Other options investigated

1.1 the weaknesses of the current tax rules and the reason for replacing them with the proposed rules. The proposals are based on the model discussed in the officials’ paper, Life Insurance tax reform: Suggestions for reform,[1] and the resulting consultation. During the submission process, two alternative options were put forward, and these were considered but rejected for reasons that are discussed in Appendix 4.

1.2 In developing the proposed rules, the tax treatment of life insurers and policyholders in other jurisdictions has been closely examined (see Appendices 1 and 2). New Zealanders’ investment income is now taxed under the portfolio investment entity (PIE) tax rules, so in bringing policyholders’ investment income under those rules, as is proposed, overseas precedent is limited.

1.3 A number of countries tax claims or benefits received by policyholders either under income tax or through inheritance tax. Although this option was raised in submissions, the government considers that taxing claims is contrary to New Zealand tax law principles (under which the claim is generally a capital item). Furthermore, with the abolition of estate duty in 1992, there is no basis to subject the estate of claimants to an inheritance tax.

1.4 Some countries provide tax deductions (in some cases up to certain limits) to policyholders for premiums paid, as happened in New Zealand up to 17 December 1987. In some countries, the deductibility is for premiums to life savings policies, and in many cases, the claims are taxable, as previously discussed. Tax preferencing of life insurance over and above other taxpayers is not acceptable, for reasons discussed in Chapter 3.

1.5 Life insurers are taxed in a variety of ways internationally. New Zealand is in a small minority by taxing underwriting profits by way of formula (discussed in Chapter 2). Many countries use financial accounts as the starting point, and this has the effect of largely taxing life insurers on their actual profits. The proposed rules favour a general insurance approach to the taxation of risk profits and fee income, similar in concept (though not necessarily in detail) to present Australian tax rules, which aim to tax the insurer fairly on the economic profits derived from that business.

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