CHAPTER 10
CONCLUSIONS AND RECOMMENDATIONS
Government Senators' conclusions and recommendation
10.1 The following paragraphs are the views of Senator John Watson (Chairman)
and Senators Alan Ferguson and Julian McGauran.
10.2 The Government Senators acknowledge all those persons who wrote
letters, prepared submissions and gave oral evidence at the public hearings.
10.3 The views have been fully considered by the Government. The Government
Senators believe no better alternative collection mechanism to the proposed
arrangements has been identified from the extensive consultations.
10.4 The Government Senators note the Treasurer's comments that the Government
will review the constitutional opinion offered by Mr Dennis Rose AM, QC.
10.5 The current concessional treatment of superannuation tends to favour
higher income earners at the expense of lower income earners.
10.6 The Government Senators believe it is a proper and legitimate objective
to reduce inequity in Australia's superannuation system, and this will
be achieved through the surcharge legislation.
Recommendation
Government Senators therefore recommend that the Bills be passed,
subject to the technical amendments to be put forward by the Government.
(SIGNED)
Senator John Watson (Chairman) Senator Alan Ferguson Senator Julian McGauran
10.7 The following paragraphs are the views of Senators Lyn Allison,
Stephen Conroy, Chris Evans and the Hon. Nick Sherry (Deputy Chairman).
10.8 Labor Opposition and Australian Democrat Senators note a previous
policy statement made by the current Treasurer, the Hon. Peter Costello,
MP, in November 1995. Mr Peter Downes of Jacques Martin drew this to the
attention of the Committee:
At that time, Mr Costello said he had three tenets for a superannuation
system under a Liberal government. They were: there should be certainty;
there should be confidence; and, above all, there should be simplicity.
I think they were admirable qualities in a superannuation system. But
if I was going to do anything at all to depart from those principles,
what I would do would be introduce a concept like this surcharge. [1]
10.9 Labor Opposition and Australian Democrat Senators note that on the
John Laws program on 25 February 1997 Mr Costello, the Treasurer called
the surcharge a tax.
10.10 This was later repeated by Senator Kemp who called the surcharge
a tax on the PM program on 12 March 1997.
10.11 Labor Opposition and Australian Democrat Senators believe that
it is critical for the 15 per cent superannuation tax to be treated as
a tax, in order for the Parliament to be assured that the legislation
is in fact within the Constitutional powers of the Parliament.
10.12 Labor Opposition and Australian Democrat Senators note the Prime
Minister's pre-election commitment to "not increase or introduce
any new taxes."
10.13 Labor Opposition and Australian Democrat Senators are firmly of
the view that it is entirely inappropriate for the Government to require
the Parliament to pass legislation which may in fact be unconstitutional,
in order for the Government to maintain their election commitment.
10.14 The Coalition's election policy on superannuation, released in
February 1996, echoed these intentions, with the clear commitment that
there would be no change to the 15 per cent tax on employer contributions,
and that:
....a Coalition Government will retain the current taxation treatment
of superannuation, including the 15% rebate incentive for income taken
in pension form [2].
10.15 Commitments to provide certainty in retirement incomes policy were
provided in the social security policy, [3]
the older Australians policy, [4] and
also in the Prime Minister's undertaking in his Campaign Launch speech
not to introduce new taxes or increase existing ones. The superannuation
tax surcharge breaches each of these four policy commitments.
10.16 The Treasurer defended the introduction of the measure, the largest
single taxation revenue measure introduced in the 1996 Budget, in his
Budget speech as a measure "designed to make superannuation fairer."
He said:
A major deficiency of the current system is that tax benefits for superannuation
are overwhelmingly biased in favour of high income earners. For a person
on the top tax rate, superannuation is a 33 percentage point tax concession
while a person earning $20 000 receives a 5 percentage point tax concession.
High income earners can take added advantage through salary sacrifice
arrangements that are not available to lower income earners. The Government
is remedying this situation. [5]
10.17 The unfair nature of superannuation tax concessions has been the
subject of considerable comment by many industry bodies and commentators,
including ACOSS [6] and EPAC [7].
10.18 Labor Opposition and Australian Democrat Senators support the stated
intention of the Government to move to correct the inequities in the taxation
of superannuation, although note that the surcharge would, even if fully
implemented, only partially achieve this purpose, while opening up new
inequities.
