Earlier this year the Inland Revenue department put out a paper on taxation of life insurance policies. The current regime was devised when life insurers were predominantly mutual societies and most life products had a significant savings component.
The savings part is taxed at a flat rate of 33%. There is agreement in principle that this should be changed to reflect the individual's marginal tax rate – and also in line with the changes to the PIE regime.
However implementation of this in practice is a thorny issue – and not just for those old life products.
It is even harder for home equity release (HER) scheme products and annuities, the Inland Revenue's adviser on these issues. Anthony Merritt, told the Institute of Chartered Accountants' tax conference.
"We're looking for feedback from the industry on how this might work," Merritt says.
"In principle, the idea is to get the benefit of the PIE regime. The issue is how we can make it work with the systems being run by the companies and how they can continue to provide products that will be able to apply that."
It is possible, he says that HER schemes might not be brought under the life insurance regime at all.
At present HER schemes are treated in a broadly similar way to annuities, with the premium treated as being due at the end of term. When that premium is paid it is treated as tax deductible. However the time frame involved means the eventual sale of the house can be 20 years or even more after the arrangement is made. The tax loss cannot at present be "carried back".
Annuities are a more difficult issue, he says. At present there are few annuities products on offer in New Zealand and one reason is the flat rate of 33%.
If they are treated at the customer's marginal tax rate that rate usually falls the longer they live.
"The tax goes down over the course of their expected life, but then if they live longer it becomes a difficulty."
Further discussion documents on the issues are due out later this month.
