Mr WILLIS(4.14 p.m.) —I rise to support the second reading amendment to this superannuation contributions surcharge legislation moved by the Deputy Leader of the Opposition (Mr Gareth Evans). The professed aim of the bills now before the House is to improve the equity of the tax system in relation to superannuation. The source of the alleged inequity in the present system is that we have a system which essentially taxes at a flat rate and gives greater benefits to people on higher incomes. The bill proposes to redress that by proposing a surcharge or an additional tax, to give it its proper title, on people on higher incomes in respect of their superannuation.

Let me say firstly that we do not oppose increasing the equity of the superannuation system. Clearly Labor in government demonstrated that amply because the system we inherited from the previous government when the now Prime Minister (Mr Howard) was the Treasurer was one which had virtually no tax on superannuation at all. The only tax on superannuation was the five per cent tax on the superannuation lump sum and you paid that at marginal tax rates. At 60c in the dollar, which was the top marginal tax rate in those days, you paid three per cent tax. That was John Howard's tax regime for superannuation—three per cent.

We changed that in many respects. It was also, I must say, a system which was there mainly for higher income earners, because low income earners did not have superannuation. It was not something that was available to them, except for those who worked for governments. But for the ordinary, run-of-the-mill private sector employee, there was no such superannuation available—40 per cent of the population had superannuation, and most of them were higher income earners.

So we did two things. We made superannuation generally available, which improved the equity because then everyone was entitled to superannuation. We did that through awards, the super guarantee system—the legislative approach—and then, of course, by changing the tax regime. The tax regime was eventually changed so that we had a 15 per cent tax on the contributions and a 15 per cent tax on the earnings on the fund. For lump sums, they were free of tax up to what is now $86½ thousand and then 15 per cent tax on the rest.

For pensions, they were taxed at the marginal tax rate minus 15 per cent, reflecting the 15 per cent that had been paid at the contributions and earning stage. So the tax rate, if you took a lump sum, was between 15 per cent and 30 per cent compared to the three per cent under the now Prime Minister when he was Treasurer. For a pension, there was simply no concession. You paid tax effectively at your marginal tax rate.

In relation to unfunded schemes, tax was only on the end benefits. For lump sums, it was 15 per cent on the front $86½ thousand and then 30 per cent. For pensions, tax was at the marginal tax rate. So, again, the total tax rate was between 15 per cent and 30 per cent for the lump sums and no concessions on pensions. That is the system on which all of this is being added.

In addition, we sought to limit the extent to which people could utilise the concessionality that was in the system through the introduction of RBLs—reasonable benefits limits—which set limits on how much you could take as a lump sum and how much you could take in terms of the total package, including pensions. So it was not there for complete exploitation with people with very high incomes being able to milk this for all it was worth.

So they were major steps towards improving the equity of the superannuation system, enormous steps compared to what was there before. Now everyone benefited from superannuation and the tax regime was far fairer. So we have very good credentials in that respect, but also we proposed to build on that through another system which was to provide for compulsory employee contributions, up to three per cent, from July 1999 and a matching means tested government co-contribution of up to three per cent of average weekly ordinary time earnings for employees' contributions. This also applied to the self-employed in respect of their undeducted contributions.

So we had the second leg of the tax cuts being converted into a payment, a matching co-contribution, into superannuation payable only to low and middle income earners. The top income earners were not going to get a penny out of that, not a cent out of the second leg of the tax cuts because they had been means tested out of it. It was all going into private sector savings, through superannuation, matching contributions to low and middle income earners.

So we were certainly going to add to the equity of the system in a very big way by that approach, an approach which I think has effectively now been abandoned. Of course, that would have boosted savings. Treasury estimated it would increase savings by one per cent of GDP by the year 2005 and 1.7 per cent by the year 2020, and of course it also considerably improved the equity of the system.

Now we have a government adopting a different approach. I must say, we see considerable problems with the way the government proposes to increase equity in the legislation now before the House. Firstly, there is the suggestion of unconstitutionality by certainly an eminent person—Dennis Rose, the former Chief General Counsel to the Attorney-General. Whether he is right or not, I do not know. All I know is that there is certainly a substantial chance that there could be some unconstitutionality involved in the approach taken here. There is also, obviously, the problem with the states. I do not want to go into that in any further detail because it has been well covered by the Deputy Leader of the Opposition.

We also see considerable problems with the way the government proposes to increase equity, and some of them are directly related to the way the government has designed this measure to try to avoid the tax label. It is petrified of labelling the thing as a tax because it promised not to introduce any new taxes—and clearly this is a new tax, along with various other new taxes. It is trying desperately to dress it up as something other than a tax.

This is a tax, quite clearly, and Dennis Rose said it clearly was. Although this tax is supposedly levied only on higher income earners, one of the really bad effects of this approach is that many lower income earners will be forced to pay the tax because, if they do not supply their tax file number to the super fund, which is to be reported to the tax office, they will pay the 15 per cent tax.

