CHAPTER 5
TARGETING AND EQUITY
Introduction
5.1 As noted in Chapter 1 of this report, the Government regards the
introduction of the surcharge as a significant means of addressing current
inequities that exist in superannuation, in particular, the greater level
of advantage derived from the system by higher income earners.
5.2 Accordingly, the Government has set the threshold at which liability
for the surcharge commences at a relatively high level, $70 000.
5.3 However, the Committee received a considerable volume of opinion
during the inquiry, that argued that many people who are not in the target
group would be required to pay the surcharge. Submissions and evidence
identified two aspects that they considered would cause the surcharge
to catch people it was not intended to affect. These were:
- the requirement to provide tax file numbers; and
- the definition of assessable income.
5.4 Several witnesses and submissions also questioned whether the surcharge
legislation adequately addressed the Government's equity objectives, arguing
that the surcharge proposal itself created new potential inequities. It
was also suggested that there are a number of better methods of addressing
equity issues in the superannuation system, particularly in regard to
the taxation of benefits.
5.5 Areas of potential inequity identified in evidence included the following:
- non-target fund members would be required to meet compliance costs,
not just those targeted;
- persons with uneven income patterns, such as farmers, women who have
taken breaks in their careers to have children, and owners of many small
businesses, may be subject to the surcharge, although, if averaged over
several years, their incomes would be less than the surcharge target
group;
- the surcharge may produce high effective tax rates in some circumstances;
and
- persons in unfunded defined benefits schemes would have a surcharge
levied against their retirement benefits with interest, although their
employers will have never paid contributions towards their benefits.
Conversely, some considered that the system placed defined benefit scheme
members at an advantage over members of accumulation funds. (The Committee
examines defined benefit funds in Chapter 9)
Tax File Number collection
5.6 The proposed collection method for the surcharge requires the ATO
to carry out a cross matching exercise between taxation returns and tax
file numbers (TFNs) provided to the ATO by superannuation providers. Under
the provisions of the legislation, the providers are authorised to collect
members' TFNs and send them to the ATO. If a member does not provide a
TFN, surcharge is levied at the full rate of 15 per cent, regardless of
the income of the member.
5.7 The Committee was told that this provision would lead to very large
numbers of non-target taxpayers being charged the highest rate of surcharge.
The Committee was advised that there are likely to be very substantial
difficulties associated with collecting TFNs, for reasons that included
the following:
- employees will not understand the requirement to supply TFNs;
- previous low levels of response to written requests to supply TFNs;
- some employees will refuse to supply TFNs; and
- funds do not have current addresses for large proportions of their
members.
5.8 Ms Louise Sylva, representing AMP Financial Services, was one of
several witnesses who explained that many low income people would be caught
by the surcharge because they thought it did not apply to them and did
not comprehend the need to supply TFNs:
When I say there are difficulties in getting tax file numbers from
a lot of low income members I mean that they believe that the surcharge
is just for high income earners. When you ask them for their tax file
number they do not realise that there is any need for them to pass it
on because they believe the surcharge is designed for high income earners
and they are not affected. Most of them would not realise that they
will be if they do not supply it. [1]
5.9 Several witnesses emphasised that the funds faced considerable difficulties
in communicating the need to supply TFNs. A lack of English skills on
the part of some fund members, particularly in some industry funds, was
identified as a contributor to this problem.
5.10 Another major difficulty is that funds have no means of tracing
some of their members because the funds do not have current address details.
Mr Peter Downes of Jacques Martin explained:
...in some of our funds we do not know where 10 or 20 per cent of the
membership are, in funds of a million people. We do not know how we
contact them to collect their tax file numbers. That is just the beginning.
Sometimes 20 per cent of our membership we cannot contact to ask and,
at least initially, we expect very high non-reporting from those that
we can ask. [2]
5.11 Trustees of a number of funds told the Committee that they had encountered
great difficulty in gathering TFNs in the past, despite repeated attempts
to do so. All witnesses who gave evidence on this issue expected that
initial compliance rates would be low and accordingly, many people outside
the target group would be liable for the surcharge. The following selection
of quotes illustrate the concerns expressed.
5.12 Mr Grahame Willis of the Metal Trades Industry Association, speaking
about the Superannuation Trust of Australia, of which he is a director,
commented:
In that fund, which has 300,000 members, we have been seeking now for
almost two years to collect the tax file numbers of the fund members.
