LABOR SENATORS REPORT
The following paragraphs are the views of Senators Stephen Conroy, Chris
Evans and John Hogg.
General
Labor Senators thank those who made oral and written submissions to the
Committee on such short notice. The evidence was of an excellent standard
and of great assistance to the Committee.
Despite some fourteen months having passed since the Government announced
the surcharge tax measure, Labor Senators note that the evidence presented
to the Committee concerning the superannuation contributions tax amendment
Bills was highly critical of the surcharge tax collection method chosen
by the Government. Evidence from Mr Noel Davis, a partner and superannuation
lawyer with Clayton Utz, was particularly scathing:
In my 20-odd years of practice in this area, this is by far the worst
piece of legislation that I have seen ...
It is bad legislation and it was enacted purely out of political expediency.
Labor Senators note the Government's failure to adopt Recommendation
10.47 in this Committee's 23rd Report, Superannuation Surcharge Legislation
tabled in March 1997. That recommendation was 'that an alternative collection
mechanism utilising group certificates be adopted'.
The Government's persistence with the complex collection method it has
chosen continues to be criticised by the industry and by those who the
surcharge tax will affect most unfairly - low and middle income earners.
Such people will pay for the collection of the surcharge tax in higher
administration costs, and will pay the surcharge tax itself if they do
not provide their tax file numbers to their superannuation funds.
Labor Senators note the evidence presented by Jacques Martin of the poor
success rate that funds administered by that firm have had in obtaining
tax file numbers from members:
From 17 February [1997] funds have had to seek tax file numbers from
their membership. In fact, some of our schemes have made three attempts
to get these tax file numbers out of their membership. They have sent
very plainly written letters to people saying things like, 'Do not pay
more tax to the government than you have to. To stop this you must give
us your tax file number.' That is quite clear, quite plain. There have
been three attempts within the membership of some 600,000 members of some
of our larger funds to get this information from people.
They have also asked employers to distribute those letters to all of
their employees as a second raft in trying the get tax file numbers. We
have run individual dedicated phone numbers for people to respond and
provide their tax file numbers. So far we have a success rate of 23 per
cent. There are going to be hundreds of people out there who are required
to pay this unfair tax unfairly.
Clearly, in the Jacques Martin case, very few people are providing their
tax file numbers to their superannuation fund despite repeated attempts
to obtain those numbers. Labor Senators therefore find that low and middle
income earners will pay the surcharge if they do not provide their tax
file numbers. The evidence suggests that low and middle income are not
providing their tax file numbers and will therefore be subject to a surcharge
tax which is supposed instead to target some 350 000 high income earners.
These amendment Bills will apply the surcharge tax to individuals in
constitutionally protected superannuation schemes. The application of
the surcharge tax to individuals in these schemes, rather than on the
superannuation funds themselves which is the Government's general method
of collection of this tax, undermines the Government's argument for using
the its complex surcharge tax collection method in the first place. As
the Association of Superannuation Funds of Australia (ASFA) said:
Really that is what the industry has asked for all along. The funds are
being asked to be the conduit, and are artificially trying to pay a tax,
when some members will get generous benefits and others not. Really, the
government has actually set in place the mechanism for the ATO to set
up the infrastructure for the members to pay the tax directly.
The Government clearly expressed an urgency in seeing these amendment
Bills passed by the Parliament. This urgency was reinforced by evidence
from Government representatives at the public hearing. To assist the Government,
Labor Senators agreed to allow these amendment Bills to be introduced
and debated in one sitting session, and also agreed to a very tight time
frame for the Committee to conduct hearings and report to the Senate.
However, Labor Senators believe that the Parliament should have a reasonable
opportunity to scrutinise the Bills and recommend appropriate amendments
if necessary. Labor Senators believe that the Government's objection to
allowing a reasonable time for this Committee to examine these complex
Bills and report to the Senate undermines the role of the Parliament.