It is highly likely that many low and middle income earners will not supply their tax file number to the fund. They will not do it because they do not understand the consequences of not doing so, or because they are lost members. Lost members can be as high as 20 per cent of members—that is, people that the fund has lost touch with. So they cannot notify them to say, `If you don't give us the tax file number, we can't pass it on and you'll be liable to the tax.' They cannot even tell them that, and many of those they do tell are not really going to understand the implications.

There will also, of course, be people who will have supplied the tax file number to their employer and think that that is adequate. So they have already given it to someone and think, `Why can't the employer pass it on,' or think he is going to but, in fact, he cannot because of the privacy provisions around the tax file number. So, for various reasons, you are not going to get the tax file number passed on by many low and middle income earners who will, therefore, be subject to this tax.

If only 10 per cent of them did not put in their tax file number, you would be looking at something like three-quarters of a million people who would be involved. The industry estimates about a million. Of course, they have some experience in this. They have been trying to get people to give them their tax file number. There has been a situation where there has not been the added incentive of a tax if you do not, but they have had very poor results—up to about 20 per cent at best, five per cent to 20 per cent of returns. So they are not getting the kind of return from their members that gives them any confidence at all that they will get everyone providing the tax file number. This is terribly important because this whole thing is supposed to be about equity but, if there are vast numbers of low income earners paying this tax, it is going to have very inequitable effects.

All employees at whatever income level will be adversely affected by the cost of administration that this measure will foist on the super funds. Estimates of these costs are around $100 million in the first year and $30 million ongoing. It is a tremendously high administrative cost to raise around $500 million, which is the supposed revenue from the tax. And that does not include the ATO's admin costs, which are also going to be very high.

Why are these costs so high? It is because the super funds have to gather and pass information to the tax office in respect of over 16 million accounts, just so that 355,000 higher income earners can be subjected to the surcharge. What an incredibly crazy administrative approach. Sixteen million accounts have to be processed in order to tax 355,000 people. It is just absurd. And this is from a government which parades itself as being here to cut the costs of red tape for small business.

The fact is that many small businesses wear the costs of their superannuation schemes and they cover those administrative costs themselves directly rather than putting them om the fund. And they will wear these costs and they are going to scream. They are going to say, `How does this fit with your promise about cutting red tape by 50 per cent?'

Through lack of time, I will not go through all of the ways in which the super funds bear these costs. But they are considerable administrative costs and they are going to have this ridiculous impact on the funds because what they do is reduce returns, therefore the fees are going to have to be higher. They are going to have to cover those higher costs by increased fees or reduced returns to members, and so you have an outcome where all members of superannuation funds, even if they all supply their tax file number, are going to be adversely affected, because they will wear those higher charges.

Also, eligible termination payments—that is, golden handshakes, retirement bonuses, redundancy payments—will all be caught up in this tax net. Of course, with redundancy payments there is an allowance for the tax free area which is, I think, $4,348 plus $2,174 per year. But anything over that gets caught up in this net. Many employees who have been sacked and then get a redundancy pay are going to find that that additional redundancy pay takes them into the bracket of high income earners. Therefore, they will be subject to the surcharge; therefore, just at the time that they get sacked they get hit with an additional tax, and then of course they are facing unemployment. And then the government says, `Hang on. Before you can claim any unemployment benefits, we are going to take your super benefits into account as well.' It is like a triple whammy—you got sacked, you got hit with extra tax and then you got means tested on your superannuation. It seems as though there is a vendetta against these sorts of people. This is surely incredibly inequitable.

There is also the fact that the transitional arrangements for golden handshakes last only five years, till 2001. After that, any golden handshake you get, which might be in respect of service that goes back 20 or 30 years before this legislation came into effect, gets taxed in full. It is real retrospective taxation. It is an outrage.

Furthermore, the way in which this legislation proposes to deal with unfunded defined benefit schemes is absolutely bizarre. An unfunded scheme of course has no annual employer contribution to tax, so what this legislation proposes is that such funds should for each member maintain a surchargable debt account, which will be calculated each year by use of a notional surcharge contribution rate obtained from tables currently being prepared by the Institute of Actuaries and agreed by the Australian Government Actuary and the Australian Taxation Office.

So the funds will be keeping these notional accounts—only notional accounts because there is no contribution while the person is actually in the fund—so they have the administrative expense of keeping that each year and putting an interest rate on it as well. And then they will inevitably find at the end of the day that it is not the right amount because the right amount can be determined only by the circumstances of the person when they retire. Whether it is voluntary or involuntary retirement, how long they have been in the system and so on will change the type of benefit they take. So just why there is a need to keep these notional accounts is beyond me.

