The Minister for Internal Affairs, the Hon Rick Barker, has announced a proposal to restructure New Zealand’s fire and rescue services and the way they are funded. Media have covered various concerns held in relation to the proposal, including feared loss of rural fire-fighting expertise through centralisation and the failure to extend the pool of levy payers to include uninsured persons.
One issue which has not yet received extensive coverage is the effect of the proposed changes to the levy-based funding on the commercial community. This alert focuses on the proposed changes to the Fire Service levy and warns of the potential for large levy increases for many commercial enterprises.
Proposal to broaden range of insurance on which levy is calculated
At present the Fire Service is funded from a levy-based on the indemnity value of property insured against fire. The proposal continues an insurance based levy system but includes a number of significant changes which will substantially increase the amount of the levy payable by many commercial parties:
- Levies will be based on insurance against any form of property loss or damage (where the property “benefits” from fire and rescue services), not only on fire insurance.
- Levies will no longer be based on indemnity value, but will be calculated on replacement value or the maximum amount payable under the insurance policy (the proposal is unclear how these options will be applied).
- The levy calculation will extend to include the insured value of all insured property even where the policy is subject to a “first loss” limit based on the value of a single asset.
- Insurance covering some currently excluded classes of items – like forests and crops – would be levied. Insurance of other currently excluded classes – including dams, bridges, and other infrastructure assets – could also potentially become leviable.
- The flat rate levy per insured motor vehicle (less than 3.5 tonnes) would increase markedly (from $5.84 per vehicle to $10 per vehicle), but would continue to be collected through insurance rather than registration levy.
Potential large levy increases
Under the proposal, expansion of the range of insurance policies which are levied may allow levy rates to decrease, but we expect that many commercial entities will face very large levy increases.
Commercial entities which have previously been able to calculate their levy contribution based on the level of indemnity insurance held against the greatest expected single fire loss will be affected by these changes and their levy liability is likely to increase significantly.
Example: multi-site entity
- For example, an entity with 10 sites across New Zealand, each with a replacement value of $1.5 million, might previously have insured these sites collectively against fire under one “first loss” policy which would have paid a fixed sum of, say, $1 million if any one of these properties was lost to fire. The entity would currently pay a $730 annual levy, calculated on the $1 million fixed sum insured.
- Under the proposal the levy could be calculated on replacement value, or the maximum amount insured under any insurance policy. So, if the sites are all insured for replacement in the case of loss or damage, the levy could be calculated on the total replacement value of $15 million. This would mean an increase from a $730 annual levy to a $10,950 annual levy.
Example: one large asset
- Similarly, an entity with one large asset worth $1 billion might have decided that only $100 million of that asset is ever likely to be lost to fire in any one incident – perhaps given the nature of the asset or the fire prevention and control systems in place. Under the current legislation the entity could insure against a loss and pay a $73,000 annual levy.
- Under the proposal, if the asset is insured to its full value against, say, earthquake damage, the levy will be calculated on that full value. At current rates the annual levy will be $730,000.
Submissions close Saturday 30 June 2007
We suggest that you:
- consider how the proposed changes might affect your current fire levy liability; and
- consider making a submission on any aspect of the proposal which particularly concerns you.
Issues on which submissions might focus include:
- whether continuation of insurance-based levy funding for the Fire Service is appropriate as an alternative to say, central or local taxation funding
- the appropriateness of calculating levies on the value of all assets where the value of total annual fire risk (or other risk relevant to the services provided by the proposed Fire and Rescue Service) is likely to be much less
- the proposed change from levies calculated on indemnity value of property to the maximum amount payable under the policy, and whether it is appropriate for property owners with more comprehensive insurance to pay higher levies than equivalent property owners with more limited insurance
- the merit of including previously excluded asset classes such as forests, crops or infrastructure assets, where those assets are often located outside the coverage area of the centrally funded fire service.
Submissions close Saturday 30 June 2007. If you have any questions about the Fire Service legislation proposal, whether in relation to the levy aspects or more generally, please contact John Knight or Hannah Northover.