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SELECT COMMITTEE ON SUPERANNUATION AND FINANCIAL SERVICES - 13/11/2000 - Family Law Legislation Amendment (Superannuation) Bill 2000

CHAIR —Welcome. Thank you very much for agreeing to the transfer of the time. I hope all your members still have the opportunity to be present as a result of the change.

Mr Johnson —The only difficulty it created was that Mr Hyndes, who was to be a member of our team, is not able to get here because of the appointment change. But we can manage without him.

CHAIR —Sorry about that.

Mr Johnson —It is not a major problem.

Air Vice Marshal Paule —He may actually turn up.

CHAIR —We might be able to give him some time later on if he does turn up. You all would obviously have an interest in one of our forthcoming hearings in relation to the public sector and the issues that are raised there that we intend to examine.

Mr Johnson —The indexing issue?

CHAIR —That is right, yes. We invite you now to raise some issues. We do not necessarily have to have just the one spokesperson, but we would like some time for some questioning. We note for the record that you have put in a supplementary submission.

Mr Johnson —I ask that the supplementary submission be the one to work on, because it encapsulates all of what was in the first one and expands on it. As we explained when we submitted our first one, the delay in the regulations created some problems for us.

Thank you, Chair, for giving us the opportunity to appear before the committee. As you would note from the papers, we do represent a very large constituency. We are the peak council which brings together the Commonwealth, military and state government superannuation retiree organisations. The position that we take in this matter is probably a little different from what other people may say, but we are, I think, the only people appearing who are on the receiving end—that is, the superannuants, the recipients, the contributors, et cetera—of the funds. So our approach is concerned essentially with public sector superannuation related matters.

Let me say from the outset that we are not opposed in any way to the concept of splitting the superannuation asset with a separating spouse. That is a major step forward that is very important and needed. But we do have some problems with the approach that is being taken. In particular, the overriding provisions in the bill create some difficulty and concern for us. It would have been better had the approach to this taken into consideration amendments to the individual superannuation acts that cover the public sector.

Section 90MB in part VIIIB of the bill, which is going to be incorporated into the family law, really walks right over the top of the superannuation acts. The way in which the separating spouse is brought into the scene is by the amendment which will be added to SIS regulations to make that separating spouse a member of the particular fund. We are not sure that is a particularly sound way. We also represent the state government superannuant organisations. They are exempt from SIS but covered by heads of government agreement. The reference to this has been totally ignored in regulations or bills, and we do not really know what is going to happen there if this family law is going to have national effect.

It would have been important to have consulted with organisations such as ours or the staff associations representing the beneficiaries under these schemes, because the public sector super schemes—whether Commonwealth, state, territory or military—are an integral part of conditions of employment, as they were in the cases of we people who are now retired. It always has been that way. If one goes back into the history, the parliamentary records reveal very clearly the negotiations which took place in the early seventies in setting up the various schemes with those who were to be affected. In the consultation clause in the explanatory memorandum we get no mention at all. The only people consulted, according to the consultation statement on page 15 of the EM, were the Family Court of Australia, the legal profession and the superannuation industry. I would have thought that we might have been considered to be reasonably important.

One of the difficulties that we encountered initially was that the superannuation provisions of our act, when they were introduced, were based principally on enduring marriages. More recent systems have introduced the de facto relationship and the conditions under which benefits are paid. Under these schemes, in the event of the death of the contributor the surviving spouse receives around 67 per cent. It varies. Your own scheme, the parliamentary scheme, is different. Some of the state schemes are different. That is a general average. The surviving spouse rate is not withdrawn or reduced if remarriage occurs, but it does terminate completely on the death of the surviving spouse, assuming there are no dependent children at that point. There is no residual capital flow-on to the estate of the deceased.

The marital breakdown provisions, we believe, should have been in an entirely separate section—and that those conditions applicable, as I have explained, should be allowed to stand, that they should provide a guiding principle as to how to deal with the marital breakdown situation. Marital breakdown is involuntary, it is self-initiated, and in many cases third parties can be involved. If remarriage occurs, in our view, consideration should be given to terminating the benefit to that separating spouse at that point and reinstating that share back to the contributor. That is probably a monumental shift from the position that you would take, but you have to accept that the contributor, particularly if the marriage has survived for a number of years, has been the major contributor to generating the benefit.

CHAIR —Can you clarify whether, when you refer to `remarriage', you are referring to the remarriage of the spouse or the contributor?

Mr Johnson —I am referring to the remarriage of the separating spouse.

CHAIR —The spouse.

