Life companies get double hit
The series of changes circulating through the finance industry has become daunting. The implications of GST and the upcoming Ralph Report 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 industry.
The series of changes circulating through the finance industry has become daunting. The implications of GST and the upcoming Ralph Report 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 industry.
Surprising little criticism has been directed towards the Howard Government, the Treasury Department or 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 Report 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 haven’t released anything further since February.
However until firmer guidelines are released real concerns remain.
Lynn Ralph Investment and Financial Services Association chief executive officer says how to consider the profits of life companies when moving from one tax regime to another is an issue which will need real work.
"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 desire to go back and change the rules. Any retrospective tax would be unfair," 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 Greenwoods 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 disadvantages 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 midstream."
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.
Atfield 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 continuing 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 concurs 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.
Ralph also sees this as an area for concern but adds that the rate for reduced input tax credits has yet to be worked out aside from the uncertainty as to what category services and products will fall into.
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 also."
With a change in profits there is also the question of increasing costs and who pays. With the components of many financial services being other financial services the question remains whether investors will move into other financial vehicles due to lower returns as a result of higher management charges.
Carey believes the consumer will meet the costs of the GST and Ralph Report changes.
“This is a concern for all those offering products including life insurance. The ATO has to call what are financial supplies, fees and so forth.”
“It is not assisting life companies putting things in place for the GST and possible Ralph Report changes and trying to price and sell products. And it is difficult for those selling on their behalf with these unresolved GST implications always there,” Carey 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 swings and roundabouts."
Lousie Biti RetireInvest technical manager says that even past this date there may still be a degree of uncertainty and contingency plans are still important.
"We are stressing it is important to start to monitor budgets, maintain a cash reserve, keep track of spending and in 12 months when things have settled people will be in a better position to make further recommendations," Biti says.
AUTHOR
Jason Spits
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