There is still a lot of life left in life

Amidst all the talk of mergers and acquisitions in the life insurance industry, it’s easy to lose sight of the strength and size of the industry in Australia.

At the end of June 1998, according to APRA's quarterly bulletin, Australia's 44 life insurance companies, many of whom are IFSA members, held $155 billion on behalf of Australian policyholders. This is growing steadily - premiums in calendar 1997 were $29 billion, up 23 per cent on 1996.

In coming months, insurance companies must decide the size and shape of their future business, especially considering they will soon likely be operating in a changed tax regime.

Under "A New Tax System" (ANTS), life insurers face changes that will affect both policy-holders and shareholders. ANTS proposes to apply the standard corporate rate of tax (currently 36 per cent) initially to all the taxable income of life insurance companies.

While this sounds simple on the surface, it disguises severe complications underneath.

For long-standing "ordinary" policy-holders, their rate of tax will be reduced from 39 to 36 per cent. IFSA welcomes this reduction, which we have been seeking since income tax rates for individuals were reduced in the early 1990s.

New policy-owners will have the rate of income tax on their policies adjusted from the initial 36 per cent deduction rate to their marginal tax rate. But complications start to appear when examining the mechanisms for these adjustments.

Therefore, IFSA has suggested that the Government set up a joint task force of regulator and industry experts to identify problems and find robust solutions.

The complications will be worst for superannuation policyholders (superannuation comprises 80 per cent of all policies). IFSA believes it would be inappropriate to tax earnings initially at 36 per cent and then, months later, pay refunds at the policy-holder level to restore the tax to its correct level - either zero for annuities or 15 per cent for other super products.

Proceeding that way would be unfair on policy-owners, who would suffer a loss of interest for the months they "loaned " their money to the ATO. A better outcome would be to eliminate the overtaxing in the first place and at the fund level.

Some retirees who do not currently lodge tax returns may miss out if they forget to claim the refund owing to them. Life companies might be forced to increase their charges to pay for installing a complex and unnecessary system of recording, and later re-crediting, tax payments to every member of each superannuation fund.

This 'round robin' of overtaxing followed by a delayed refund would apply to investors in any investment vehicle, including a pooled superannuation trust (PST).

This sort of unfair and (presumably) unintended result could be overcome if a joint government/industry working party is established to design sensible rules.

In addition, life company profits will be taxed at the company rate (currently 36 per cent) and shareholders will eventually pay their marginal rate of tax after the adjustments for franking credits.

But complications arise when calculating taxable profits within a life insurance company. Life insurance balance sheets must intermingle policy-holder and shareholder reserves in their statutory funds, and separating out the interests of each requires careful calculation.

The GST on financial services, including life products, is another burning issue. IFSA believes that until a way can be found to tax products with implicit charges like margins and interest, input-taxing is the preferred route. However, we are still working with the Government to find alternatives.

A further GST issue is how the new regime will apply to pre-existing products. IFSA has submitted that they should be allowed to operate as before to avoid inequitable outcomes.

The life insurance members of IFSA are also keenly awaiting the CLERP 6 reforms, which will streamline disclosure rules and bring disclosure for life insurance products into line with similar products. Consumers will then find it easier to make informed judgements about them.

On the other CLERP 6 issue - licensing - insurers and distributors await resolution on a new uniform, harmonised system. We expect to receive the latest Government paper on this in early March.

Life insurers are also following IFSA's campaign to raise the awareness of all Australians of the importance of savings and risk protection. IFSA is currently developing its retirement incomes and long-term savings strategy, of which risk protection will be a cornerstone.

Promoting financial independence for Australians will become one of IFSA's flagship activities in the latter half of 1999.

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Richard Gilbert is deputy chief executive officer, Investment and Financial Services Association.