CHAPTER 1

Twenty-third Report of the Senate Select Committee on Superannuation
SUPERANNUATION SURCHARGE LEGISLATION
TABLE OF CONTENTS

CHAPTER 1

OVERVIEW

Introduction

1.1 On Budget night, 20 August 1996, the Treasurer, the Hon. Peter Costello MP, announced that the Government would introduce a surcharge of up to 15 per cent on all future tax deductible contributions made to superannuation funds or Retirement Savings Accounts providers by or for high income earners, including those who salary sacrifice. [1] This surcharge is to be phased in commencing at the $70 000 assessable income level, reaching a maximum of 15 percent at $85 000.

1.2 Giving effect to this decision, on 13 February 1997, the Government introduced the following Bills into the House of Representatives:

1.3 On 6 March 1997, the Government introduced a further two Bills:

1.4 In the second reading speech for the Superannuation Contributions Surcharge (Assessment and Collection Bill) 1997, the Parliamentary Secretary (Cabinet) to the Prime Minister, the Hon. Chris Miles MP, advised the House of Representatives that the surcharge legislation is:

1.5 Mr Miles told the House that the Government considered that the superannuation system was inequitably biased in favour of high income earners. He said that high income earners have been benefiting from the concessional taxation treatment of superannuation to a much greater extent than low income earners.

1.6 The surcharge is also a significant revenue item in the Budget. The Government estimates that the revenue impact of the package of surcharge legislation will be $434 million in 1997-98, $500 million in 1998-99 and $526 million in 1999-2000. [3]

Conduct of the Inquiry

1.7 On 26 February 1997, the Senate referred the provisions of the first five Bills to the Senate Select Committee on Superannuation for examination and report by 18 March 1997.

1.8 The Committee advertised the reference on Monday 3 March, setting a closing date for submissions of 7 March.

1.9 On 6 March, the Senate referred the provisions of the latter two Bills to the Committee and extended the reporting date by two days, to Thursday 20 March 1997.

1.10 The Committee received in excess of 70 submissions and other responses to the inquiry. A list of submissions made to the inquiry appears at Appendix 1.Two public hearings were held, in Sydney on 10 March and Canberra on 11 March. A list of witnesses who appeared at those hearings is at Appendix 2.

1.11 1.12 The Committee records its thanks to those persons and organisations who made submissions within the very tight time constraints imposed and gave evidence at the hearings at short notice.

Summary of views

1.13 Submissions and evidence received by the Committee were overwhelmingly critical of the surcharge legislation. Not unexpectedly, the legislation was criticised by representatives of the superannuation industry and high income earners. However, representatives of several State Governments, industry representatives including the Business Council of Australia, the Metal Trades Industry Association of Australia, the accounting professions, the Judiciary and representatives of the Defence forces and other public sector employees also commented adversely on the surcharge proposal.

1.14 There were many calls for the surcharge legislation to be rejected outright.

1.15 Several witnesses and submittors contended that the legislation would lead to a severe further loss in confidence in superannuation, already damaged by a lack of stability in this area for several years.

1.16 Comments made by Mr Grahame Willis of the Metal Trades Industry Association summarised many of the views that were put to the Committee:

1.17 It was argued that superannuation could no longer be regarded as an attractive investment vehicle for retirement saving and that those who could repackage their remuneration would do so, minimising their participation in superannuation to that required by law. Persons who held this view contended that for this reason, the Government's revenue targets for this measure may not be achievable. Others however argued that repackaging may not necessarily be attractive or feasible in the larger corporations.

1.18 The State Governments of New South Wales and South Australia and Mr Dennis Rose AM, QC, appearing on behalf of the Business Council of Australia, raised constitutional issues.

1.19 Evidence was received that many lower and middle income earners would also be required to pay surcharge because they failed to understand the necessity of providing tax file numbers (TFNs) to their superannuation funds and because of the way assessable income is to be calculated.

1.20 Similarly, several contributors to the inquiry contended that including termination payments would require many lower income people to pay the surcharge.Many contributors to the inquiry singled out the surcharge collection mechanism for critical comment. This was held to be excessively complex, cumbersome and costly.

1.21 1.22 Members leaving superannuation funds prior to receipt of an assessment was identified as creating administrative difficulties for funds. It was argued that the additional requirements to pay an advance surcharge compounded these problems.

1.23 It was pointed out that all superannuation and RSA holders will bear a portion of the considerable costs associated with collecting the surcharge, although only a small proportion of those who hold superannuation, estimated to be approximately 355 000, will be directly affected by the surcharge. The Australian Taxation Office will also have to cross match several million tax file numbers to determine liability, at considerable administrative cost.

1.24 Several submissions contended that the surcharge proposal effectively results in tax rates on deductible employer superannuation contributions that are significantly greater than the highest personal tax rates.

1.25 It was argued that the surcharge would be difficult to administer fairly in respect of defined benefit schemes, particularly unfunded schemes. It is impossible to determine the extent to which the surcharge will affect benefits associated with such schemes until an "actuarial standard" is released, and the Committee received a number of expressions of anxiety about this.

1.26 The system under which the ATO notifies funds of surcharge liabilities of individual members means that trustees can infer information about members' incomes. It was suggested that this has privacy implications.

1.27 The Committee received a number of suggestions about how the Government could more effectively achieve its objectives to improve equity through other means.

1.28 While expressing reservations about the concept of the surcharge, several submittors accepted the Government's right to pursue policy objectives in this area, including improving equity and collecting revenue. However, they argued that there are a number of alternative approaches to achieving these objectives. They contended that these would be simpler and more efficient to administer and decrease the likelihood of lower income earners outside the intended surcharge target group having to pay surcharge.

Structure of this report

1.29 The next chapter of this report, Chapter 2, describes the surcharge in detail, explains how the surcharge will be calculated, who will pay it and how it will be collected. It also briefly places the surcharge in the context of the evolving taxation treatment of superannuation. The Chapter then explains the structure and objectives of each of the Bills before the Committee.

1.30 Chapters 3 to 9 set out the major issues identified by the Committee in its examination of the legislation, and report on the nature of the arguments raised in submissions and evidence. The issues examined by the Committee in these chapters include:

1.31 Chapter 10 consists of the separate conclusions and recommendations of the Government and non-government Committee members.

 

[Go to chapter 2]

Footnotes

[1] Press release by the Treasurer, the Hon. Peter Costello, MP, 20 August 1996.

[2] House of Representatives, Hansard, 13 February 1997, p. 625.

[3] House of Representatives, Hansard, 13 February 1997, p. 625.

[4] Evidence, p. 160.