Car Insurance - Set To Double?
The Age
Monday January 22, 1996
Can damages cost twice as much as the damage done? Under a new tax ruling, that becomes a possibility, Janelle Carrigan reports.
CAR INSURANCE premiums could double following a new method of taxing compensation payouts, according to tax solicitor John Morgan. But the insurers disagree and are at odds over interpreting the lengthy capital gains tax ruling that determines if compensation is subject to tax. Morgan, of the Melbourne firm Phillips Fox, says the new ruling, introduced late last year by the Federal Government, widens the extent of tax to include previously untaxed legal damages.
Neil Wilson, a member of the insurance council of the taxation committee, says these gains will not be taxed. ``If the loss suffered is equal to or greater than the compensation received, the ruling makes it clear that there is no capital gain and therefore there is no need to effect any form of gross-up.
" According to Morgan the ``very expansive definition of asset" has created problems. The tax office imposes capital gains tax on property movements but, as cars are not recognised as an asset, compensation payouts are taxed instead.
The ruling regards the right to sue as an asset in motor vehicle claims, and any settlements are subject to capital gains tax.
Morgan says that while many damage claims are already subject to capital gains tax, some claims were previously exempt.
To cover extra tax costs, people claiming on car insurance through the court system may have to increase their claims, says Morgan, and this ``gross-up" will force insurance companies to increase car premiums in order to meet costs.
If compensation payouts are taxable, Morgan warns, Australia could become the only country in the world where damages could cost twice as much as the damage done.
Damage claims amount to almost $3 billion per year according to AAMI's Crash Index. Current car insurance premiums on a standard five-year-old six-cylinder car range from basic third party at around $100 - $300 to comprehensive insurance between $300 and $2000.
Car insurers contacted by Money Extra were aware of the new ruling.
The RACV would not comment, as it prefers comment to come from the insurance council.
Michael Kay, executive chairman of AAMI's corporate affairs, does not think the ruling will affect car insurers. ``In a motor vehicle claim, the underlying asset will be the car.
Compensation for that loss will not result in any profit and therefore no tax is payable."
Morgan believes AAMI has fallen into the trap he has exposed in the ruling. ``The way they read it is the way it should be (but) the logic of the ruling is flawed."
He says that, as the ruling does not recognise the car as an asset, the right to sue becomes the asset, making compensation taxable. ``If a car was a capital-gains tax asset, the tax office would select the car but the act doesn't permit this.
" Morgan uses the example of a, owner whose $10,000 vehicle is stolen. Although $10,000 would be the logical amount to claim, once tax is taken into account (at 48.5 per cent) the figure almost doubles to more than $19,000. ``The car owner will then have to claim double damages so they have enough left after tax to repair their car," he says.
Sam Sorbello, manager of the CGT division of the Australian Tax Office, says car claims will fall under the definition of asset. ``If the insurance claim was totally written off or permanently damaged that's fine; the exemption still applies.
" Sorbello says that car compensation claims may be subject to capital gains tax if they fall outside these conditions.
Individuals who receive a tax bill for a compensation payout, but are unaware of this new ruling, can appeal to the tax commissioner.
Morgan warns that a 25 per cent surcharge on the tax bill can be imposed for disobeying a ruling.
Morgan, who is a former chairman of the Victorian Law Institute's tax committee, took up the draft ruling with Attorney-General Michael Lavarch in December 1994. Changes were made, but not enough to eliminate the prospect of taxing some compensation payouts.
While rulings are not officially regarded as law, Morgan says they have ``a nasty habit of becoming law" by becoming de-facto guidelines.
Morgan warns that if the ruling is fully implemented, some insurance companies may place the additional costs on the defendant.
Although the matter could have been corrected without affecting the overall ruling he believes the tax office is being ``fiscally paranoid" to ensure the point does not become a loophole for other claims. Morgan says the complexity of the 80-page ruling has created misinformation on other matters that are exempt from capital gains tax, such as, sexual harassment or unfair dismissal compensation payouts.
However, Kay says: ``There were issues in the draft ruling, (but) we don't believe it will have an effect on insurance premiums. We do not believe that it will affect AAMI."
HOW CAR INSURANCE COMPARES
RACV AAMI GIO
18 y-o* 50 y-o 18 y-o 50 y-o 18 y-o 50 y-o
1. Ford Laser Ghia 1995,
sedan, automatic, 4 cylinder
3rd party $213 $133 $235 $110 $301 $114
3rd party fire
& theft $305 $230 $295 $170 N/A** N/A**
comprehensive $1308 $395 $1519 $401 $2409 $646
2. Ford Laser Ghia 1990,
sedan, automatic, 4 cylinder
3rd party $213 $133 $235 $110 $301 $114
3rd party fire
& theft $305 $230 $295 $170 N/A** N/A**
comprehensive $1179 $367 $1439 $380 $2191 $588
3. Ford Falcon GLI 1995,
sedan, automatic, 6 cylinder
3rd party $213 $133 $235 $110 $301 $114
3rd party fire
& theft $305 $230 $295 $170 N/A** N/A**
comprehensive $1308 $395 $1519 $401 $2113 $567
4. Ford Falcon GLI 1990,
sedan, automatic, 6 cylinder
3rd party $213 $133 $235 $110 $301 $114
3rd party fire
& theft $305 $230 $295 $170 N/A** N/A**
comprehensive $1179 $367 $1340 $354 $2160 $580
* Figures for 18-yr-old males
** Third Party Fire and Theft insurance not available for cars
valued at $10,000 and over
© 1996 The Age
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