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Tax on life insurance next

Plans to revamp how life insurance policies are taxed are likely to follow the current reform of savings and investments tax changes.

Wednesday, June 14th 2006, 8:14AM

by Rob Hosking

Earlier, it was envisaged how life policies are taxed would be included in wider proposals to revamp the whole investment and savings tax area.

The initial report on reforms, written by former BT Funds Management chief executive Craig Stobo, recommended including life insurance policies and last year’s discussion document from the Inland Revenue Department took a similar line, pointing out that many life insurance companies “offer savings products which, in many cases, can be similar to those offered by unit trusts and superannuation schemes.”

That same document noted that changing the tax rules for savings vehicles while leaving investment income made via life insurance under the old rules would result in “inequity in treatment” between he two.

However – for a time – that is what will happen.

Senior tax policy adviser David Carrigan told Good Returns that the taxation of life polices is “phase two”.

“It’s a much more complex issue than it is for other savings vehicles.”

At present life companies are taxed on two bases – the life company base, which is taxed on revenue account, and the second base which taxes the returns to policy holders, who also get a credit for the tax paid by the company.

The difficulty, says Carrigan, is adopting this to the new “look through” regime.

Pressure of time in order to meet the 1 April 2007 deadline (to tie in with the introduction of KiwiSaver) meant the issue was set to one side.

“But – although its not definite yet - we will probably be looking at it next year.”

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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