New fire services levy regime takes effect with an anti-avoidance rule

It’s never been clear to me why Fire and Emergency NZ is funded by levies on insurance policies, rather than by the government. It’s not as if FENZ checks to see whether property is insured before responding to a fire. People who take out insurance are subsidising the fire service for the benefit of the uninsured – a perverse incentive to not take out insurance.

The levy system is also costly to administer, and disputes often arise as to how to interpret the levy rules. I had a case a decade ago about the proper interpretation of the levy that went all the way to the Supreme Court, and a solid body of case law has developed.

But the rules change from today. Parliament had amended the levy regime a decade ago, and it was due to come into force on July 2017. However, those amendments were put on hold for 9 years as the proposed amendments were reworked. After a further round of amendments, the regime now comes into force today, 1 July 2026.

There are a number of key changes to the regime. But perhaps the most significant is the introduction of a new anti-avoidance regime. Even if a levy payer calculates and pays the levy in accordance with new rules, they could still be hit with a shortfall penalty if their insurance policy is a “levy avoidance arrangement”.

Just what is that? It’s defined as an arrangement that directly or indirectly has levy avoidance or reduction as one of its purposes or effects – unless that purpose or effect is merely incidental. While this definition has been lifted from the tax legislation, it remains to be seen how it will be applied in the context of FENZ levies and insurance.

In the meantime, the Act requires levy payers – which may include insurers, brokers and insureds – to ensure that their insurance policies not only comply with the new levy rules, but that they do no fall foul of the new anti-avoidance regime.