Evidence presented to the Committee was critical of the Government for
not addressing more of the issues raised by the industry since the passage
of the original surcharge legislation. These issues are discussed below,
but Labor Senators note the lack of a detailed response by Government
officials at the public hearing to questions raised in this area by other
witnesses. This is further evidence of the complex nature of the surcharge
tax measure, and of the difficulty even the best of industry experts have
in understanding exactly how the surcharge tax measure will apply in practice.
Workability
Labor Senators note evidence that, despite these amendment Bills, the
surcharge tax still may not apply to some superannuation schemes because
there is no actuarial practice that would apply in Australia for calculating
the notional surchargeable contributions.
The following evidence came from Mr Davis:
As a result of that provision in the original act, the government asked
the Institute of Actuaries to adopt an actuarial practice that would apply
in Australia in calculating the notional surchargeable contribution, which
could then be taxed for high-income earners or for low-income earners
who do not provide their tax file numbers.
The Institute of Actuaries, after looking at the issue, resolved that
it could not adopt an actuarial practice to apply to this, because it
was too difficult to try to do so ...
We will have, therefore - if you do not make adverse comment on this
and if the Senate passes it - an act of parliament that will apply to
funds that make up half of the assets in superannuation, and which is
unworkable because there will be no actuarial practice. The government
actuary's view of how the notional contributions factor should be calculated
is one actuary's view. It does not constitute actuarial practice, and
no other actuary will be required to take any note of it in attempting
to calculate it. An actuary, therefore, who seeks my advice on this will
be told, 'You can't calculate that. The act requires you to calculate
it in accordance with actuarial practice. You cannot do it. If you were
to attempt to do so and caused trustees to pay tax that they wouldn't
otherwise have to pay, that would be negligence.'
You in the Senate, therefore, are being asked to pass a bill to fix what
is already bad legislation by putting in place a regime that will be unworkable
in relation to defined benefit funds.
Volume and complexity
Labor Senators believe that these amendment Bills add to the complexity
of the surcharge tax measure and will lead to further confusion within
the industry, and among those who will pay the surcharge tax. ASFA expressed
this view when they said:
We are very concerned about the volume of legislation. We have seven
original pieces of legislation on the surcharge and now five new or amending
Bills. The actual volume of legislation is becoming increasingly hard
for the individuals in the industry to comprehend.
Mr Downes of Jacques Martin was also particularly critical of the complexity
of the legislation. He said:
It is the most complex and inefficient series of legislation that has
been introduced into the parliament in my time of examining Commonwealth
legislation since 1969.
Clearly, these amendment Bills do not assist in providing clarity to
the surcharge tax measure, not do they comply with the Government's stated
policy of 'engendering simplicity into the superannuation system'.
Timing
Labor Senators are concerned that the complicated collection method and
the timing of the surcharge tax measure has created a convoluted paradox
which will impact on Government revenue. Representatives from ASFA and
from Coopers and Lybrand indicated that many superannuation funds will
not be capable of reporting member contributions until March 1998, some
three to four months after the first reporting deadline. This is due to
an inability of superannuation funds to calculate a member's contribution
level without the appropriate actuarial guidance.
Labor Senators are aware that these amendment Bills, if passed, will
allow the Commissioner of Taxation to grant an extension of time beyond
the 15 December 1997 deadline for funds to report member contribution
levels to the Australian Taxation Office (ATO). However, if the Commissioner
grants a three month extension to superannuation funds, this will have
an impact on the Government's revenue collection estimates.
The paradox arises because the ATO cannot collect the revenue from the
surcharge tax until the funds report contribution levels. The funds cannot
report until the appropriate actuarial calculations are completed. This
creates a competing interest between revenue collection and ensuring the
appropriate calculations are accurately undertaken. Labor Senators believe
it is essential that superannuation funds should be given adequate time
to prepare the necessary surcharge calculations to ensure that no errors
occur, and that those who are targeted to pay the tax pay it, while low
and middle income earners do not pay the surcharge tax.
