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Tuesday, 12 June 1984
Page: 2851


Senator MESSNER(6.22) —The Bill we are discussing tonight, the Income Tax Assessment Amendment Bill (No. 3) 1984, includes amongst its many matters chiefly the imposition of the new tax on superannuation lump sums. I will come to that matter a little later in my remarks, but firstly I would like to make some brief points about some of the other aspects of the Bill. First and foremost there are liberal sprinklings throughout the Bill. In particular I draw the Senate's attention to clauses 18, 19 and 20, which establish a very great number of new discretions in the hands of the Commissioner of Taxation. I think that is a very serious matter because it has been a growing trend in legislation , of a kind such as taxation legislation, for Parliament to abrogate its responsibilities in terms of setting down a precise form of the law and to provide the Commissioner of Taxation with powers whereby he can determine how much of a deduction is going to be allowed in particular circumstances, or how much income is going to be taken into account in assessing people's liability to taxation. I believe that is a very bad trend in our taxation law, as it is taking away from Parliament its right to determine specific laws in respect of taxation, which of course traces its history back to the earliest days of the establishment of Parliament and its rights over the management of money paid for and raised in taxes in the past by the autocrats.

Leaving that aside, perhaps the most disturbing use of this new discretion, as set out in the Bill, is in respect of the proposed new clause 17 and in particular the clause which refers to the amendments to section 26 (a). These amendments are designed, as I understand it, to take account of the situations that have arisen in respect of profit making by sale and the interposition of trusts and companies in situations where tax avoidance can be practised. The point of this legislation is to overcome those difficulties and to make it easier for the Commissioner of Taxation to be able to assess taxation in those circumstances. I think none of us would defend or support the actions of those determined tax avoiders who have undertaken the kinds of complicated schemes which this clause is designed to attack. Nevertheless, the Bill does bring in a whole range of new discretions as to how the Commissioner of Taxation will determine the liability to tax, how he will determine the amount which will be taxed and in what circumstances those provisions can be decided upon, quite irrespective of the Parliament's determination of the law, as I believe we would be looking for in proper taxation law.

In those respects I believe there are grounds for concern as to the gradual transfer of power to the hands of the Commissioner to determine the liability for taxation and, in fact, the amount of tax. Indeed, we all know of the practicalities of that situation once the Commissioner has got hold of that power because it then becomes a question of whether the taxpayer can demonstrate clearly his bona fides and whether he is capable of doing so without the most sophisticated advisers at his elbow to ensure that he does pay only that amount of taxation for which he is liable. I believe that point needs to be demonstrated clearly because not all taxpayers are equal when it comes to an understanding of the law, an understanding of accounting techniques and an understanding of the ways in which the Commissioner of Taxation operates. I believe that should be very clear in the minds of taxpayers and, indeed, in the minds of honourable senators when it comes to a vote on this Bill.

I turn to the major point of legislation, which is the imposition of the new taxation on lump sum superannuation. The first question I would like to ask the Government is whether the urgency which is claimed at this stage for the legislation can be justified. Indeed, as is clear from the second reading speech of the Minister for Housing and Construction and Minister Assisting the Treasurer (Mr Hurford) in the House of Representatives, urgency has not been justified at all. The Government has gone to some length in its remarks to say, as clearly as it can, that the action that is being undertaken in this Bill is part and parcel of some major grand plan for the introduction of a retirement income program. It is clear from the confusion and blunders of the last 12 months, as the Government has staggered from one disaster to the next in the retirement income area, that this program as outlined in the Bill is another one of those ill thought out disasters which will come home to haunt it in due course. It will be my purpose, in the course of my remarks, to try to deal with some of the great fallacies that exist in the Minister's second reading speech, and to put some of those issues at rest. Because of the time, I would like to stress at this point only the question of urgency and whether the Government, having waited 13 months or so for the presentation of this legislation, really considers it necessary to push it through in the last days of this session without proper identification of the issues and without proper discussion of the real concerns that lie in this legislation about a new radical approach to the taxation of superannuation payments, which I believe requires the most deep examination.

As an example of that I think we have to acknowledge-again bearing in mind my earlier remarks about the increase in the Commissioner's discretions in these areas-that it is clear that this Bill represents an attempt to try to set down a set of rules for the management of superannuation funds. I have to say that that being so, it is an incomplete set of rules and is done only as part of some other legislative package, which perhaps we will see in the Budget session, touching life assurance companies and the establishment of annuities and so on. But those matters I would like to address a little later in my remarks.

