Dr SOUTHCOTT (11:54 AM) —In speaking to the Taxation Laws Amendment Bill (No. 7) 1997 , I would like to touch on three of the areas that the bill covers: the choice of superannuation funds, the distribution of income to shareholders of private companies and the government's savings rebate. The choice of super fund was an election commitment by the coalition before the 1996 election. It was also a recommendation of the Wallis committee into the financial system. The recommendation was that employees should be provided with a choice of fund subject to the constraints of administrative costs and fund liquidity that you can get with being able to change too easily. Members should also have the right to transfer the amounts to any fund.

The Wallis committee reported that most members now do not have a choice of superannuation fund and are unable to transfer their benefits between the funds. That has reduced the competition in superannuation. For example, some industrial awards name the fund where the compulsory superannuation guarantee fund must be paid. Employees under some of those awards have no choice of super fund they can be in. More than half of the superannuation accounts are in funds where members do not have full choice. The Insurance and Superannuation Commission estimates that 24 per cent of superannuation members have no choice of fund at all.

The benefit of allowing choice of a fund in superannuation is to increase the competition and therefore increase the efficiency between the funds. As the financial systems inquiry highlighted, if you have free choice between the funds, you need to address the problems of administration costs with transferring between the funds, and also fund liquidity. However, in the United States, where they have a greater choice of superannuation funds, they have not had any problems with fund liquidity. Competition will ensue only if you have informed consumers—if you have education on the choice of funds, on the risks, on the returns and also the rights of consumers. That is the responsibility of both the industry and the regulators.

The principle behind having a choice of superannuation fund is that with information, choice and control consumers will take a sense of ownership of their superannuation fund and savings vehicle and will take an interest in saving for retirement. As the previous member, the member for Lowe (Mr Zammit) mentioned, the legislation will take effect on 1 July 1998. From then on, new employees will have a choice of where their compulsory superannuation guarantee is paid. On 1 July 2000, choice of fund will also be available to existing employees.

Employers will have a choice to offer four complying funds or retirement savings accounts or, secondly, to offer the employee an unlimited choice of superannuation funds or, thirdly, to specify a fund through either formal or informal workplace agreements. If they do not do that, they will have to pay an extra 25 per cent on the superannuation guarantee charge. As was indicated in the Senate Select Committee on Superannuation, many employees are likely, even if offered a complete choice, to go with the default. But you might see the level of competition occurring at the level of the company or employer, in that they will be looking at four funds or retirement savings accounts and will be trying to pick what they consider to be the four best funds.

The previous speaker and other speakers in this debate have mentioned a very important point and that is that the consumers really need to be given adequate information. It is only through informed choice that the principle will work to deliver competition, thereby improving efficiency in superannuation. The Senate Select Committee on Superannuation, in their public hearings on the bill, found considerable support for the broad concept of the choice of fund.

The savings rebate had its origins in the l-a-w tax cuts legislated by Paul Keating in 1992 and which were never delivered. In the 1995 budget, the l-a-w tax cuts became the superannuation co-contribution. Last year in the budget, the government announced that it would offer a maximum of $225 in a savings rebate from this year onwards and then a maximum of $450 in future years. That would be offered as a 15 per cent rebate on savings from whatever means: through super contributions or from dividend and investment income or interest income from savings. This benefit is available to all those people who are either saving or who have saved in the past. It is an incentive for saving, but it is also a reward for those who are living on their investment income at the moment.

The Australian Council of Social Service has argued that the benefits will not be available to those on lower incomes, but that is wrong. A Bankers Trust study released in May 1997 and reported in the Financial Review on 27 May 1997 showed that 79 per cent of all eligible savings income for this rebate is held by people earning less than $40,000 a year. The study also showed that, for the very lowest income earners, the rebate was worth between five and 10 per cent of the tax they paid. Those earning greater than $70,000 held only 5.5 per cent of the eligible savings and the rebate was only 0.3 to 0.5 per cent of the tax they paid.

The ALP has argued that this is an inequitable measure. Capping the rebate at $3,000 handicaps the affluent who have more eligible savings and makes it more generous for those on lower incomes. For example, the same Bankers Trust study showed that those on incomes between $5,400 and $20,000—in other words, those who are paying tax, but at the lowest level—will be the largest beneficiaries under this savings rebate. We need to hit on the head this notion from the Labor Party that this is somehow inequitable. It is trying to encourage people on lower incomes to save. As most studies have shown, it is often very hard for people on the lower 40 per cent of income to save. This gives them an added incentive and can quite significantly reduce the tax they pay by five or 10 per cent if they take up the savings rebate.

The last issue I would like to touch on is distributions by private companies. This was another announcement in the 1997 budget which aimed to deal with loans to shareholders which were not at arms-length which could be used to avoid income tax. Loan guarantees, superannuation and so on were also considered as dividends. This was an anti-avoidance measure which was designed to impact on high wealth individuals who were trying to minimise their tax and also applied to loan guarantees and superannuation payments.

The unintended consequence of this measure was that, with superannuation payments made by a company to an employee, potentially the employee paid 15 per cent of the contribution, and that was debited to the member. If they were on an income over $70,000, there would be an additional super surcharge. On incomes above $85,000 the super surcharge could be as high as 15 per cent. If the employee was a shareholder, the amount that the company paid as super would have to be declared as a dividend. The government has recognised this. This was an unintended consequence of the drafting of the legislation.

The announcements that were made by the Assistant Treasurer (Senator Kemp) on 9 March were very sensible announcements. They still keep in mind the anti-avoidance provisions of this legislation but have removed some of the unintended consequences. Another example that came up in the legislation is that shareholders who borrow from the banks and have a loan guaranteed by the company had to declare the loan as taxable income. That has now been amended. Only if the shareholder defaults will the guarantee be considered as a dividend. It will not apply to superannuation. In fact, the government amendment says that payments made to shareholders or associates in their capacity as employees will not be treated as dividends under the new division 7A.

In the area of choice of superannuation funding, the coalition is offering employees a true choice of whatever superannuation fund they would like. The savings rebate is not inequitable. It is rewarding those who are saving and who have saved in the past. As to the distributions by private companies, this was an anti-avoidance measure, which I support. But the government has recognised that in the drafting of the legislation there was an unintended consequence in that it picked up a much wider net of employees than was initially intended. Therefore, the government amendments are quite sensible. I commend the bill to the House.