10.19 Labor Opposition and Australian Democrat Senators believe that
the surcharge's proposed collection mechanism is inefficient. Labor Opposition
and Australian Democrat Senators note the statement to the Committee by
Mr Vernon Winley of the Business Council of Australia (BCA) that:
... from the initial announcement of the surcharge, the council has
been extremely concerned about the workability, the administrative costs
and the fairness of the proposed implementation arrangements. In principle,
a tax that has either disproportionately high compliance costs or disproportionately
high collection costs is a bad tax on the economy. The implementation
approach proposed for this surcharge fails both of those criteria, making
it doubly a bad tax. Likewise, an implementation approach that is inequitable,
as we believe this one is, creates a bad tax. [8]
10.20 The New South Wales Government made an extremely interesting observation
regarding the intention of the Bills and their interaction with privacy
laws.
10.21 The New South Wales Government expressed concern that the Bills
may be beyond the Parliament's constitutional taxation power and incidental
power.
10.22 As currently drafted, the Bills may be construed as having as their
primary intention the collecting and collating of information. The surcharge
acts in this analysis as the penalty for failing to provide such information.
By failing to provide information the individual is subjected to a tax
of 15 per cent.
10.23 If this is indeed the intention of the Bills, it would seem that
the Parliament is beyond the scope of its constitutional power in relation
to the incidental power. Indeed Bills intending to effect this outcome
would possibly constitute the most substantial legislative invasion of
privacy laws ever enacted in Australia.
10.24 Labor Opposition and Australian Democrat Senators are concerned
that the superannuation tax seeks to overturn the voluntary quotation
principle in respect to TFN's.
10.25 Labor Opposition and Australian Democrat Senators believe that
it is a fundamental principle of Australian society that individuals are
able to choose whether they quote their tax file number to non-government
organisations who are not subject to privacy laws, without fear of being
subjected to a punitive penalty tax.
10.26 If the collection mechanism of the tax were to be amended to the
alternative collection mechanism then there would be no requirement for
individuals to disclose their tax file number to the superannuation funds.
10.27 Labor Opposition and Australian Democrat Senators are concerned
that the failure of the Government to adopt this position of amending
the collection mechanism will result in a number of implications for privacy
laws which may not be appropriate or supported by the Australian community.
That the surcharge is a tax
10.28 The superannuation surcharge was the largest single revenue measure
in the 1996/7 Budget. The Budget Papers clearly categorise the revenue
to be raised on superannuation contributions as being part of Income Tax
collections [9], citing a key factor
underlying growth in the 1997 forward estimates as:
10.29 Evidence given to the Committee by the ATO stated that the power
to be relied upon for the imposition of the Bill is paragraph 51(ii) of
the Constitution, which is the taxation power. [11]
10.30 Mr Dennis Rose AM, QC, on behalf of the BCA, also supported this
argument on the basis that the surcharge is a tax. In his advice, he indicated
that, in his opinion, there were no other Constitutional powers which
could support the Constitutional authority of the surcharge, including
the corporations power.
10.31 Mr Ross Ramsay, a trustee of the Superannuation Fund Bramex Super
Pty Ltd, made the point that if the taxation power is not relied upon,
the surcharge would amount to the acquisition of property on other than
just terms and so breach paragraph 51(xxxi) of the Constitution.
10.32 The surcharge has all the attributes of a tax. These include:
- compulsory payment, including for those who do not provide their TFN;
and
- no service provided in return for the payment.
10.33 It cannot therefore be called a fee for service. It doesn't matter
whether a measure is described as a tax: whether it is a tax depends on
the nature of the impost. For example, the training guarantee levy and
the superannuation guarantee levy are both based on the tax power even
though called levies. If the Government is relying on paragraph 51(ii)
of the Constitution, then the surcharge is clearly a tax.
10.34 None of the witnesses who appeared before the Committee justified
the Constitutional basis of the surcharge other than on the grounds that
it was a tax. Notwithstanding the constitutional basis of the measure
and the categorisation by both Treasury and the Tax Office, the Government
continues to deny that the measure is indeed a tax increase. For example,
the Assistant Treasurer told the Senate on March 18 1997 that:
A tax is a tax and a surcharge is a surcharge......A tax is defined
as a compulsory unrequited payment demanded by government for its support.
A surcharge is defined as an additional charge. [12]
10.35 This continuing denial of the true nature of the increase in superannuation
contributions tax contained in this legislation and attempts to cloak
its true taxing effect are contributing to the administrative problems
caused by the legislation.
