At the beginning of July, fire authorities amalgamated to become Fire and Emergency New Zealand (FENZ) despite much opposition from the insurance industry to its formation.
The outcry was partly a result – as Insurance Council of New Zealand CEO
Tim Grafton pointed out – of the FENZ Act putting the liability on individuals/businesses, insurance brokers, and insurance companies to accurately calculate the levies on insured assets.
“We [insurers] are the tax collector and, under the bill, we and insurance brokers, and the insured, all have liability for paying the right amount at the right time, and face penalties for not doing so,” Grafton said.
This liability for levy avoidance – which constitutes taking an incorrect position on the amount of levy payable on an insurance policy – will come into effect from the beginning of January, 2019.
However, there is very little detail in the act as to what is known about the legal test for levy avoidance and the factors the courts may look at in levy avoidance cases.
According to Auckland barrister Veronica Cress, the new levy regime is set out in part three of the act. Subpart four imposes civil penalties for any levy shortfall caused by taking an incorrect position on the amount of levy that must be paid on an insurance policy.
“The penalties are set out in the act as percentages of the levy shortfall and they vary according to the relative culpability of those involved in taking the incorrect levy position,” she said.
“At one end of the scale is ‘not taking reasonable care’, which attracts a penalty of 20%. At the other end of the scale is ‘taking an abusive levy position’, which includes levy avoidance and levy avoidance arrangements, for which the penalty is 100%.”
Levy avoidance is very broadly defined in the act as follows:
‘levy avoidance includes directly or indirectly—
(a) altering the incidence of the levy:
(b) relieving a person from liability to pay the levy:
(c) avoiding, postponing, or reducing any liability to pay the levy’.
It is clear that the definitions of “levy avoidance” and “levy avoidance arrangement” raise more questions than they provide answers, said Cress.
“Together, these definitions are arguably broad enough to capture almost any insurance purchasing decision or policy arrangement that reduces the amount of levy paid,” she explained.
“This will make it incredibly difficult to identify levy avoidance with any real certainty in many cases.”
She explained that – as an example – a decision to self-insure could arguably fall within the definition of a “levy avoidance arrangement” because one of the obvious effects of not buying insurance is that levies are avoided.
However, the act deals with this situation by expressly stating that self-insuring is not a levy avoidance arrangement.
“Apart from self-insurance, the act gives very little guidance on what levy avoidance means in the insurance context or how to identify it.”
Related stories:
Increased levies perplex the insurance industry
FENZ package prompts industry anger
