State taxes help to fuel underinsurance

Malcolm Turnbull

Taxes levied on life and general insurance by state and territory governments are exacerbating Australia’s chronic underinsurance problem, according to Shadow Federal Treasurer Malcolm Turnbull.

These “notoriously inefficient taxes hinder the efficient allocation of risk and deter many individuals from taking out market insurance”, Turnbull told an Association of Financial Advisers seminar in Sydney.

In a presentation entitled ‘The Future of Financial Advice in Australia’, he said “these taxes on insurance, like many inefficient taxes, have tended to be the least visible and therefore become the least controversial”.

However, by imposing these taxes, state governments are “actively discouraging the choice of one particular alternative and artificially inducing individuals to substitute the more costly and ultimately more risky options”, he said.

He added that researcher Access Economics ranks insurance taxes as “among the least efficient in terms of the dead weight loss that they create (to the economy)”.

The duties levied by the state and territory governments are among a number of taxes that the shadow federal treasurer and shadow state and territory treasurers have pledged to eradicate.

“I recently hosted a meeting with shadow state and territory treasurers, and we issued a communiqué agreeing to pursue policies to eradicate and eliminate Commonwealth, state and local government taxes,” Turnbull said.

He said 6 per cent of all state and territory taxes are collected through duties on life and general insurance taxes, raising just over 3.7 billion in revenue in 2006-07.

All states and territories levy duties on general insurance and all except WA levy duties on life insurance, with the rates varying from a low of 7.5 per cent of the premium in Queensland to a high of 11 per cent in SA, Turnbull said.