Eligible Termination Payments (ETPs)
10.36 The application of the surcharge to ETPs will result in great injustice
and will not only affect the Government's proposed target group of high
income earners. If a person on a low or middle income accumulates long
service leave over a number of years, they will receive a payment on leaving
the workforce that is likely to put them into the income group liable
for the surcharge. They will then face losing 15% of their entire ETP
even though it has been accumulated for a large number of years. Where
is the equity argument?
10.37 However, Labor Opposition and Australian Democrat Senators recognise
that there are situations where large ETPs are paid to some people, such
as company directors, and that even with the proposed surcharge in place,
such measures as 'golden handshakes' could be used to result in a tax
rate lower than would otherwise apply if the payment is disguised as an
ETP rather than normal income.
10.38 There is therefore a need for anti-avoidance measures to be contained
in the surcharge. As the surcharge is not imposed under the Income Tax
Assessment Act 1936 (ITAA), the anti-avoidance rules in Part IVA of that
Act will not apply. This view was supported by the ATO. [13]
The Bills should be amended to include anti-avoidance provisions or be
called a tax and imposed under the ITAA so that Part IVA applies.
10.39 The Bills will increase the tax paid on ETPs which are currently
concessionally taxed under the ITAA, and if the Government want to increase
the rate of tax on ETPs, why doesn't it increase the rates contained in
the ITAA?
Defined Benefits Schemes
10.40 The impact on members of defined benefits schemes will be severe.
They will not only have to pay the surcharge, if liable, but will also
be paying interest on this amount. As there is no ability for an employer
or employee to pay off the surcharge as it accrues, they will also have
to pay compound interest, even if willing to pay off the amount on a yearly
basis as the tax liability accrues. Where is the choice for members and
isn't the Government supposedly about providing choice for members of
the community?
Guidelines
10.41 The actuarial guidelines have not been released and evidence to
the Committee is that they will not be finalised before the proposed passage
of the Bills. [14] The guidelines are
crucial to the operation and impact of the Bills yet the Parliament is
expected to pass the legislation without having seen the guidelines.
The proposed collection mechanism and alternatives
10.42 Many witnesses and submissions drew attention to the cost of the
proposed collection mechanism. Comments included the following:
Huge amounts of data will be unnecessarily collected and passed backwards
and forwards between the funds and the Australian Tax Office (ATO) for
fund members who will never legitimately have to pay the surcharge.
[15]
Every superannuation fund member will pay a charge for the purpose
of sending the information about them to Canberra in order that someone
can assess that there is no surcharge payable. [16]
10.43 Labor Opposition and Australian Democrat Senators note the submission
of the Investment Funds Association (IFA) that:
... if the Government treated this initiative as a tax on each individual
and not as a surcharge on superannuation fund members, the overly elaborate
yet unsophisticated procedures would not have been necessary. [17]
10.44 Labor Opposition and Australian Democrat Senators note the widespread
support for an alternative collection mechanism utilising group certificates.
Many bodies supported the use of group certificates for the surcharge
collection mechanism, including:
- the AMP Society; [18]
- the Association of Superannuation Funds of Australia (ASFA); [19]
- the Australian Council of Trade Unions (ACTU); [20]
- the Australian Society of CPAs; [21]
- BCA; [22]
- Coopers and Lybrand; [23]
- the Institute of Actuaries of Australia; [24]
- Jacques Martin; [25]
- the Life Insurance and Superannuation Association of Australia Inc
(LISA); [26] and
- the Metal Trades Industry Association of Australia (MTIA). [27]
10.45 Labor Opposition and Australian Democrat Senators believe that
the advance instalments system adds another layer of complexity to an
already unnecessarily complex collection mechanism. The advance instalments
system will be highly disruptive to the investment practices of superannuation
providers. Dr Michaela Anderson of ASFA told the Committee that:
The surcharge is likely ... to lead to a liquidity problem for funds
because of the need to hold reserves to cover an advance instalment.
This would occur particularly at one point in the year where there is
the second group assessment and the advance instalment coming at the
same time. Around 15 June seems to be what we have called the 'double
whammy' time where many funds could have liquidity problems. [28]
Recommendations
10.46 Labor Opposition and Australian Democrat Senators recommend that
the equitable principle of the 15 per cent tax surcharge be supported.
10.47 Labor Opposition and Australian Democrat Senators recommend that
an alternative collection mechanism utilising group certificates be adopted,
and that the advance instalments system not be adopted. As the surcharge
Bills are currently framed every single superannuation member will pay
- through high administration costs and lost opportunities to funds for
long-term investment - for the inefficiencies of a collection mechanism
that is targeted at only approximately 350,000 people.
