CHAIR —I welcome Ms Margaret Gillespie and Mr Sandy Ross. We prefer all evidence given to the committee to be in public. If you wish at any stage that part of it shall be in camera, or in private, please apply to the committee and we will consider your request. I now invite you to make an opening statement and, if you would like to, to comment on evidence given by other witnesses.

Mr Ross —I should say at the outset that we want to apologise for Ms Sally O'Loughlin, who has given evidence to this committee in the past and who is the assistant national secretary of the CPSU. She was unable to attend today.

I have prepared a brief statement, which I provided to the secretariat a little bit earlier, and I intend to speak to that statement. Firstly, I would like to echo a lot of the sentiments that have been expressed by other witnesses today. Certainly among our members there is a lot of anger and confusion about the operation of this legislation. I think that Mr Downes and other witnesses have expressed quite eloquently the wide ranging and significant difficulties with the legislation as it currently stands and the fact that the new bills that are currently before this committee really fail to address the difficulties with that legislation.

In summary, I think it could be said that the legislation creates an enormous cost and complexity in the collection mechanism. These costs will be passed on almost inevitably to all members of superannuation funds and I think that will introduce the first significant of many inequities in relation to this legislation. Further, the effects of the legislation on people with eligible termination payments, as Mr Davis was just outlining, are also highly inequitable.

Last but not least, it will create a great deal of further concern and confusion about superannuation amongst members of the public generally and certainly I can testify to the fact that amongst our members there is considerable concern and confusion about the operation of these provisions. Our members, of course, are in the Commonwealth public sector and are currently primarily in the CSS and the PSS, although in some of the other statutory agencies they are in other schemes as well. Therefore, these schemes are unfunded and defined benefit schemes, by and large, and there are specific problems that our members encounter because of that.

Clearly, when the original legislation was conceived, it had an accumulation fund model in the mind of those conceiving the legislation. This has meant that although the legislation is quite horrendous with regard to its implementation in accumulation funds, there is another layer of difficulty in its application to people in defined benefit schemes. I think this path has been well trodden by many of the witnesses to this hearing. I believe, as you referred to earlier to the 10 chapters in the 23rd report of this committee, these issues were well canvassed at an earlier time with the original legislation being considered by this committee.

Perhaps a little cynically, I might say that the material that we put together to put to you today anticipates that the legislation, notwithstanding these rather immense difficulties, will continue to apply and operate. I think it is certainly, at a practical level, difficult to avoid the fact that, notwithstanding all the considerable difficulties, the legislation was actually passed in May and it is likely, and desirable though that may be, it may well continue to function although we would certainly add our voice to the others who said that the whole scheme of the superannuation contributions tax needs to be re-examined.

However, in the alternative and failing that sort of re-examination, we have a few propositions to put to the committee in relation to at least ameliorating or improving some aspects of the provisions. The first of these relates to the roles of trustees in government schemes. Some issues in relation to the role of the trustees have been raised by earlier witnesses and the operation of the legislation in regard to defined benefit schemes, in particular, raises concerns in our minds about the capacity of the trustees to discharge their responsibilities in an effective way. This is not something that we have sufficient expertise ourselves to comment on in detail but we do think that the views of the trustees, as to how these things will actually operate in practice, should be sought by this committee while in the process of considering the legislation.

Our proposition is that the committee seek the views of trustees of government schemes about the workability and costs of implementing the tax on defined benefit schemes as proposed. I should add here that I was quite disturbed to hear Mr Davis's comments about the difficulties with regard to actuarial practice. The actuaries, as I understand it, have developed the matrices which Mr Downes referred to which will enable calculation to be made of the notional surchargeable factors for our members in the CSS and PSS schemes. I am disturbed to hear from Mr Davis's evidence that even the devising of those tables--complex and inaccessible as they are--itself does not have any proper foundation although the legislation purports to give it such foundation.

Moving on from that particular point, the second point which we wanted to make was in relation to the application of the tax to pensions and annuities. We note that for members leaving the CSS and PSS, those members are potentially and frequently, at least in the case of the CSS, entitled to an indexed pension and that indexed pension is paid out of the unfunded employer liabilities. These pensions, when received, are fully taxable as income. However, under this legislation these pensions are to be reduced by the amount of the surcharge. Our argument in this case is that effectively the benefits are being taxed twice for our members.

On top of this, in terms of public policy and the desire of the government to increase the capacity of people to fund their own retirement and to encourage people to take retirement income streams, we would say again that the application of this tax to people who elect, quite properly, to take their entitlements in the form of an income stream is not desirable. There should be amendment to the legislation to exempt pensions from being subject to the tax and, in the event that a tax has already been paid on a benefit that is now being used to purchase an income stream, that tax that has been paid should be rebated.

Lastly, in relation to points we wanted to raise, is the issue about eligible termination payment rollovers and also the counting of various other separation benefits in situations where a person is not retrenched towards the calculation of the threshold. Clearly there are significant equity difficulties with these provisions as they currently stand. There are also the policy difficulties with the way in which they discourage people from putting money into superannuation and providing for their future retirement. In relation to these matters, we believe that there needs to be a re-examination of, and a reworking of the legislation, to improve the outcomes both in equity terms and in policy terms in regard to encouraging people to put aside money into superannuation. They are all the submissions I had.

Ms Gillespie —I have more of a comment than anything else. I think that it would clearly be the view of the CPSU that this legislation is, in effect, a sow's ear; I do not think you can turn it into a silk purse. However, what we have attempted to do is to point out some of the difficulties that we see our members will experience, both in terms of administration and also the application of the legislation as it stands at the moment.