Mr Johnson —Yes, the spouse. It might be a male, it might be a female, depending on who the contributor was. If the entitlement is terminated, as I have just mentioned, there should not be any flow-on. The bill as it is written does provide for flow-on because in section 90MZC of the bill it says that the payment split will continue if the nonmember spouse dies. That suggests to us that the intention is that whatever the value that is remaining at the point of her death would pass on to the estate. We do see that, in terminating the entitlement as we propose in the event of the death of that separating spouse—if she dies or remarries—it is obvious that it could not reasonably be reinstated to the contributor or the contributor's account if she entered a new relationship and, after preservation date, had been paid a lump sum.

The other problem we have is that in division 7A.4 of the regulations it is allowing transfer or rollover of the separating spouse benefit to another fund. Again, that would not facilitate the restoration to the contributor if these events occurred. Therefore, to us it does seem more appropriate for the separating spouse benefit to be made available as a regular pension payment as a start, and not as a lump sum, and for the separating spouse benefit to remain in the same fund, not to be rolled over to a separate one. In the objectives that the government states in the EM for having superannuation, et cetera, it states that it wants it to be used for living standards in retirement. As we well know, there is nothing to prevent anybody receiving a lump sum from spending it immediately—buying a new car, going on an overseas holiday—and then falling back on social security benefits. It does happen: it happens a great deal. We see some burgeoning social security costs, defeating what we believe is the government's real objective in having superannuation.

Concerning the 67 per cent or whatever is prescribed, we have talked about the surviving spouse benefit. The proposed bill ignores the situation I have spoken to you about. For example, the separating spouse takes 50 per cent of the superannuation benefit at preservation date—let's say she survives for only a very short time after that—yet the superannuation bills themselves provide for the surviving spouse to get 67 per cent or so on: what is going to happen in that case? Let us say that the contributor did not remarry, the separated spouse is on 50 per cent and he dies: is her benefit automatically going to be lifted to 67 per cent? There are issues there which have really been ignored. Section 90ME or 90MF of the bill refers to the reversionary beneficiary. That is unclear and, we think, even inadequate. The other point with the surviving spouse under a superannuation scheme is that, let us say she has been in the marriage for many years and when the contributor dies the maximum amount that she can take as the survivor is of the order of 67 per cent or whatever the percentage is, as established in the acts governing those public sector funds. Does that not suggest that, in determining what a separating spouse's share should be, the base amount that it be calculated against should perhaps be 67 per cent; that is, if there is a fifty-fifty split, her 50 per cent should be 50 per cent of the 67 per cent of the contributor's benefit. If you do not have that sort of consistency, you are increasing the cost to revenue. Secondly, if you do not lift it to 67 per cent from the 50 per cent, as I mentioned early, when she dies revenue gains a little bit. There are some complications relating to that.

The other issue which we felt was really lacking in what is proposed is that the dependency provisions are not prescribed. Under the superannuation acts and the schemes that the public sector belong to, before there is any entitlement at all to any spouse benefit, the marriage has to have survived for a minimum of three years. If the marriage commenced after the age of 60 or after retirement—say it was a first marriage—that marriage has to have been established for a period of five years under the acts. The same situation applies to the parliamentary scheme. We note that sums of less than $2,000 do not have to be split and we are also fully aware that in the non-splitting situation, as a former contributor ages, he can get to a situation where it does not have to be split, depending on what his age was when he retired and what the life expectancy is. Again, that raises some difficulties. Let us say that a person retired at 60 years of age in 1983 and that was when his pension commenced. The life expectancy tables at that date said that it was 16.4 years. If separation occurred after retirement—let us say in 1997 when he would have been 77 years of age—it does not have to be split if there is a separation at that point. These things happen in retirement.

In the latest life tables we have, which are much later than those, it increases at 60. It is now 20.05. These are male tables for life expectancy. So, instead of 77—it is going to be 2003; another four years down the track—he will be 81. I think there are some inconsistencies there. If you are going to apply the tables at the particular date, I think that has to be made a lot clearer. And we note that sums of less than $2,000 do not have to be split. It seems to us that it would be very important for that bill to establish clear dependency provisions before any entitlement on splitting could occur. Otherwise you could have a situation where somebody might be married for 18 months to the contributor and a separation occurs and you split. That is totally contrary to the original principles under superannuation.