Our success rate to date is approximately 11,000 out of 300,000. [3]
5.13 Mr Ian Silk, Australian Retirement Fund, who indicated that less
than two per cent of members had adjustable taxable incomes of $70 000
or more commented:
5.14 Mr Brett Westbrook, Fund Secretary, Transport Workers Union Superannuation
Fund commented:
Our estimates, as I indicated before, are that we are likely to receive
only a 30 per cent response rate in the next 12 months. In our quick
calculations, that indicates that from our fund up to $7 million will
be collected and paid to the tax office that is not necessarily surchargeable.
[5]
5.15 For many people in accumulation funds, receipt of a statement at
the end of the year showing that they had been surcharged may operate
as a prompt to comply with the legislation. However, Ms Robin Quinn, representing
the NSW Government, advised the Committee that members of defined benefit
schemes may not receive such a prompt and therefore will be unaware of
the surcharge debt that will accumulate if they do not supply TFNs. She
noted:
We have large numbers of people who will not understand the need to
provide a tax file number. In a defined benefit arrangement, which is
unfunded, they will not even be aware that this debt account is accruing
away in the background. Until some big event like seeing the tax bill
happens, it will not really mean anything to them. That would be our
assessment of the behavioural nature of people. [6]
5.16 Mr Westbrook summarised the concerns of many who gave evidence about
the possiblity that low income earners may be liable for the surcharge
because they had not supplied TFNs. He told the Committee that such persons
could ill-afford the surcharge:
From a trustee's point of view, we do not want to see our members paying
a 15 per cent surcharge amount when the majority of them are on low
incomes and cannot afford to pay that sort of amount. Given that in
a lot of cases their only retirement savings are in the TWU fund, or
similar funds of that nature, we want to try to maximise their end benefit,
not reduce it. [7]
5.17 Mr Richard Gilbert of the Investment Funds of Association of Australia,
acknowledged that members could avoid paying surcharge relatively simply,
if they complied with the provisions of the legislation that require TFNs
to be provided. However, in the following exchange with Senator Alan Ferguson,
he indicated that the complexity of today's superannuation system is a
barrier:
Senator FERGUSON: There is nothing stopping them giving their tax file
number, is there? Mr Gilbert: Provided the communication system is optimal, that is right.
However, as I said in the submission, superannuation is a very complex
system and we are adding another layer to it. We anticipate that, in
this first instance, what is the percentage?
Ms Howes: Around 40 per cent would be a good response rate for TFNs.
[8]
5.18 As indicated in the preceding paragraphs, most witnesses who gave
evidence on this matter indicated that they expected a low response rate
to written requests for members to provide TFNs. The Committee also received
evidence that funds considered that there were difficulties associated
with collecting TFNs by phone, because of the requirement to advise members
of their rights to refuse information. Ms Noelle Kelleher, appearing before
the Committee representing the Australian Society of Certified Practicing
Accountants, told the Committee:
Could I add a comment on the collection of TFNs over the phone. A lot
of funds are not prepared to use that method because they have no proof
that they have actually read the statement to the member, which is a
concern because it means that that method is just not a method that
is being used. [9]
Government and ATO initiatives to facilitate use of TFNs
5.19 The legislation contains a number of measures to facilitate the
wider use of TFNs to avoid persons who are not in the surcharge target
group from paying the surcharge. These provisions are described in Chapter
2 of this report.
5.20 Officers of the Australian Taxation Office also provided the Committee
with information about measures to minimise lower income earners being
inadvertently caught.