I would also make the comment that, while this is one in a series of changes that are contemplated by the government in relation to our members' superannuation--and I would remind the committee members that superannuation is the second-most important condition that our members currently enjoy--it is one that they see as of great importance in their working life. The CPSU believes it is one condition that is worth defending, and defending vigorously. Of course, in relation to any outcome of this committee and voting on the legislation, we will be at great pains to communicate the various positions that the senators take on this very important piece of legislation.

CHAIR —Mr Ross, you mentioned that your members are, effectively, taxed twice. Would you just like to amplify that, please?

Mr Ross —In relation, for instance, to a member of the CSS who retires and is to take the full indexed pension, which is the standard entitlement from the CSS, that pension arises out of unfunded employer benefits. As a result, that pension is fully taxable as income. The argument is therefore that there has been no tax concession on the employer benefits, and I suppose the argument for the surcharge or tax is that that reduces the amount of tax concession on employer benefits. Where there has been none, then effectively it is a double taxation.

CHAIR —I thought there might be something further. Thank you very much.

Senator CHRIS EVANS —What, in effect, is going to happen is that the trustees will have to calculate some notional taxation on the pension to be paid, therefore reducing the pension.

Mr Ross —The provisions as proposed in the legislation say that, during the life of the person's membership of the scheme, the notional employer contribution is calculated using the actuarial tables that we are told don't have a good basis. A factor is produced to apply to a particular individual, that factor is multiplied by the salary, and the notional employer contribution is calculated. That is then used to calculate a notional surcharge liability. That liability is then accrued in the debt account and members of the fund have the option to pay that off directly, if they wish. Alternatively, that accrues and each year, as they are assessed, there may be more debits or liabilities added to that account. In the course of that account's existence, any debts that are in that account accrue interest at the 10-year government bond rate.

When the benefit becomes payable, as I understand it, the trustees of the scheme must pay to the tax office the balance of the account that is owing. The trustees must then make a decision to reduce the benefit payable under the legislation that has been proposed, to take account of the debt that they have paid to the tax office, but the provision is also for the trustees to exercise some discretion where the benefit paid is greater or less than the amount that is implied it should have been by the notional contributions.

CHAIR —Is that right? Don't you calculate your surcharge liability as at the date of retirement? There can be a difference between the notional amounts that have built up in your surcharge account after taking into account the long-term bond rate--that is one of the problems--and your actuarial calculation at the time when you leave, because the only true time that you calculate accurately--

Mr Ross —That is the only time you actually know what the benefit is. On my reading, the benefit accrues and the liability in the debt account is actually what the scheme is liable for. My reading of, certainly, the explanatory memorandum for this new legislation seems to suggest that the trustees pay the tax office what is in the debt account and then they have a look at what the person actually got and whether that is a long way off the notional debt.

CHAIR —That certainly seems to be true in respect of people who are in constitutionally protected funds. I read that in the way in which you do for that, but we might get some advice from somebody later on that.

Senator CHRIS EVANS —Don't you actually ever know till they die?

Mr Ross —The key event is when the benefit becomes payable, and that may be--

Senator CHRIS EVANS —You do not know the total cost of the pension annuity. All you have got is another actuarial calculation as to how long the average person is going to live. So you match that with your actuarial calculation about the level of tax they should have paid.

Mr Ross —My understanding is that this relates to the amendments to the Superannuation Act and other Commonwealth legislation. In relation to the comment about the pension arrangements, the idea is that you take the lump sum liability that has been paid and you commute that into a pension equivalent, using I think the existing factors the DSS uses in calculating or converting, for instance, the undeducted contributions component of pensions. You use those sorts of factors to calculate what equivalent amount the pension needs to be reduced by to account for the superannuation tax debt.

CHAIR —Thank you for raising it. We will certainly take it up with Treasury.

Senator CHRIS EVANS —But your key argument is that, if they don't pay off their debt account as they go, the person will have an adjustment made to their pension. Your argument is, effectively, that they would have paid more tax as PAYE income earners in taking their pension if they had not had that deducted in the calculation of the pension, isn't it? It was not your point, but you made a double taxation point. It just occurred to me that you actually make an adjustment in terms of their pension downwards to account for the surcharge.

Mr Ross —That is how they actually, effectively, pay it. That is right.

Senator CHRIS EVANS —That means that person's pension may have been reduced from, say, $25,000 a year to $22,000 or whatever, but in fact they then will be paying less income tax on the pension than they would otherwise have been, because of the application of the surcharge at an earlier point.

Mr Ross —You make it sound almost as though people would be grateful if they paid enough surcharge to get the lower marginal tax rate.

Senator CHRIS EVANS —No, it just seems to me it is an unnecessary complication in the sense that what they were paying out would have been taxed as income tax in any event.

Mr Ross —I suppose our point is simply that it is taxable income. There are no concessions on that income.

Senator CHRIS EVANS —That is right, but the taxable income they receive is reduced by virtue of the application of the surcharge.

Mr Ross —That is correct.

Senator CHRIS EVANS —It is just another complication, so why would you bother?

Mr Ross —Why would you bother--

Senator CHRIS EVANS —Applying the surcharge.

Mr Ross —I could not say--

Senator CHRIS EVANS —I am just trying to take it through in my own thinking.

Mr Ross —It all gets very circular, I find.

CHAIR —Thank you very much for appearing before the committee today.

[6.28 p.m.]