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Tuesday, 19 October 2010
Page: 767


Mr FLETCHER (8:47 PM) —As we have heard, the Superannuation Legislation Amendment Bill 2010 contains several sets of amendments to the existing superannuation law. The amendment that I want to focus on specifically in my remarks tonight is one that is included within schedule 4. It is one which would allow the Commissioner of Taxation to exercise a discretion for the purposes of excess contributions tax before an assessment is issued. The fundamental point I want to make tonight is that to grant the commissioner a discretion in this way to deal with an assessment of excess contributions tax is an inadequate response to a serious problem. The serious problem is the fact that Australians can be exposed to very high rates of penalty tax in circumstances where they make an innocent and inadvertent mistake in the amount they contribute to superannuation. We need to consider why it is that the commissioner is required to be given such a discretion in the first place. The reason is that the policy approach of this government in relation to contribution limits for superannuation is a real mess.

As we know, there are limits on the amount that any Australian can contribute to superannuation so as to enjoy the benefits of concessional treatment. The concessional treatment, of course, is that moneys which are paid into a superannuation fund are taxed at the rate of 15 per cent rather than the individual’s marginal tax rate. As we also know, the policy reason underlying this concessional treatment is to encourage people to make provision for their own retirement through building up a significant superannuation balance so that they are not reliant on a government funded pension. As we have heard speakers from all sides remark tonight, that underlying policy enjoys bipartisan support. The important point is that the concessional tax treatment is only available up to the concessional contributions cap.

The Rudd government, in one of its early acts in this area, reduced this cap. People aged 49 and below had the cap reduced from $50,000 to $25,000, and those aged 50 and above had it reduced from $100,000 to $50,000. This was a poor decision. It was a bad piece of public policy. It was done with limited notice and represented a fundamental change to the rules of the game. It threw the existing salary sacrifice arrangements of many thousands of Australians into disarray. Somebody who had been making regular annual contributions at a level above $25,000 was suddenly hit with a significant change in the rules—and severe consequences, in the form of excess contributions tax at 31.5 per cent on all amounts in excess of $25,000.

Every time the government tinkers with the rules about superannuation, it reduces confidence in the system. So the fact that this was a serious change to the rules in the middle of the game was a problem in and of itself. But there is a further and more serious problem, which is that the rules that now apply are so capricious that they can penalise people very severely if they make an innocent error. For example, many Australians do not understand that the superannuation guarantee contributions contribute towards the concessional contributions tax. Why would they be expected to understand this? The regulations around this area are eye-glazingly complex and most Australians would be very surprised to know about the capricious consequences which can be visited upon them if they make an innocent error.

How might such an innocent error occur? There are several ways. A person may be salary sacrificing a large amount of money into their superannuation fund and may simply and in good faith make a calculation error about the amount they are able to contribute without attracting the excess contributions tax. Another scenario is that an employer may make additional concessional contributions to the employee’s superannuation fund in ignorance of other contributions made by the employee. The combination of both the employer and employee contributions may trigger the excess contributions tax. Alternatively, a person may have a windfall and may make an error by contributing too much of that to their fund without realising the serious consequences that follow. Or—recognising the reality, which is that most Australians do not follow these complex laws themselves but instead rely upon advisers—the person making the contribution may simply receive bad advice. Yet quite remarkably an individual who has made an innocent error does not simply have the option of having the contributions returned and being subject to the normal taxation arrangements.

The measure proposed in the bill before the House today to give the commissioner extra powers to exercise discretion in some of these circumstances is a bandaid solution to a serious design flaw. Many Australians would be quite shocked to know that if they make an innocent mistake in these circumstances they can potentially be exposed to consequences including a 93 per cent marginal tax rate. To explain that: if you make a concessional contribution or a contribution which is intended to be a concessional contribution and you exceed the cap of $25,000 you are, as we have seen, exposed to the excess concessional contributions tax of 31.5 per cent. But if you are also making a non-concessional contribution—that is to say, a contribution that is made out of post-tax income—you also face a limit. If you exceed that non-concessional contribution then any excess amount attracts tax of 46.5 per cent.

The interaction of these provisions means that in certain circumstances Australians can be exposed to marginal tax of 93 per cent on a superannuation contribution. That will happen if you make a payment that exceeds the $25,000 limit and also happens to tip you over your limit for non-concessional contributions. Once it is over the $25,000, the incremental component over the $25,000 is automatically deemed to be non-concessional. If that inadvertently takes your non-concessional amount over your non-concessional limit you then hit that 93 per cent marginal tax rate. Let us be plain: this is a badly drafted provision which visits harsh and unfair consequences upon Australians who make an innocent mistake, a mistake which is all too easy to make given the eye-glazing complexity of the superannuation provisions.

One of the reasons that this has turned from a theoretical to a significantly more present risk is the Rudd-Gillard government’s capricious reduction in the contribution limits. This has turned a problem which was in the main theoretical into a real problem that can cause anguish to many thousands of Australians. What is the Gillard government’s bold solution to this problem contained in today’s bill? The Gillard government’s bold solution is to give the commissioner extra discretion. This bill gives the commissioner the power to make a determination to disregard or reallocate contributions for the purposes of excess contributions tax without first issuing an excess contributions tax assessment. I look at that supposed solution with considerable suspicion. I believe that many Australians with experience of dealing with the Australian Taxation Office would share that suspicion. This is a second-rate solution to the underlying problem.

As we have heard from the shadow Treasurer, we support the measures in the bill, including this one, on the grounds that it is the best that the government has put forward. But when you have a law which is flawed you should deal with the fundamental flaw. Australians should not be put in the position where they can be exposed to a sudden-death penalty tax that could arise due to an innocent mistake.

According to the Taxation Office’s statistics, more than 35,000 Australians breached the contributions tax rules for the 2008-09 year. It is very likely that the number will be bigger in subsequent years if current trends continue, I would suggest. You have a very large number of Australians being exposed in these circumstances to considerable mental anguish. They may have sold a small business or may have received a one-off bonus and set out to put the proceeds into superannuation so as to provide for themselves and suddenly they find that they could be facing the prospect of a very large proportion of those proceeds being confiscated by the tax office. It seems to me that in these circumstances it is not good enough for those Australians to be fobbed off with wafty assurances that the commissioner might exercise his discretion. Australians have a right to expect better from this government, and it is a shame that the solution that has been put forward to this problem in this bill is a second-best solution rather than one that addresses the fundamentally unacceptable and capricious nature of these provisions.