5.21 Mr Chris Casey, Assistant Commissioner, Superannuation Systems,
described a number of the strategies that the ATO will adopt to maximise
the provision of TFNs:
Firstly, we will be including a special insert into Taxpack which will
advise people of their ability to quote their tax file numbers, and
the implications from a surcharge point of view of them not quoting
their tax file numbers. We will also be including with income tax assessment
notices a further note, saying the same thing. After funds have reported
to us on 15 December, with their details of member contributions, we
will be allowing funds to continue to report to us up until probably
May, at this stage, for any additional tax file numbers that they have
collected. [10]
5.22 Another strategy is the use of employment declaration forms to make
a match between a person and their employers' name and address, in order
to address the issue of non-current address details of fund members. Mr
Casey cautioned, however, that while the legislation allowed such a use
of information, the ATO had not yet discussed with industry the possibility
of including employer details on the reports due on 15 December. [11]
5.23 Mr Michael Monaghan emphasised that the ATO was very conscious of
the TFN issue and is working actively to overcome the problems that have
been identified:
...we are looking, virtually every day, at the changing situation in
relation to the tax file number issue and the communication of it. We
see it as being very important and we are building strategies as to
how we will get that message out. ...We have been canvassing dealing
with tax agents to get to excluded funds, we are canvassing the extent
to which we can use administrators' dealings with employers and employees;
and, to the extent that we believe we need other means such as press
or radio, we will certainly be looking at all those things. [12]
5.24 Mr Monaghan told the Committee that the ATO did not underestimate
the difficulties associated with TFN collection, including problems associated
with obtaining TFNs from persons who had communication difficulties:
We are not understating the difficulty of getting to some of the sectors
in the community to explain the message to them, but I am saying we
are taking the responsibility on to do that....
We will do everything we can to ensure that people are aware that that
is an implication of choosing not to quote your tax file number or of
us being unable to match you otherwise. [13]
Definition of assessable income
5.25 For the purposes of administering the surcharge, the definition
of assessable income includes certain termination payments or 'golden
handshakes'. The Committee received evidence that the inclusion of termination
payments and a number of other items in the definition of assessable income
would result in lower income persons being incorrectly targeted for surcharge
payments.
5.26 Mr Kevin Casey, representing the AMP Society, was amongst those
who argued that the inclusion of termination payments in assessable income
would make many people who were not high income earners liable for the
surcharge. He commented that persons who had just lost their jobs and
received a redundancy payment could find themselves in this category:
It means that there are going to be a number of people who will be
tipped over the $70,000 and will get a surprise in respect of this.
People who would otherwise not regard themselves as high income earners
will get included because a number of these other payments, redundancy
payments, for instance, are included in the adjusted taxable income.
There is an allowance for the tax free component, but there will certainly
be circumstances where, in respect of the surcharge, somebody who has
lost their job becomes a high income earner because of the payment that
is made in respect of that and will be subject to additional liability.
[14]
5.27 Similarly, ASFA and others contended that the inclusion of ETPs
in assessable income meant that many people in their year of retirement
will suddenly find themselves classified as high income earners. ASFA
acknowledged that the tax free portion of an employer redundancy payment
is excluded, but offered the opinion that public sector employees who
took a redundancy package would be particularly hard hit:
...public sector employees on a salary of $40 000 who receive a redundancy
payment from a superannuation fund of over $30 000 will be treated as
high income earners, even though they may take years to get another
job. [15]
5.28 ASFA concluded that the inclusion of ETPs and other "lumpy
income" has the potential to apply the surcharge on low and middle
income Australians, despite the express objects of the main Bill for the
surcharge to be assessed and collected on 'high income individuals'. [16]
5.29 Mr Raymond Stephens, representing William M. Mercer Pty Ltd, was
also among those who contended that the inclusion of eligible termination
payments (ETPs) gave rise to a number of anomalies. He advised the Committee
that the treatment of ETPs under this legislation differed from how other
tax legislation treated these payments. He noted that:
... eligible termination payments and unused leave payments are excluded
from the income used in other tax legislation where income is intended
to reflect the normal level of income rather than the effect of one-off
lump sum payments. [17]
5.30 Mr Stephens suggested that removing these one-off lump sums would
eliminate a number of anomalies and simplify a number of provisions in
the Bills.
Government position on assessable income
5.31 The Committee sought information from officers of the ATO on this
issue. Mr Mark O'Connor, Executive Officer, Legislative Services, explained
the Government's policy decision in the following terms:
The policy that was announced on budget night is that the adjusted
taxable income measure, as is detailed in the definition of that term
in the Bills, is normal taxable income plus surchargeable contributions....Eligible
termination payments, the specific components of that amount, are included
in the assessable income and become taxable income. With taxable income,
I have just explained that it is assessable income less all allowable
deductions. So, as the formula for adjusted taxable income includes
assessable income plus surcharge or contributions, then those ETPs,
to the extent they are paid in the year, would add to adjusted taxable
income. [18]
5.32 The ATO advised that bona fide redundancy payments were not included
in the assessment, Mr Anthony Regan, Acting Tax Counsel, Legislative Services,
stating that:
If the payment is a bona fide redundancy payment then that is not included
in assessable income up to tax-free limits. If you are talking about
a redundancy situation, then it would not necessarily be the case. [19]
5.33 In his press release on the Budget, the Treasurer explained the
Government's position with regard to golden handshakes. He said that the
definition of 'golden handshakes' for the purposes of the surcharge:
... this definition would not include bona fide redunduncy and approved
early retirement payments to the extent to which they are within the
income tax exemption levels. [20]
5.34 The Treasurer noted that from 1 July 1994 bona fide redunduncy and
approved early retirement payments have been exempt from income tax up
to a limit which is indexed annually to average weekly ordinary time earnings.
