Death and taxes
Jo McIntosh, New Zealand Tree Grower February 2019.
They say that two things in life are guaranteed − death and taxes. It seems perhaps another tax, hidden in the form of a levy, is on its way. This levy is going to directly affect those of you who insure your trees and crops.
Back in July 2016, Internal Affairs issued a discussion document in respect of the introduction of the new Fire and Emergency New Zealand Act. This Act was to bring rural and urban fire fighters together and, in doing so, repeal the Forest and Rural Fires Act. The Fire and Emergency New Zealand Act was duly passed into law in July 2017. There were also changes to levy regulations, and the public release of a draft of the regulations including regulations for Fire and Emergency New Zealand’s enforcement regime and fire plans.
A recent amendment bill, which is expected to be passed by 1 July 2019, will delay commencement of the new levy regime to 1 July 2020. The draft levy regulations are being released to give the public certainty of how the new regime will work in the future. These are expected to be finalised when the new regime rate is set in 2019.
We therefore do not currently know what the new charging regime will be. Based on the draft regulations forestry insurance will be included and although we do not know the levy rate, I would imagine that it is safe to say this will be a new cost to forest owners who insure.
Levy on insurance
For the insurance industry the fact that fire services continue to be funded by a levy on insurance continues to be a big disappointment. The Insurance Council and the Insurance Brokers Association have consistently advocated that a levy on insurance is unfair because only those who insure carry the burden of these costs. The insurance industry has lobbied hard to get their message across but to no avail. Other parties, such as the New Zealand Institute of Economic Research, have also recommended that the government look for a fairer way of funding the fire service. Unfortunately, despite all this, the law was passed.
Currently a fire service levy is only paid on property, motor vehicles and inland transit. Fire and Emergency New Zealand are now seeking to apply the levy to other policies including domestic aircraft, electricity infrastructure, hazardous substances, livestock, crops and forestry. The government has now realised that this is a complex process and, as a result, the implementation has been delayed to July 2020 and it is expected that feedback may be sought in 2019.
The paper issued by the Minister details matters being considered and it raises several questions. First, as noted above, the rate of the levy under the new fire levy regime has not been set so the cost is unknown. For existing policies which currently pay a fire service levy, one of the first changes in 2017 was that the levy increased by 40 per cent. Most of you will have noticed this when paying for your home, business and motor insurance.
The interim fire levy rate changes under the old levy regime came into effect on 1 July 2017. The changes saw the increases shown in the table below.
|Levy before July 2017||Levy from July 2017|
|Commercial property||7.6 cents per $100 insured||10.60 cents per $100 insured|
|Domestic house and contents||7.6 cents per $100 insured − insured amounts are capped at $100,000 for residential buildings and $20,000 for contents||10.6 cents per $100 insured − insured amounts are capped at $100,000 for residential buildings and $20,000 for contents|
|Vehicles over 3.5 tonnes||7.6 cents per $100 insured||10.6 cents per $100 insured|
|Vehicles less than or equal to 3.5 tonnes||$6.08 per vehicle||$8.45 per vehicle|
This has resulted in a significant increase in fire levy revenue income for Fire and Emergency New Zealand. This increase over the four-year period from July 2017 is expected to be in the range of an additional $780 million.
Possible double costs
Under the new fire levy regime, if the rate applied to forestry was set at the same rate as existing property insurance, this would effectively double many people’s timber insurance costs. For example, a forest in Northland with a fire only cover of insured value of $2 million along with a small amount for re-establishment is currently paying $2,200 in premiums. If the levy rate remains as it is, and as suggested is applied to the full sum insured, that would result in fire service levy of $2,120, almost the same as the insurance premium.
The paper notes that the fire service levy will be applied to the full sum insured on any first loss policy. Many larger forest groups have policies which have policy loss limits. For example, if you have a $100 million estate spread over multiple locations, it would not be unreasonable to have a policy loss limit of $20 million. However, if the fire service levy is applied to the $100 million rather than to the $20 million policy loss limit, the cost would be significant.
The paper does suggest that there are plans to offer transitional levy relief for large entities facing a significant increase resulting from the legislative changes. It has been suggested this relief will be available to those liable for fire levy payments of $75,000 or more. However the relief is only transitional and the majority of policy holders will fall under this limit and potentially be directly affected by the new levy.
To think about
There are a many other important points and questions, and here are a few −
- What about carbon insurance and would it be exempt?
- There is some talk that the forest owner will only be liable when a forest reaches an age when it has a market value and the levy will not apply to any portion of the policy that relates to financial loss.
- There is a potential argument that all standing timber coverage is about financial loss. A property policy such as home, building or motor vehicle is in place to reinstate the insured. In other words, to rebuild a house or repair your car. You cannot go down to the nearest Bunnings and replace or repair your forest.
- Currently property owners are required to have a formal valuation or sign a statutory declaration which confirms that the amount the fire service levy is calculated on is fair and reasonable relative to the replacement value of the property. Who will review these values? Will forest owners be required to obtain formal valuations and if so, how often?
- This new regime will also result in a greater level of administration for brokers and insurers who will be responsible to gather and settle this tax. Increased administration will almost undoubtedly result in increased costs for forest owners. We want people to be able to afford to be insured. The more tax applied to insurance premiums the more likely it is that people will under-insure or, even worse, not insure. New Zealand is exposed to natural disaster risk particularly severe weather.
- Investors and banks will not want to invest in forests which are not insured.
The timing, when we are being encouraged to plant trees, seems counter-productive.
Perhaps the biggest question is what are tax payers getting for their money? Fire and Emergency New Zealand has already seen a big jump in their revenue. I would encourage you to review how these changes will affect you when this comes up for discussion next year and communicate any concerns appropriately.
Jo McIntosh is an Executive Director of Aon and specialises in insurance for forestry and horticulture.