10.48 Labor Opposition and Australian Democrat Senators recommend that
unpaid leave and termination payments contained in prescribed industrial
instruments be excluded from the definition of assessable income. Unusual
payments (eg. golden handshakes) should be included in the definition
of assessable income where they have been received after August 20 1996.
10.49 Labor Opposition and Australian Democrat Senators support the recommendation,
made as part of an alternative collection mechanism utilising group certificates,
that individuals be allowed to nominate how they pay their surcharge liability,
for example: by offsetting the surcharge against any tax refund due; or
paying the surcharge directly; or passing the liability to the superannuation
fund to make the payment by debiting his or her account. Labor Opposition
and Australian Democrat Senators note that an approach along these lines
has been suggested by both the BCA and ASFA. [29]
10.50 Labor Opposition and Australian Democrat Senators are concerned
that the Australian Tax Office's proposed approach of collecting surcharge
on a proportional basis from superannuation funds in cases where an individual
holds accounts with more than one fund will lead to additional administrative
work which could have been avoided by allowing individuals to nominate
how they would wish to pay their surcharge liability. [30]
This will be a particular issue in relation to small accounts.
Conclusion
10.51 The problems with the collection mechanism proposed by the Government
appear to stem from a determination to muddy the true nature of the surcharge
by requiring a second party (ie. the funds) to pay a tax imposted on the
first party (ie. the high income earner). The convoluted nature of the
resultant legislation flows from the reluctance of the Government to concede
that the largest revenue measure in the 1996 Budget, categorised by Treasury
in the Budget Papers as part of Income Tax collections [31]
is in fact, a tax.
10.52 The problems identified by the Committee could be solved by admitting
that the surcharge is a tax and implementing it as a tax under the ITAA.
This would allow the implementation of the Government's objective of reducing
inequities in superannuation taxation concessions to be achieved, while
reducing the massive compliance costs associated with the legislation.
(SIGNED)
Senator Lyn Allison Senator Stephen Conroy
Senator Chris Evans Senator the Hon. Nick Sherry (Deputy Chairman)
AUSTRALIAN DEMOCRAT SENATORS' SUPPLEMENTARY CONCLUSIONS AND RECOMMENDATIONS
10.53 The following paragraphs are the views of Senator Lyn Allison on
behalf of the Australian Democrats and are in addition to the conclusions
and recommendations above.
10.54 The Australian Democrats strongly support a fairer taxation system
for superannuation. Indeed, we have been calling for an increase in tax
paid by high income earners for several years because the current concessional
treatment of superannuation contributions provides a disproportionate
benefit for high income earners. The following table illustrates:
Income (p.a.) |
Marg. Tax Rate (%) |
Super Tax Rate (%) |
Super Tax Concession (%) |
Tax benefit |
$20,000 |
20% |
15% |
5% |
$60 |
$30,000 |
34% |
15% |
19% |
$342 |
$40,000 |
43% |
15% |
28% |
$672 |
$50,000 |
47% |
15% |
32% |
$960 |
$100,000(a) |
47% |
15% |
32% |
$1920 |
$100,000(b) |
47% |
30% |
17% |
$1020 |
(* Assumes 6 per cent employer contribution)
(a) On current tax rules (b) With proposed 15% Surcharge
10.55 Under the flat rate contributions tax, the more a person earns,
the bigger the benefit. Given that superannuation tax concessions are
now worth more than $6.4 billion a year, this means a very large chunk
of tax revenue is being diverted to high income earners. This defeats
one of the arguments in favour of concessional tax treatment of superannuation
ie. that encouraging employees to save for retirement through tax concessions
will ultimately reduce reliance on the pension.
10.56 This is because the tax benefits under the current scheme are biggest
for those least likely to be on the pension. The current unfair nature
of the superannuation contributions tax has been extensively canvassed
by a wide range of organisations such as EPAC reports [32],
the Committee for Economic Development [33],
ACOSS [34] and Access Economics, and
by a wide range of commentators including economist Professor John Head,
commentators Brian Toohey and Eva Cox and former Treasury Deputy Secretary
and member of the National Commission of Audit, John Fraser. ACOSS estimates
that someone earning a salary of $90,000 will receive tax concessions
worth three times as much as the eventual pension drawn by someone earning
average weekly earnings.
10.57 Research by the Australian Democrats have shown the tax system
is also tilted against women because men tend to enjoy much higher incomes.