For the 1996-97 year the income tax exemption limits are $4348 plus $2174
per year of completed service with the employer.
5.35 The Treasurer advised that he considered these limits to be generous
enough to ensure that the majority of such payments would be outside the
scope of the golden handshake definition entirely. However, he emphasised
that it was necessary to include the excess of payments over these limits
in the definition to prevent such payments being used as a method of avoiding
the surcharge.
5.36 There are also transitional measures in the Bill to ensure there
is no retrospective application of the surcharge to golden handshakes
received within five years of the budget announcement.
5.37 The Government is of the view that this is a balanced approach which
should:
- ensure the surcharge will not apply retrospectively; and
- reduce the potential for golden handshakes to be exploited as a means
of surcharge avoidance.
Uneven income patterns
5.38 In its submission to the Committee, ASFA noted that ATO statistics
show that over 100 000 individuals a year average their income for income
tax purposes. ASFA told the Committee that the legislation apparently
contains no provision for averaging of income or contributions for surcharge
purposes.
5.39 ASFA and a number of other witnesses told the Committee that there
are a number of professions where income levels varied greatly from year
to year, and a single year's assessable income did not give an accurate
indication of their true situation. Examples of persons who fall into
this category include primary producers, sports people, artists, musicians,
consultants and other self-employed people. Ms Rosemary Vilgan of ASFA
told the Committee that:
They are not really high income earners if one averages their income,
but the averaging provisions are not to be made available in this legislation.
[21]
5.40 Representatives of the Institute of Chartered Accountants made a
similar point in respect of operators of small businesses. Mr Robert Brown,
National Councillor, told the Committee that due to variations in the
profitability of many small businesses, small business operators generally
have a very small window of opportunity to contribute to superannuation.
He argued that imposing the surcharge on these individuals severely limits
their ability to provide for their retirement needs. [22]
5.41 Ms Glenese Keavney of the Financial Planning Association (FPA) was
among those who shared Mr Brown's concerns about small businesses:
I believe that small businesses are not always in a position to be
able to make contributions. It is not just that they are looking for
a window of opportunity. It is really that they are constrained to a
large extent by the cash flows of their business. [23]
5.42 Several witnesses argued that women were particularly penalised.
For example, ASFA told the Committee that many women with career gaps
and perhaps a late start in the higher paid part of the labour force will
find it difficult to catch up, particularly with age based limits on contributions.
ASFA argued that these groups need to be encouraged to use their 'good
years' to save for retirement. [24]
5.43 Evidence given by Ms Keavney succinctly summarises the position
of many who expressed concerns about the impact of the surcharge on people
with uneven income patterns:
People have uneven patterns of contributions because quite often they
do not have the capacity in some years... Cases of that are women, who tend to have a shorter working life and,
therefore, do not have the capacity for regular disciplined contribution
over a long working time. If they are going to try to make larger contributions
in later years, they are going to be penalised for attempting to catch
up and make themselves more in a position to provide for themselves.
...A similar pattern emerges with consultants and self-employed people
who can have fluid employment circumstances. Farmers can have lumpy
income patterns and professionals, such as sport people, may have a
limited working life where they have to attempt to accelerate their
savings for retirement. Potentially, all of those people are penalised
by the impact of the surcharge. If they attempt to avoid the surcharge,
they are going to end up with inadequate superannuation to fund their
retirement. I do not believe a broad policy objective would be to have
more people unable to fund their own retirement. [25]
Other issues
Costs to non-target members
5.44 As described in Chapter 4, the Committee received a considerable
volume of evidence concerning the allocation of compliance costs across
superannuation fund memberships. Witnesses and submittors pointed out
that a substantial proportion of the compliance costs would be borne by
persons who were outside the surcharge target group.