Inconsistent treatment of different superannuation funds
The Government has argued that, in order to be consistent, these amendment
Bills will apply the surcharge tax to all high income earners, regardless
of the type of superannuation scheme they may be in. The Bills are necessary
because the original Bills excluded members of certain funds from having
to pay the surcharge tax. Labor Senators agree that all high income earners
should pay the surcharge tax, but do not support the reality that many
low and middle income earners will also incur the tax.
Labor Senators note the evidence concerning several inconsistencies in
the application, and the payment, of the surcharge tax liability. First,
there is the inconsistent treatment of superannuation funds as a result
of the introduction of a fifteen per cent cap of the total surcharge tax
liability for Commonwealth and some State defined benefit funds. ASFA
pointed out that there are four different surcharge tax treatments depending
on which scheme the tax is applied:
There are actually four different treatments of tax here in terms of
a cap on benefits ... We have concerns that, as the industry has said
all along, it is quite possible for more than the maximum rate of tax
to be taken out. There have been four different treatments, really, set
up here, and we have concern that members of different schemes will be
treated quite differently.
Labor Senators believe that all superannuation schemes should be treated
equally, and that the surcharge tax should not apply retrospectively to
benefits accrued before 20 August 1996. ASFA pointed to the inconsistent
wording and treatment of the funds which the fifteen per cent cap affects.
ASFA believed:
The provision being inserted into the 1976 Superannuation Act ... says
that only 15 per cent of the employer financed benefit after 20 August
[1996] should be taxed. That is the maximum. That is really how it should
be for every member of every fund in Australia ... That is ... the straight
down the line method of application.
Labor Senators note the evidence from Mr Ray Stevens of William Mercers,
that a cap on all schemes would be difficult to implement. However, Mr
Stevens also said that it is unfair that a cap exists for certain fund
members, but not for others, 'particularly where that group is the Government's
own employees'.
Further inconsistencies exist in relation to private and public sector
accumulation and defined benefit schemes, in regard to how the tax is
accrued and how it is paid. Accumulation fund members who are assessed
with a surcharge tax liability will have to pay the tax as it accrues.
However, members of some defined benefits schemes, including some public
sector schemes, can allow the surcharge tax liability to accrue, or have
the option to pay it as it accrues. Labor Senators believe that payment
options for surcharge tax liability should be consistent across all superannuation
schemes.
Another inconsistency, that of surcharge tax liability being applied
to individual members of constitutionally protected superannuation schemes
rather than to the funds themselves, has been discussed above (especially
see paragraph 8).
Allocated surplus amounts
Labor Senators note with concern that the amendment Bills will apply
the surcharge tax to surplus amounts (investment fluctuation reserves).
Such amounts are set aside by some superannuation funds for drawing down
in years when fund earnings are low, in order to smooth out the longer
term return. Mr Davis suggested that applying the surcharge tax in this
way was against the Government's original intention:
The effect of that provision will be that the surcharge will now tax
... investment earnings in accumulation superannuation funds. The intention
of this legislation, said the government, was to tax superannuation contributions
in relation to high income earners. It was never said that the intention
was to tax investment earnings in superannuation funds.
Mr Davis was highly critical of the definition of 'allocated surplus
amount', stating:
Some people are going to ask me for advice on what that means and I am
going to have to tell them that I have no idea. It may as well be written
in Russian, It is rubbish!
Further evidence from Mr Davis suggested that accumulation-type superannuation
funds will now require the services of an actuary, where there had been
no need before, to calculate the taxable allocated surplus amount for
their members.
Labor Senators are concerned this measure could effectively be a double
tax on fund members. If a member's contribution is surcharge taxed when
paid into a fund, and some of that contribution is set aside in an investment
fluctuation reserve, it will be a double tax if it is surcharge taxed
again when that reserved contribution is returned to a member's account.