About 74 per cent of super tax concessions flow to men and just 26 per
cent to women. This is despite the fact that women constitute 55 per cent
of the post-age 60 population [35].
10.58 The research also showed that the 6.9 per cent of the population
with an income above $50,000 received 33.2 per cent of the $6 billion
of tax concessions. By contrast, the 22 per cent of people earning less
than $21,000 earned just 3.2 per cent.
10.59 It is clear that the reform proposed by the Government still fall
well short of delivering a fair superannuation contributions tax. The
tax system will still be unfairly skewed toward high income earners while
low income earners will receive little benefit from concessional tax treatment.
10.60 Not just is the Government's proposed surcharge administratively
cumbersome and constitutionally questionable, it also fails the primary
objective set by the Treasurer in his Budget Speech of delivering a fair
superannuation taxation regime.
10.61 A much fairer process would be to tax all employer superannuation
contributions through the PAYE tax system with a flat rebate (eg. 15 -
20 per cent) available to all contributors off their marginal tax rates.
This would have the added bonus of appearing clearly as a tax rebate for
super implying concessional treatment rather than as a contributions tax
implying punitive treatment.
10.62 The evidence presented to this inquiry confirms that it would be
possible to develop an administratively simple system for identification
and payment of superannuation contribution taxes through the group certificate
system, a conclusion already reached by this Committee in 1992. [36]
10.63 It is also noted that the Coalition proposed a similar charge to
superannuation taxation prior in their 1993 Election Policy, although
the 1996 Election Policy proposed retention of the current 15 per cent
contributions tax.
10.64 The Australian Democrats recommend that the Government give consideration
to further reform of superannuation taxation concessions to provide full
equality of treatment across all income groups.
(SIGNED)
Senator Lyn Allison
[Return to Table of Contents]
Footnotes
[1] Evidence, p. 28.
[2] "Super for All - Security and Flexibility
in Retirement" Coalition Superannuation Policy Statement, p.16.
[3] "A Social Security Safety Net"
Coalition Social Security Policy, p. 12.
[4] "Security for Older Australians"
Coalition Policy, p. 3.
[5] Costello, P. "Budget Speech",
August 20 1996, p.10
[6] Submission 58, pp.12-5.
[7] Pender H and Ross S "Taxation, Regulation
and Private Savings in Australia" EPAC Jan 1994; "Economic Effects
of an Ageing Population" EPAC Council Paper No 29 1988.
[8] Evidence, p. 210.
[9] Budget Paper 1996/7 No 1, pp.4-28.
[10] ibid pp. 4-45.
[11] Evidence, p. 304.
[12] Senator Rod Kemp, in response to a Question
from Senator Sherry, Senate Hansard March 18 1997, p.1601.
[13] Evidence p. 302.
[14] Evidence, p. 254.
[15] Submission 6, Australian Institute
of Superannuation Trustees (AIST), p. 1.
[16] Ms Robyn Quinn of the New South Wales
Premier's Department, Evidence, p. 24.
[17] Submission 26, IFA, p. 7.
[18] Submission 27, AMP Society, pp.
4-5.
[19] Submission 23, ASFA, p. 11.
[20] Submission 52, ACTU, pp. 2, 5.
[21] Submission 21, Australian Society
of CPAs, p. 1.
[22] Submission 32, BCA, p. 3.
[23] Submission 30, Coopers and Lybrand,
p. 5.
[24] Submission 39, Institute of Actuaries
of Australia, Attachment, pp. 7-8.
[25] Submission 10, Jacques Martin,
p. 3.
[26] Evidence, pp. 148-149.
[27] Evidence, p. 159; Submission
20, MTIA, Annexure A, p. 1.
[28] Evidence, p. 63.
[29] Submission 32, BCA, p. 3; Submission
23, ASFA, p. 11.
[30] On the proposed ATO approach see Evidence,
pp. 301-302.
[31] Budget Paper 1996-7 No. 1, pp. 4-28.
[32] Pender H and Ross S "Taxation, Regulation
and Private Savings in Australia" EPAC Jan 1994, "Economic Effects
of an Ageing Population" EPAC Council Paper No 29 1988.
[33] Argy F "An Australia that Works:
A Vision for the Future" CEDA August 1993.
[34] Submission 58, pp. 12-15.
[35] Kernot C "Briefing Paper on Women,
Superannuation, Tax Concessions and the Pension" Sep 1994, p.2.
[36] Fourth Report of the Senate Select Committee
on Superannuation Dec 1992, pp.82-4.
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