Furthermore, these actuarial tables have not been prepared yet. So no-one in such a fund, which includes many public servants and members of parliament, knows what the impact of this legislation will be, as the member for McPherson (Mr Bradford) said. And most importantly, the government does not know, but it is bringing legislation into this House, saying, `We are going to impose a tax and we don't know what the impact is.' They cannot even tell us what the impact is on us—let alone tell anybody else outside in respect of these unfunded schemes. They simply do not know. So this is a bizarre state of affairs. What an incredibly poor legislative approach it is to bring in legislation when you have no idea what the impact is on those whom it is going to affect.

In respect of the parliamentary super scheme, the Minister for Finance (Mr Fahey) is saying. `Well, this might have an impact of around 13 per cent, we think. But we don't really know.' But there are calculations being made in the industry which say that this impact could be more of the order of over 50 per cent reduction in the end benefit. That is before normal taxation cuts in. So those calculations are out there, and what is the government saying about that? What is it saying to the public servants about their unfunded scheme?

It is simply incredible gall to bring in legislation not knowing what the impact will be. It is just incredible legislative laxity. It means the government does not know what it is doing, does not know what the revenue impacts are—because it cannot know them if it does not know what the impact will be on individuals—and it cannot say what the impact is on people whose lives are affected by this very legislation.

This tax will also have the perverse effect of discouraging many people from putting their money into superannuation, as the member for McPherson acknowledged, because they will see very little tax advantage. Indeed, there will be no tax advantage if they take a pension. That is because those subject to this new tax will be taxed at rates higher than the top marginal tax rate.

For those with funded schemes, the contribution rate will now be 30 per cent, there will be an earnings tax rate of 15 per cent and a pension tax rate of the marginal tax rate minus 15 per cent. So if you are on 48½ per cent, minus 15 means you are on 33½ per cent, but you have already paid 30 per cent on the contribution rate and then you are paying 15 per cent on the earnings. So what was actually in the fund is taxed somewhere between 15 and 30 per cent but closer to 30 per cent, then you have 33 per cent on your pension, and you are paying something up towards a 63 per cent tax rate. That is the effective tax rate that is going to apply in these circumstances—way over 48½ per cent, the top marginal tax rate.

For those with unfunded schemes, pensions will be reduced by this tax on retirement by the application of the 15 per cent surcharge and will then be subject to full marginal tax rate. Although the pension itself will be reduced at the outset by a process that I do not have time to go into, it will then be subject to the full marginal tax rate. But the full effect of that is that it is being taxed at way over the top marginal tax rate, at around 63 per cent. If you are going to be taxed above the marginal tax rate, where is the concessionality? Who in their right mind will take a pension? If you are going to get taxed at 63 per cent, why would you take a pension if you can avoid it?

As for lump sums—those in funded schemes—there will be 30 per cent tax rate on the contribution, 15 per cent on the earnings, a tax-free lump sum of up to $83,000 plus 15 per cent thereafter, which means that the tax will be at 45 per cent for amounts over $83,000. That is close to the top margin al tax rate—still some concessionality but not much. So people, after they get over the $83,000, will not see much value in staying in these schemes. For pensions, people will not see any value because they are going to be taxed at the full marginal rate. So why bother being in them?

We now have a situation where we have great incentives to get out of superannuation. We are seeing such articles as `Get out of super'. The message that the Institute of Chartered Accountants is having its member accountants tell their clients is that they should choose other investments over superannuation in the near future. I expect that will be a very wide reaction—which, of course, raises the question about the revenue. If they do get the money, it is much more likely that the money will come not from the high income earners it is proposed to tax but from the people who are the unintended consequences of the surcharge—the collaterally damaged lower-middle income earners who are going to have to wear the impact through not supplying their tax file numbers.

Of course, the better approach to have taken would have been to pursue what the Labor government had announced in its 1995 budget, and that was to greatly improve the equity of the tax system in the way that I mentioned earlier. That would have certainly meant that we would have had an administratively simple scheme. The government, of course, could say right now that it is going to pursue that scheme. It certainly said at the election that it would, except that it maintained the right to vary the mechanism. But in fact the government has destroyed the whole way in which that scheme could have worked by taking superannuation out of awards. So the whole process of requiring employees to make contributions cannot be maintained now because superannuation will not be an award condition in a couple of years time.

Clearly, the government has in mind, in any case, using the second leg of the tax cuts not as matching co-contributions for employee contributions but by setting up some medium-term savings vehicle which is not going to be superannuation at all. That will be less equitable, because it will be utilised mainly by higher income earners who have the savings rather than by lower income earners who are unlikely to put their money into such a vehicle in very large numbers. So equity is not going to be improved by that process.

With the process that we have here in this legislation, we have an administrative shambles of the first order which is going to be very inequitable, largely because of the approach taken—but not just because of it. (Time expired)