The 2014-15 Victorian State Budget stated that stamp duty would be abolished on life insurance policies saving consumers $4 million annually. Naturally this was greeted with much fanfare by the superannuation industry. However, what the Victorian Government has delivered is something quite different. Not only will it increase stamp duty costs for members of superannuation funds but it will also increase administration costs for those funds.
An amendment to the Victorian Duties Act 2000 which purported to remove stamp duty from life insurance policies has the potential to actually increase the cost to members of superannuation funds who reside in Victoria. These changes applied from 1 July 2014. They have not attracted much media attention probably because we were all expecting that stamp duty on life insurance policies will be a thing of the past. Group Life Policies have always been subject to stamp duty in Victoria but previously it was calculated on the number of new members taking out insurance less those leaving the fund. These changes will apply to new members issued with insurance and will not be offset by the number of members exiting the fund. The result of this change means superannuation funds will pay more stamp duty for members living in Victoria. While stamp duty is incurred by the Group Life Insurer, Group Life Policies usually provide that increases in stamp duty can be passed on to the Trustee of the superannuation fund who in turn must pass that increase on to members.
What is life insurance?
The amending Act is the Building a Better Victoria (State Tax and Other Legislation Amendment) Act 2014 (Vic) which inserts new sections 196A and 196B. Section 196A defines what will be life insurance for the purposes of the Duties Act. Basically this will be any insurance in respect of:
- a life or lives; or
- any event or contingency relating to or depending on a life or lives,
of any person living in Victoria at the time the insurance policy is issued but does not include insurance against accident. Insurance against accident is any insurance under which payment is agreed to be made on the death of a person only from accident or violence or otherwise from a natural cause or as compensation for personal injury.
Obviously the usual Group life arrangement for super funds includes death and total and permanent disablement due to injury and illness. While the reference to "any event or contingency relating to or depending on a life or lives" would seem to include insurance for disablement, communications from the Victorian State Revenue Office (SRO) and statements in the Duties Act Bulletin of June 14 De/14 (the Bulletin) issued by that office, make it clear that this is not the case. Only death cover is seen as qualifying as life insurance. Disablement cover is treated as additional insurance and will be subject to stamp duty.
The Bulletin states:
"..the addition of a new member to a group life policy is taken to be a separate policy of insurance (see general principles established in Prudential Assurance Company Limited v Commissioner of Inland Revenue (1935) 1 KB 101).
Accordingly, where a new member joins a group life fund constituting a separate policy of insurance and that policy includes life insurance policy riders, insurance duty is payable at 10% of the amount of the premium that relates to the life insurance policy riders.
Because duty is payable in respect of new members who join a policy, it is not open to an insurer to off-set the number of new members against the number of existing members leaving the policy, thereby paying on the balance only."
The addition of a new insured member under a Group Life Policy does not create a separate policy of insurance at law. The policy owner of a Group Life Policy is the trustee of the superannuation fund and the members of that fund are third party beneficiaries of that policy. Members do not have any standing to enforce the Policy.
What is additional insurance?
New Section 196B inserted into the Duties Act imposes stamp duty on additional insurance offered by life insurance policy riders and deems them to be general insurance not life insurance and subject to stamp duty. This will be the case regardless of whether:
- the life insurance and additional insurance are separate or distinct matters; and
- payment of a benefit under the additional insurance reduces the benefit payable under the component classed as life insurance or results in termination of the Policy.
A rider is an attachment to an insurance policy that alters the policy's coverage or terms. They are usually used to add benefits not covered by the Policy. Cover under a Group Life Policy includes death and disablement benefits. While most offer death only cover it is not possible to take out just disablement cover. That cover must always be purchased with death cover. This is not additional insurance tacked on to cover for death. It is an integral part of the risk protection package offered by the Group Life Policy, and does not involve anything resembling an insurance rider.
If the life policy in addition to insuring the risks described in Section 196A (i.e. death cover) also covers payment of a benefit on the occurrence of a contingency or event that does not relate to or depend on a life or lives, that additional insurance is deemed to be general insurance not life insurance and is subject to stamp duty of 10% of the amount of the premium applicable to that additional insurance. I am at a loss to identify a contingency or event that does not relate to or depend on a life which would be included in a Group Life Insurance Policy. However, the SRO has determined that disablement benefits in a Group Life Insurance Policy are additional insurance and therefore not life insurance but general insurance subject to stamp duty.
Stamp duty applies to all new insured members
Previously stamp duty was paid on the net movement of members. That is if 10 new members took out insurance and 5 left the fund the duty was assessed on the premium for 5 members. This is no longer possible as the duty is levied on all new members who join a policy and who reside in Victoria.
At least one Group Life Insurer has already written Funds advising them of these changes and the potential impact on the stamp duty costs that will be passed on to the Funds by the insurer.
Under the previous stamp duty arrangements new members could be offset against exiting members and stamp duty was usually only payable in year one of the term of the Policy, but not during the remainder of the term as the movement of members cancelled this out. Comparisons between the old and the new approach indicate superannuation funds will be paying substantially more stamp duty to cover their Victorian members. For large superannuation funds with significant members in Victoria the cost over time could be millions of dollars.
It is not possible to calculate the impact of Victorian members who leave the fund and move interstate as the new regime means they can only be offset if they joined the Fund or moved to Victoria after 1 July 2014. This means in the first year the number may be small. In addition there are administrative issues in tracking people who move interstate with the fund often not being notified for 12 months or more after they move.
Change of Group Life Insurer
There are also significant issues if a Fund changes insurers whether by choice or as a consequence of a fund merger. The issue of a new Policy attracts stamp duty on all members being issued disablement cover which is treated as additional insurance. This will give the incumbent Group Life Insurer a significant advantage over any other insurer tendering for the work. It will also create issues for superannuation funds merging using successor fund transfers where members are moved to the Group Life Insurance arrangement of the successor fund.
- costs will be passed on to members at time when some funds have had to increase premiums by 30%;
- these additional costs will only impact on those living in Victoria which means higher premiums would have to be paid by those in this group or subsidised by all members;
- it would be a deterrent to any fund to change insurers and so stymie competition in this space;
- will impose administrative costs to track member movements between States;
- will impact on successor fund transfers where members move from one insurer to another and may therefore be a barrier to fund mergers.
There are questions as to whether the wording of the new sections support the interpretation being given by the SRO. Even if the changes cannot be challenged based on the wording of the sections, the consequences that will flow through to superannuation fund members is unacceptable and effectively imposes increased fees on Victorian members of superannuation funds. How changes of insurers is to be handled, whether by a decision of the trustee or as a result of a merger, needs to be clarified as a matter of urgency.
In his second reading speech which accompanied the Bill introducing these changes the Treasurer makes the following statement:
"As announced in the 2014-15 budget, the government will also abolish duty on life insurance policies. This is an important measure on a number of fronts. Abolishing duty on life insurance policies will provide an annual saving of approximately $4 million per annum and will reduce the cost of life insurance for Victorian consumers. Moreover abolishing this duty will result in efficient and simplify benefits for the insurance industry overall. They will no longer have to deal with duty on two different types of insurance at two different rates. Instead, they benefit from the reduced administration and compliance costs of dealing with only one type of insurance duty – general insurance duty."
Taking a benefit under life insurance policy and calling it general insurance does not achieve any of advantages described in this statement. The changes will have the opposite impact on insurers and the people who ultimately bear the cost of these changes will be Victorian members of superannuation funds.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.