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Tax changes mean higher premiums

Tax changes before Parliament will alter the way life insurance policies are taxed and mean higher premiums for consumers. The industry has told officials working on the changes introduced to Parliament as part of the omnibus Taxation (International Taxation, Life Insurance and Remedial Matters) Bill premiums could rise anywhere between 1% to 30%.

Tuesday, July 22nd 2008, 6:09AM

by Rob Hosking

The industry also wanted a later starting date than 1 April next year, but that now looks unlikely. Existing policies will be grand-parented for five years, however.

The changes are driven by the shift away form savings related insurance policies and the government's changes to how investments are taxed.

Life insurers will be taxed on two bases: the shareholder base, which will be taxed at the company tax rate; and the policyholder base, where insurers will have the option of attributing income from savings-related products at the policyholders' marginal tax rate under the new portfolio investment entity (PIE) regime.

The basis of the change is that at present savings-related products are over-taxed, while term life policies are under taxed.

"It's pretty clear that is the case," says Kensington Swan tax lawyer Tony Lines.

Lines says the industry though will have difficulty meeting the 1 April deadline, and this is likely to be a bone of contention at select committee hearings on the bill.

The analysis accompanying the bill notes that premium increases are likely, but these should not happen until "at least 2014-15".

Although that does not fit with the government's own analysis of changes in tax revenue flows stemming from the change.

The 2008 Budget included estimates of the impact of the change. They forecast a drop in revenue for the first year, breaking even in the 2011 financial year and then an increased tax take from 2012.

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

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