The marital breakdown declarations in the bill at 90MP seem to be less than stringent in determining whether one is entitled to a split as a result of a breakdown. It does not have to be a decree; it can simply be a signed declaration. We understand that under the Family Law Act people can continue to live under the same roof. That is a fairly weak provision. I say it is weak because in the superannuation area there are fairly stringent tests to establish the marital relationship. In the case of de factos there is an even more stringent test under the superannuation acts. In that sort of weak situation where a separation can occur fairly readily—and they do—there is a big tax advantage to be gained by separating. We think that, as it is prescribed at the moment, the legislation does not eliminate the possibility of those bogus breakdowns. Certainly there is reference made to penalties under the tax act, but people will still ignore those penalties. I think it needs to be much more stringent.

That leads us to how to eliminate the bogus breakdown. Because you are clearly recognising, in what you are planning to do here, the spouse's value in supporting the contributor while the partnership lasted, where the marital relationship is maintained, would it not be much fairer to make it possible for the superannuation split for income tax purposes, et cetera, to be allowed from the date that you commence contributing to a fund? I have some figures here that indicate what the differences are. For example, with respect to a superannuant couple—and I am dealing here exclusively with superannuation income and part social security pension—with a superannuation income of $14,508 per annum, each of the people in that marriage would be entitled to a DSS pension top-up of $6,544 per annum each. On that income, their tax—and they are taxed as a couple—would be $2,875.18.

CHAIR —Is that the combined tax?

Mr Johnson —Yes, that is the total tax payable. Another retiree couple on $14,508 per annum split, and that amount becomes $7,254 each per annum. They still have the same entitlement to that DSS amount of $6,544 but neither of them pay any income tax—they are income tax free. So there is nearly a $3,000 benefit if you split the marriage. When you go up the scale to the higher end—and at the time that we did these figures we took just below what was then the cut-off point for a part social security pension—if the superannuation is $43,532 and the part DSS for the couple is $740 each, the income tax they pay is $9,100. If you split that at $21,000 each, they each pay income tax of $3,389. So the couple who have split are paying $2,321.90 less in income tax than the superannuant couple are. We have made submissions to the finance minister on these issues, and we are not getting anywhere. But I think it is being highlighted in this bill.

CHAIR —How do we overcome it?

Mr Johnson —The first thing, of course, is that government is going to say that revenue could not stand the cost. We have not got the figures—we have no idea—but it is our view that it should be an option that a couple can exercise. It does not have to be a compulsion, because you could have a situation where a couple will continue to live together. If their relationship is strained but they do not want to separate, they might not want to take advantage of such an option—there could be circumstances. But I think it is an issue which has to be addressed; otherwise you are continuing with a tax regime which is really very unfair.

To quickly summarise the issues at the bottom of our page 4, we do not feel very excited about the overriding provisions. The marital breakdown provisions should be negotiated with employees as consequential amendments to the super acts. I think it is completely wrong that the government has not seen fit to hold negotiations with the end users of this. Separating spouse entitlements from splitting of super assets to be payable as a pension, not a lump sum, would be much more consistent with the government's retirement objectives. The separating spouse benefit should terminate on remarriage or death and revert to the contributor. The 67 per cent issue has not been addressed. There is no provision for that going up again in a fifty-fifty split—or whatever the split is below 67. We think that the separating spouse share of the public sector super assets should be calculated against the surviving spouse rate specified in the acts; that is, 50 per cent of 67 or whatever it is. We believe that the dependency provision in the separation provisions could be considered to be five years in the absence of nothing at all, and we have concerns about the weaknesses in the marital breakdown declarations.

I think that is about all I need to say. My military colleagues might have a few words to say.

Cdre Adams —As you know, the RDFWA has been around since 1959, and we were involved with the Jess committee report, which led to the modern military superannuation scheme, and later we were involved with the Cole report, which led to the MSBS system. Of course, the question of the Family Law Act as it impacts on the provisions of the defence and military superannuation schemes is of concern to us, as the military do not have a union and we are virtually the only organisation there is to really examine how these things may impact upon serving personnel, of which there are currently 50,000, and they are contributors to the two military schemes. Also of concern is the impact on those who have retired and are in receipt of retired military payments under three schemes. There are about 53,000 recipients of those.

I note that according to the Australian Bureau of Statistics the current rate of marriage breakdown is about 46 per cent. So there are a lot of people in the Defence Force in marriages now, or who are intending marriage down the track, who may well be affected by these regulations. As far as we can gather, there has been virtually no dialogue with the hierarchy of the Australian Defence Force on this matter—although I think the matter is being examined in the bureaucracy by way of exchange of correspondence with the department of finance and others. But I do not believe it has been addressed in terms of its impact on serving personnel and on their families. We believe that unless a position of more compromise, a more softened position, is taken—along the lines outlined by Mr Johnson—something is needed to protect the careers of servicemen: it could become a big issue and drive people into de facto relationships, of which there are quite a lot in the services, and of course they are not covered by this particular legislation.

