― 379 ―


21.158. Having regard to the fact that two of its members are directors of Australian life insurance companies, the Committee feels that it is unable to make detailed recommendations on tax changes in this area. In addition, the subject is one of considerable complexity, particularly when it comes to determining the correct basis of taxing life insurance companies themselves. Life insurance is distinctive in combining elements of investment, protection and mutuality. The very diversity of overseas practice is an indication that no single method of taxing a life insurance company is accepted as correct. It often tends to be arbitrary.

21.159. Accordingly the Committee, while acknowledging assistance received from several submissions, recommends that a review of the taxation aspects of life insurance be undertaken by a separately constituted committee which can consider the particular problems in this area in greater depth than the present Committee has been able to do. Though minor anomalies such as the denial of the section 46 dividend rebate to non-resident life insurance companies and the treatment of foreign-source income may be noted, the Committee wishes to confine itself to some observations of a general nature.

21.160. Firstly, as with superannuation, the taxation of life insurance must be considered as a whole. There must be harmony between the treatment of premium payments, the income of the life insurance fund and payments of policy proceeds. No one element can be looked at in isolation from the other two.

21.161. Secondly, unlike the situation with superannuation benefits, it is neither feasible nor desirable to tax the proceeds of a life insurance policy; nor is it possible to impute to a policy-owner for tax purposes his share of the company's income during the term of the policy. Because of the insurance, as distinct from investment, aspects of life insurance, there is no reasonable way of taxing the excess of the policy proceeds over the amount of premiums paid. This being so it is necessary to exact some tax from the company itself, particularly since there is no way of imposing a limit on the extent to which high-income taxpayers may use life insurance as a saving and investment medium. Maximum benefit limitations can be imposed on tax-exempt superannuation funds to prevent the tax-free accumulation of excessive amounts, but this approach cannot be adopted with life insurance.

21.162. Thirdly, if it is desired that life insurance be encouraged there is justification for giving some form of concession related to the payment of premiums. The Committee has already recommended in paragraph 21.103 that superannuation contributions be taken outside the ambit of the present section 82H and divorced from the treatment of life insurance premiums. While a deduction system should be retained for superannuation contributions, largely because the benefit will emerge in taxable form, it is felt that a rebate, which is an equal per-dollar subsidy, is more appropriate in the case of premiums for life insurance the benefits from which are non-taxable.

21.163. Fourthly, and most significantly, the Committee wishes to stress that the tax treatment of life insurance should not be subject to abrupt changes. Life insurance is a long-term undertaking for both the policy-owner and the company. The long-term financial plans of individuals should not be lightly interfered with and it should be borne in mind that a life insurance company must be able to build up assets to meet liabilities due many years in the future. Because of the long-term nature of the contract entered into between the policy-owner and the company, it is necessary that there be some stability of the tax structure within which this contract will function.

  ― 380 ―

21.164. Finally, regard must be paid to the eroding effect of inflation on the protection and savings provided under life insurance policies. No less than in the case of business and professional income, the tax system should have regard to the impact of inflation on the income of life insurance funds, which are particularly vulnerable because of their required holdings of fixed-interest securities.