IRD changes to reinsurance tax deductibility

Inland Revenue are looking to implement changes to existing sections in the Income Tax Act 2007. DR 3, the section IRD are looking to improve, was originally designed to ensure that no deduction was available for the reinsurance of a policy unless the policy was offered here in New Zealand. However, there was a loophole which meant that some life reinsurance premiums could be excused from being taxed under the double tax agreements (DTAs). The amendment will ensure that DR 3 is widely effective.

The amendment will work to deny a deduction for a life reinsurance premium incurred under a life reinsurance policy for clients not residing in New Zealand, given that the client is not living in a country that New Zealand has a DTA with.  It is important to note that the section would not be applicable to life insurance premiums that are attributable to a deemed PE under section GB 54.


Who's on first: Income Protection Tax Update

There is a great deal of debate about tax treatment of Income Protection. Given the importance of this product as society progressively shifts towards greater dependence on living benefits from a focus on death benefits this matters. A little while ago I asked the FSC to tell me what their goal in lobbying for consistent tax treatment is. This was their response: 

  • Consistent income tax and GST treatment of income protection products.  The income tax treatment is on the current Government work programme with an Officials Issues Paper the likely next step as part of the Government Generic Tax Policy Process (“GTPP”).  The TAG will continue to lobby Tax Policy Officials for consistent GST treatment as part of this process also.

So far so good. So I blogged that, and this tax watcher on Twitter said something which shall we say contrasted with the above. 

  • "Review likely but outcome non-taxable non-deductible (AV) taxation. Existing indemnity policies are grandparented" Adding for good measure: "...years away. IRD got bigger projects on; no drive from industry to change tax treatment either"

Back in among the industry on LinkedIn JP Hale had this to say, in this case, he kind of put it differently.

  • "...the IRD has repeatedly refused to review the position over the years"

It is, of course, perfectly possible that someone is right, and the rest are wrong. But clarity in long-term planning is handy, more so when contemplating a contract which can be hard to switch or change if your health has deteriorated. This is an example of a long-term issue we should be prioritising. Meanwhile, you may find this explanatory video helpful (yes, it is the right video, requires sound, and is suitable for work). 

 


Taxation of Income Protection: Complexity and Risk - updated

For those advisers that like the idea of a lower, non-taxable, income protection benefit the potential for a review of the taxation of income protection adds risks, or complexity, or both. 

For example, if a future review were conducted by Inland Revenue, and the position were changed so that all IP benefits (AV, LOE, or Indemnity) are deductible and taxable then those clients with existing AV benefits may have a problem. If the tax position changes for in-force contracts then they probably need to buy extra cover. A boon, perhaps, to insurers and advisers, but difficult for some clients that have developed health problems in the meantime. Alternatively the change could apply from a certain date forward, adding to the complexity of giving advice to clients with in-force AV contracts which will remain non-deductible and non-taxable. Insurers could make like easier for advisers by allowing a one-off increase to the benefit if it is deemed to be taxable. They are only likely to be tempted to do this if there were better information and enforcement around the taxation of IP benefits.

We continue to hear of complaints that claimants do not declare their income and then discover that they have unpaid tax problems to add to their health issues. Which brings us to the other eventuality: assuming everything becomes non-deductible and non-taxable, then the reverse problem applies. Some may seek to reduce their benefits, a one-off hit to insurers. But the gains to consumers and reduced replacement ratios may be worth it. Each of these costs probably still outweigh the complexity of staying with the current situation.