Today the Minister has announced the new funding regime for this merged entity.
Regrettably the new regime continues to be based on insurance. There are however significant changes proposed although many details are yet to be worked through. IBANZ has been asked to assist in ensuring the process is as pragmatic as possible, we are happy to do so.
Funding Basis
The primary purpose of the funding model review was to address the “thin” base that results from applying the levy to fire insurance only. This is highlighted by the fact that much of the activity of the Fire Service is no longer around fires.
In future the levy will be based on policies covering “material damage” perils, not just fire. The good news is the government has agreed with us that rather than apply a rate to the value of all assets, it will be calculated on the sums insured. This should make it simpler to calculate as the issue of “indemnity value” will disappear.
In discussions earlier this week we pointed out to Department of Internal Affairs (DIA) that any definition referring to material damage could be problematic as there is no universal definition of what is covered. The DIA agreed the definition of perils included would require careful consideration to avoid future complications with how the levy is applied.
One outcome of using the sum insured is that it is often higher than the indemnity value. The DIA has indicated they wish to work with the industry on what rates should be used in future to achieve the required revenue for the Fire Service.
On motor vehicles the decision has gone against industry recommendations in that the levy is to be extended to third party policies. Applying the levy to a liability cover is contrary to the rest of the regime and seems to show a lack of understanding of insurance.
An area of concern for insureds is that with the amalgamation of the rural and urban fire services the current funding for the rural service from regional councils, forestry owners and DOC will not apply. DOC will make a “contribution” in future and forestry owners will only pay if they have insurance for the defined perils.
Although it appears the EQC will not cover domestic contents they will continue to have a Fire Service levy. The link between EQC and the Fire Service regimes will disappear.
A key focus of the review has been the shift from fires to other activities of the Fire Service. In the options originally proposed the Crown was to contribute funding to acknowledge these activities. This will happen however the contribution is well below that initially proposed with a sum of only $10 million to be made in the first year which clearly does not reflect the level of non-fire activities.
Government departments will continue to have the option of making a “good citizen” contribution to acknowledge their considerable assets at risk.
Levy Rates
In regard to the rate there are some other new initiatives. Differential rates will apply to acknowledge the different risk profiles between domestic and commercial properties. There will also be allowance for caps to apply to levies payable. Already seen with domestic in future there is to be an option for a cap on commercial risks. The Fire Service and DIA will be consulting on the cap levels before putting a recommendation to government.
A review of rates will apply every three years involving public consultation on a detailed business case that the Fire Service is required to produce.
Exemptions
All current exemptions will be removed and replaced with a new schedule. Future exemptions are likely to include some current examples such as horizontal infrastructure. Given the current exemptions are logical and well understood it is to be hoped most will be reinstated. The government will be consulting on this aspect.
Anti-Avoidance Measures
A general anti-avoidance regime (GAAR) is to be introduced along the lines of IRD regime. This will introduce new collection powers for the Fire Service. Our concern in this area has been that there is an overly negative view that everyone is out to rip off the system.
It is good therefore to see the government acknowledging the amount of insurance is up to the individual or company. Self-insurance or non-insurance are perfectly valid options and are therefore not going to be treated as avoidance. Levies will only be payable on insured assets for the amount insured.
Payment Cycles
Payment cycles are to be realigned and in future will follow GST. This will mean that rather than inception dates being used the invoice date will apply.
Dispute Resolution
A dispute resolution regime is to be implemented. This is a positive step and a much better alternative than the current confrontational approach through the courts. Regulations are to be introduced to appoint a dispute adjudicator.
Penalties
Penalty rates for late and non-payment of levies are to be changed with the introduction of “use of money interest” (UOMI) as used by the IRD. This will see a reduction on the existing interest rates being used. The current the UOMI rate is 9.6%.
Penalties for non-payment and late payment have also been reviewed. The amounts vary according to the level of non-compliance ranging from minor infringements to deliberate avoidance.
Maximum penalties:
Infringement:
$1,000 to $1,500 (personal) to $5,000 to $30,000 (body corporate)
Significant non-compliance:
2 months imprisonment
$25,000 (personal), $50,000 (body corporate)
Gross carelessness:
penalty – 40% of amount avoided
Avoidance established:
penalty – 100% of amount avoided
Timeframes
There will be transitional period for the implementation of the new regime. The timeframes reflect the government financial year which runs from 1st July to 30th June.
There will be a transitional period through to 2017/18 during which the existing regime will apply.
Consultation on new rates will happen over the coming year with new rates implemented for 2017/18. The three yearly rates review cycle commences after this.
The new regime will be fully implemented in the 2018/19 year.
