input taxed
where do they draw the line since some investment products have death/disability
AC
Concern for all offering products including life insurance
Are lot of unanswered questions about costs of products
ATO has to call what are financial supplies, fees and so forth.
Not assisting companies putting things in place for GST and considering Ralph changes
Difficult for life companies, trying to price and sell products and difficult for those selling on their behalf with GST implications there
Philip Barlin, Senior Tax Counsel, Citibank
GST won’t adversely affect profits but only if companies charged wear that cost
There are questions of whether investors will move out due to lower re-turns due to higher management charges
No Australian fund manager will have an advantage or disadvantage but will overseas rival products now be more attractive, ie investment over-seas under FIF
Could be bias to putting super monies into life products
At moment definite leaning to better having super money in life products from GST standpoint
The big costs will be labour and cost of funds
So much that might affect life companies is unknown
Lynn Ralph, IFSA CEO
when areas finalised in October will know what happens
when set the products will move and reach equilibrium and be redesigned
at present life saving products risk is set by market
GST seeks to set that level, our aim to set as close to market as possible but when changes there is a problem because the law doesn't change
Proposition to review regularly because products will come out and gov-ernment can change list whenever
Anna Carey, tax principal, Greenwood and Freehills
Pricing issues ie GST costs being passed on to clients
At the end of the day consumer will meet the cost of GST and Ralph
The issue isn't policy subject to GST, the costs of company are not recov-erable but passed on and services are GST taxable as well
Financial supplies won't be subject to GST, cost increase because of GST on product provision
Strong arguments have been put forward for status quo.
Biti states there is no definite answer on financial services and what is taxable.
"With GST management fees are subject to tax but depending on what services are taxable and what will be input taxed it may also affect annui-ties and income streams," Biti says.
However with less than a month before the release of the Government's response to the Ralph Report Barlin says it's wise to take a step back and survey the scene before taking any action.
"The way I see it at present, the more switched on people in the industry are not looking at the GST or Ralph in isolation."
They are prepared to take on the unpleasant parts of one in favour of the beneficial parts of the other. To use the classic jargon, it's all swin
AUTHOR
Jason Spits
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