We note also that neither the trustees of the DFRDB nor those of the Military Superannuation Benefits Scheme have made a submission in regard to how it would impact on the administration of those funds—which we think would be significant—nor on the things that have been outlined by Mr Johnson as to how that is going to be arranged. We think the impact on the legislation governing military superannuation schemes and the public sector schemes is quite significant and has to be really carefully walked through. So they are the matters of concern to us, and we believe that the submission we have made addresses some of those more fundamental points.

CHAIR —We have a requirement to report by 28 November. From what you are saying, you would be advising the committee to get an extension so that these further issues can be addressed.

Mr Johnson —Yes. That is fairly important. In fact, from listening to Dr Michaela Anderson before, I think she rather indicated that she felt there was a need for more time, from where they sit on the funds side of it, for this to be carefully considered. It does seem to us that it would be a bit of a rush, with the way it is going.

CHAIR —You did indicate about state governments. There is an area of difficulty with state governments, of course; but there is an understanding under the heads of agreement—

Mr Johnson —The heads of government agreement—

CHAIR —that basically such funds will comply with the SIS requirements. But we have recently seen in New South Wales a situation where it does not.

Mr Johnson —That is right; yes.

CHAIR —While in effect that might apply, there is no guarantee that it is going to be the outcome. Unfortunately, we cannot control that—

Mr Johnson —No; I realise that.

CHAIR —except to suggest that perhaps there should be a more rigorous enforcement of that by Treasury.

Mr Johnson —As we mentioned in our first submission, we will quote a letter we had from the Western Australian state super board about the heads of government agreement. But, when we were negotiating at both the state and the federal level about the splitting of a superannuation pension with a spouse, they came back and said, `No; it cannot be done by the heads of government agreement ,which contains the sole purpose test.' I had a meeting with Treasury officials about a week ago to explore in greater details. In fact I asked if I could have a copy of the agreement and, whilst we could make application under F0I, I was told that Treasury would not object but that they would have to consult all the states and, by the time we went down that merry path it would probably be a very long time before we got it.

What was explained to me was that the heads of government agreement, because the state schemes are exempt from SIS, in effect applies the prudential requirements, or that they themselves would observe them generally. But, as you just mentioned, it does not really compel it to happen. With the way this is being done—with the overriding clause and with the amendment to the SIS to make a nonmember spouse a member of the fund at the time of splitting—from where we and our people out there sit, they see this as governments almost trampling over the existing provisions without proper consultation. Nobody is saying to us that they will object to the division, but they believe it needs to be done in the proper way and that the superannuation acts themselves should be amended to contain the relevant separating provisions.

We are dealing with a large audience here: there are 42 public sector funds operating, and the membership of those funds is 2.721 million—it is a big audience—and I am not dealing there with the retirement side. The retirement side is pretty substantial. For example, in the Commonwealth CSS-PSS it is, in round figures, 110,000 retirees, and in the military it is about 50,000. In your own state there are 7,104, to be precise, as of 30 June this year, and there are 17,000 contributors. In Victoria it is over 50,000. It is a significant number of people, and this division has an effect on them. They see it as being an interference with their retirement benefits. The government has said all these things were gilt-edged, rock-salted and never going to be shifted. We are not saying there should not be a change to accommodate what we believe is very important. We would support totally the need for a division for the separating spouse, but we do not find the way it is being done super attractive.

CHAIR —We will certainly raise the issues that you have mentioned with the Attorney-General's Department. Although they gave us an outline this morning, they will be appearing again tomorrow, and they have a list of issues—

Mr Johnson —I think we have stirred the pot for you just a little bit.

CHAIR —Air Vice Marshal Paule, have you some issues that you would like to raise out of all this? Is there anything that you think we should highlight?

Air Vice Marshal Paule —No, I am quite happy with what has been said. Anything I would say now would merely be an embellishment of what has already been said, I think.

Cdre Adams —As far as I am concerned, we have stated what we need to do and focused on those points that we believe can affect people serving in the military. It is a pretty tender flower—conditions of service in the military. This is a tender flower, and I think it is one that really needs to be very carefully thought through.

CHAIR —Thank you very much for appearing before the committee. We may hear from you again under other terms of reference later on—next year, that will be.

Proceedings suspended from 1.07 p.m. to 2.24 p.m.