Labor Senators believe this measure will impact adversely on members
of accumulation funds, and is an unnecessary complication on top of what
is an already complicated policy. In addition, it will further increase
the collection costs of the surcharge tax which will be passed on to all
fund members regardless of their income level.
Inconsistent treatment of "golden handshakes"
Labor Senators believe that the inconsistent treatment of golden handshakes
for surcharge tax purposes, depending on whether they are taken as cash
or rolled over, is inequitable. It also has the potential to severely
damage the superannuation system and is contrary to the Government's retirement
incomes policy.
Labor and Australian Democrat Senators recommended in the Committee's
23rd Report that:
Unusual payments (eg. golden handshakes) should be included in the definition
of assessable income where they have been received after August 20 1996.
The surcharge tax legislation appears to apply this recommendation to
those golden handshakes which an employee takes as a cash payment, that
is only the post 20 August 1996 component is surcharge taxed. However,
where an employee rolls a golden handshake payment into a superannuation
fund, the entire amount (pre and post 20 August 1996) is surcharge taxed.
Labor Senators note that this is contrary to the Treasurer's 1996 Budget
night press release, and also his press release of 5 February 1997 which,
while stating that a five year transitional period would apply to golden
handshakes, did not distinguish between those taken in cash or rolled
over. The effect of this policy is to make the taking of golden handshakes
in cash more tax effective than rolling them over into the superannuation
system.
The Committee received evidence from Mr Bruce Harris who, acting on the
advice contained in the Treasurer's Budget night press release, rolled
over his golden handshake payment. Much to his dismay, the entire amount
of the golden handshake was subsequently subject to the surcharge tax.
Mr Harris stated:
Had I cashed this same amount of money in, my tax incidence because of
the surcharge would have been almost nothing, because I would have had
very little service after 20 August and I happened to have quite a lot
of service before then, so the proportion would be very small.
Labor Senators are concerned that this inequity has the potential to
undermine superannuation as a savings vehicle, and is contrary to the
Government's retirement income objectives.
RECOMMENDATIONS
Labor Senators repeat their recommendation in the Committee's 23rd Report,
that the Government adopt an alternative surcharge tax collection mechanism
which will ensure that only those targeted to pay the tax actually pay
it, and which is
- more efficient;
- simpler; and
- more cost effective
to administer. A collection method recommended in the Committee's 23rd
Report and supported by many employer, employee and superannuation industry
experts, was the utilisation of group certificates.
Labor Senators recommend that the Australian Taxation Commissioner grant
an adequate extension of time to superannuation funds that cannot meet
the 15 December 1997 deadline, to ensure that only those who are targeted
by the surcharge tax actually pay it.
Labor Senators recommend that the surcharge tax be applied consistently
across all superannuation schemes. This recommendation has the following
three limbs:
- the fifteen per cent cap on the surcharge tax liability for members
of Commonwealth superannuation schemes and constitutionally protected
schemes should apply to all superannuation schemes;
- the definition of the fifteen per cent cap which applies to Commonwealth
public sector schemes should be extended to all superannuation schemes:
that is, the cap should be limited to fifteen per cent of the benefit
for the period after 20 August 1996; and
- the options for payment of the surcharge tax for members of some defined
benefit schemes (letting it accrue in an account on a yearly basis,
or paying it as it falls due) be consistently applied across all superannuation
schemes.
Labor Senators recommend that surplus allocation amounts not be subject
to the surcharge tax. This avoids adding further complications to an already
complicated policy. Alternatively, where an allocated surplus amount is
subject to the surcharge tax, the liability be adjusted for any part of
that amount which has already been surcharged taxed.
Labor Senators recommend that, in the interests of maintaining a robust
superannuation system, golden handshakes be treated consistently for surcharge
tax purposes, regardless of whether they are taken as cash or rolled over.
Senator Stephen Conroy
Senator Chris Evans
Senator John Hogg
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