Legislation has life insurance reeling
Financial services groups are reeling under the strain of a massive upheaval of their businesses once the implications of the GST and the upcoming Ralph Report hit home. Life insurance companies are probably under even more strain than other industry players.
Financial services groups are reeling under the strain of a massive upheaval of their businesses once the implications of the GST and the upcoming Ralph Report hit home. Life insurance companies are probably under even more strain than other industry players.
Surprising little criticism has been directed towards the Howard Government, Treasury or the Australian Tax Office (ATO) in recent weeks in relation to the Ralph Report.
This is probably due to the trickle of information coming from the bureaucra-cies. But while this has produced some reticence among industry players to re-veal their corporate approach to Ralph Report recommendations, real concerns re-main.
Under Ralph Report recommendations, life insurance companies may soon be hit with the same corporate tax rate as other companies.
The GST adds its share of the unease with the definition of categories for fi-nancial service and products and the rate of input tax credits.
Investment and Financial Services Association (IFSA) chief executive officer Lynn Ralph says the prospect of life companies facing a corporate tax rate is illogical.
"The concept of taxing companies at 36 per cent and then claiming back down to 15 per cent would be ludicrous," Ralph says.
The end result of such an approach would see a drying up of some products in the market, according to the IFSA chief.
Ralph believes there is still considerable work to be done to ascertain the real bottom line effect on life companies if they are forced to move to the corporate tax rate.
"We accept changes will occur but want to know how it will work because life companies have long-term contracts under the old tax regime. There is no desire to go back and change the rules. Any retrospective tax would be unfair," Ralph says.
Mercantile Mutual managing director Rod Atfield agrees. Atfield advocates 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," Atfield says.
He believes there is no need for complexity, arguing revenue to the Government is unchanged if the industry remains input taxed.
Greenwoods and Freehills tax principal Anna Carey believes the impact of the Ralph Report may only be absorbed by removing some products and restructuring others.
This in turn will create competitive disadvantages for some life insurance prod-uct suppliers and makes the proposed changes akin to putting the cart before the horse.
"This means tax then sets the rules for commercial products instead of tax real-ising commercial realities which is a problem when changing a whole regime mid-stream," Carey says.
The bottom line of the tax changes is a dramatically increased tax burden which will influence the structure of products and the profits of life insurance com-panies.
Citibank chief tax counsel Philip Barlin says earlier releases of the Ralph Re-port made reference to life companies and a potential revenue pool of $600 mil-lion for the Government.
"Governments being the avarice beasts they are just won't go past that," Barlin says.
He sees the changes impacting heavily on whole of life products, endowment prod-ucts and possibly superannuation funds sitting inside life insurance funds.
Atfield agrees but says there is a need for restraint by the Government in ap-plying new taxation to super funds invested back into 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 says.
Even if superannuation funds managed by life companies escape the wrath of Ralph reforms, Barlin believes super will be hit by the GST through increases in man-agement and service fees.
"The rate of return will be decreased by the GST on fees and services and this is a fairly subtle raid on this pot of money," Barlin says.
Yet this creates a rock and a hard place situation for life companies having to find the median between higher returns to clients or a healthier bottom line.
Carey believes the consumer will meet the costs of the GST and Ralph Report changes. She also suggests the increasing costs will force investors to move to other financial products.
"This is a concern for all those offering products including life insurance. The ATO has to nominate what will be defined as financial supplies, fees and so forth," Carey says.
"It is difficult for those selling on behalf of life companies with these unre-solved GST implications there," Carey says.
IFSA's Lynn Ralph also says the mixture of tax rates is an area for concern. She says the rate for reduced input tax credits has yet to be worked out and there is still uncertainty as to what category services and products will fall into.
Carey concurs and says that while life products will be taxed under a GST, some of these products contain more than just life insurance elements.
"There has to be a way of dealing with products where part is input taxed and part taxable, especially those spanning the GST deadline in July of next year," Carey says.
Atfield believes the GST combined with ongoing Y2K issues, the Ralph Report and other changes such as CLERP 6 will create a difficult atmosphere for life compa-nies in which to work.
"The biggest problem will be the sheer complexity of the GST. When placed on fi-nancial services it will look at input taxes across the financial services in-dustry but with a separate corporate tax status on insurance. This approach makes transacting business very difficult," Atfield 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.
"Treasury is still trying to grasp how the life industry works and some products will be input taxed. Asset management is being turned upside down and annuities products and insurance profits will probably change," he says.
"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."
AUTHOR
Jason Spits
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