Govt proposes fairer tax rules for the life insurance industry

A government discussion document released today sets out proposals for fairer taxation of the life insurance business.

“The current rules for taxing life insurance profits, enacted 17 years ago, are seriously out of date,” Finance Minister Michael Cullen and Revenue Minister Peter Dunne said today.

“As a result, people who save through life insurance products such as traditional participating policies are over-taxed on their investment income relative to people who invest directly in shares or through managed funds that offer the benefits of the new portfolio investment entity rules.

“At the same time, profits from term insurance, which provides a payment on the death of the policyholder, are now significantly under-taxed. Moreover, in many cases, profitable term insurance business can generate artificial tax losses for insurers, which effectively gives them concessions that are not available to other industries.

“The government is therefore proposing an integrated reform of the life insurance tax rules, to resolve these and other tax problems relating to life insurance.

“To deal with the problem of the over-taxation of people who save through life insurance products, the government proposes to extend more of the tax benefits of the portfolio investment entity rules to those products. These investor-friendly changes are the only changes relating to individual life insurance policyholders that are proposed.

“The main change proposed for term insurance is to tax the business on actual profits rather than on the basis of the artificial formulas contained in present law.

“That will mean life insurance companies will be taxed on their profits in the same way that other businesses are taxed on their profits. After all, tax is a cost of doing business and, in our view, efficient life insurance companies should continue to prosper under the proposed changes.

“These proposals have emerged from a comprehensive review of the life insurance industry tax rules announced in August last year, a review that has involved extensive consultation with the industry.

“The discussion document proposes a five-year transition period for term insurance products sold before 1 April 2009, which means profits from them will be taxed under the present rules for a period of up to five income years, and for the duration of the policy for some single premium and level term products. The new rules will fully apply to policies taken out from 1 April 2009.

“These are important changes that will significantly update the way the life insurance business is taxed, putting it on a par with the taxation of other industries. The government invites all interested parties to make their views known on any aspect of the proposed changes.

“The aim of the proposals is for life insurance companies to pay no less and no more tax on their profits than would any other business, and to remove tax disadvantages for individuals who hold life insurance savings policies,” the Ministers said.

The discussion document, “Taxation of the life insurance business: proposed new rules”, is published at www.taxpolicy.ird.govt.nz

The closing date for submissions is 12 February.