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Life insurance included in tax review

How life insurance products are taxed is to be subject of an earlier-than-planned review, following lobbying from the Investment Savings and Insurance Association.

Friday, August 18th 2006, 6:26AM

by Rob Hosking

Taxation of life products was initially included in the review of investment taxation which led to the bill currently before Parliament. However pressure of meeting the deadline for implementation of KiwiSaver next year meant insurance products were set to one side.

As Good Returns reported last week, the fact that there is around $9 billion in life products as savings vehicles was brought to the government’s attention, and yesterday the government announced a review.

The changes cannot be done in time for the current bill but will be introduced next year, Minister of Finance Michael Cullen and Revenue Minister Peter Dunne said in a joint statement yesterday.

"The current rules have been operating in a largely unmodified form since 1990, even though the commercial, regulatory and savings environment has changed markedly over the last 16 years,” say the ministers.

The review will also look at whether life insurance should be included in the proposed rules for taxing portfolio investment entities, the subject of a bill currently before Parliament, to prevent them being disadvantaged relative to other savings vehicles.

ISI chief executive Vance Arkinstall says the review is welcome, and the industry expects one outcome will be to extend the exemption for tax on capital gains to life insurance savings in the same manner that is being introduced for unit trusts and superannuation plans.

“Savings through managed funds and life insurance has long been disadvantaged by the tax system and in comparison with direct investment in equities. It is great to think that those disadvantages may soon be removed and that these products will then compete from a neutral tax position with all savings options.”

The review should also include annuities, he says,

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

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