5.45 Submittors questioned the equity of such an arrangement, as increases
in fund operating costs would reduce the benefit paid to all members of
the fund, not just those in the higher assessable income brackets.
Effective tax rates
5.46 The Committee received several submissions that argued that the
imposition of the surcharge imposed excessively high overall rates of
tax on some individuals.There were several different aspects to this concern.
Mr Deane Prior, appearing on behalf of the South Australian Government,
illustrated his point with the example of a judge on the South Australian
judges' pension scheme:
...we assume that the judge serves 15 years. Because of their salary
they would be over the surcharge threshold. As soon as they become a
judge that person would have a liability of $384,500 after serving 15
years. Once again, that person would be paying the top marginal tax
rates on their pension when they commence a pension. What this amounts
to, as I said before, is an 85 per cent marginal tax rate on that amount
of additional superannuation benefit over $70,000. We do not believe
this is an equitable tax. [26]
5.47 5.48 Mr Raymond Stevens, a Director and Principal of William M.
Mercer Pty. Ltd., was among a number of others who argued that the surcharge
in some circumstances led to unacceptably high rates of tax. Mr Stevens
told the Committee that :
For example, where a benefit exceeds the reasonable benefit limit,
the overall tax on contributions can be 64 per cent. With a pension
benefit, the overall tax can be 54 per cent even where the benefit is
below the reasonable benefit limit. All of those rates are far higher
than the maximum personal tax rate... [27]
5.49 William M. Mercer developed their example in detail in their submission
to the Committee as follows:
- Super contributions are already subject to 15% tax;
- If a benefit exceeds the RBL and the excess is taken as a lump sum,
the excess amount is subject to a further tax of 48.7%. Where the full
15% surcharge also applies, the overall tax on the contribution is 64%
- far higher than the highest marginal rate of 48.7%;
- In the case of a benefit taken as a pension, the overall tax on a
contribution where the full 15% surcharge applies can be as high as
53.5% even where the benefit does not exceed the RBL. Where the benefit
exceeds the RBL the overall tax can be as high as 64%. [28]
Alternative methods of addressing equity issues
5.50 The Committee received a large number of suggestions for alternative
approaches to addressing equity issues within the superannuation system
which, it was argued, would be more effective than the approach in the
surcharge legislation. Briefly, these suggestions can be categorised as
follows:
- a tax on the benefits rather than a tax on the contributions;
- a progressive scale of contribution surcharge which would apply across
all income ranges;
- to apply the surcharge only to deductible contributions, as was originally
announced, and to achieve this by limiting actual notional contributions
subject to the surcharge to age based limits applicable on an individual
member basis within accumulation funds,or on a global basis for defined
benefit funds; and
- to use the l-a-w law tax cuts to leave the 15 per cent in place for
high income earners and to lower the income tax rates on superannuation
for low income earners to 10 per cent.
5.51 Time constraints on the inquiry and preparation of this report prevent
the Committee from explaining these suggestions in any detail.
[Go to Chapter 6]
Footnotes
[1] Evidence, p. 48-9.
[2] Evidence, p. 36.
[3] Evidence, p. 158.
[4] Evidence, p. 262.
[5] Evidence, p. 309.
[6] Evidence, p. 12.
[7] Evidence, p. 312.
[8] Evidence, p. 125.
[9] Evidence, p. 96.
[10] Evidence, p. 292.
[11] Evidence, p. 313.
[12] Evidence, p. 294.
[13] Evidence, p. 296.
[14] Evidence, p. 56.
[15] ASFA submission, p. 15.
[16] ASFA submission, p. 15.
[17] Evidence, p. 180.
[18] Evidence, p. 298.
[19] Evidence, p. 299.
[20] The Hon. Peter Costello, MP, Treasurer,
Press release no.5, 5 Feb 1997,p. 3.
[21] Evidence, p. 64.
[22] Evidence, pp. 88-89.
[23] Evidence, p. 117.
[24] ASFA submission, p. 14.
[25] Evidence, p. 117.
[26] Evidence, p. 16.
[27] Evidence, p. 183.
[28] Submission, William. M Mercer Pty Ltd,
p. 13.
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