Sitting suspended from 6.30 to 8 p.m.


Senator MESSNER —Before the suspension of the sitting for dinner we were discussing the new tax to be imposed on lump sum superannuation under the Income Tax Assessment Amendment Bill (No. 3) 1984. I want to address myself now to some of the Opposition's criticisms of the principle upon which this new tax has been founded. First and foremost I believe there is one fundamental fallacy in the second reading speech that the Attorney-General (Senator Gareth Evans) put down in this place. That is the assumption that because a benefit has accrued to superannuitants by virtue of tax deductions available to employers, the non- taxation of the income of superannuation funds and, of course, tax benefits to employees as well, somehow some inequity has grown up as a result of that system having been institutionalised for many decades. The argument goes that payments out of superannuation funds such as annuities and pensions are taxed as though they were income whereas lump sums are taxed under the present tax regime at a very moderate level-that is, only 5 per cent of the lump sum is included in taxable income. That is fair enough because that is the present regime. But I want to make the point that that argument fails to acknowledge that the income generated from the investment of lump sum superannuation payments is then taxed in exactly the same way as are pensions, annuities and other payments from superannuation funds. I want to make that point very strongly because it is the fundamental fallacy of the argument laid down by the Government that lump sum superannuation is inequitable.

Let us take the matter a bit further. Last year's Budget Papers included a statement from the Commissioner of Taxation that some $2.5 billion worth of tax is forgone by the Government as a result of benefits given to superannuation scheme contributors. The amount of tax forgone is made up of non-taxable amounts such as interest or the income of superannuation funds. Tax is also forgone in respect of the value of contributions made into superannuation funds for the benefit of employees. But the point that is ignored is that offsetting that $2, 500m is at least $1 billion worth of tax that is generated from the income arising from the investment of lump sums. That figure is simply not taken into account and as a result the amount of tax forgone needs to be substantially reduced.

Secondly, people who receive lump sum superannuation payments are able to invest their money and thereby earn investment income to keep themselves alive. As a result they do not draw so much on the government pension and social welfare system. Obviously, the amount of money involved cannot be quantified but it is quite considerable. Thirdly, the Government makes savings because people are not taking advantage of the income limit system in respect of fringe benefits. Therefore, a very considerable amount of money is involved there as well.

The fourth point I would like to mention is that superannuation funds, in order to maintain their exemption for superannuation tax purposes, must in fact have permanently 30 per cent of their assets invested in government bonds. As a result, the Government has a captive market for its bond issues and there are consequent savings for the Government.

By totting up all those figures, and I admit we are in the areas of very wild estimations in many cases, we have to admit that the amount of savings to the Government is very considerable and probably of the order of one and a half billion dollars. If one then deducts that from the Government's estimate of the tax forgone, which is only a very partial estimate, of $2.5 billion, the net cost to revenue of superannuation schemes falls to around a $1,000m. I take the point that that may be too easy a method of doing the sums on this but I can point to evidence given in the Senate Standing Committee on Social Welfare. The Association of Superannuation Funds of Australia gave evidence that supports those figures in general terms.

Taking that as the basic argument it is clear that the Government has been hoodwinking the people of Australia in arguing that, somehow, lump sum superannuation is inequitable in its taxation treatment because the amount of money involved is far less than it has led us to believe. Indeed, the amount of money which is being utilised by people from lump sums to keep themselves alive is a very significant feature in reducing the future cost of welfare in this country. I believe that that is one of the fundamental differences between this Party and the Government in their approaches to the cost of social welfare. I believe that it needs to be recognised that it is far cheaper in the long run for people to receive a lump sum for their superannuation benefit than to continue to receive pensions over long periods of their lives. That is a fact of life. Any actuary can prove that very easily. I only wish I had some example to put before the Senate to demonstrate that point. However, it is quite clear that if the Government wants to reduce the future draw-down on its social security costs it should adopt an approach whereby lump sums were the norm and indeed the Government encouraged lump sums so that people could invest them in their own names and put it out in the market place so as to reduce the future cost of social security payments.

Having said that, and bearing in mind the limited time we have tonight, I move very quickly to two other areas. Firstly, the Bill sets out, in quite a lot of detail, aspects relating to the management, future control and regulation of superannuation funds. It seems that the Commissioner of Taxation is now to be appointed the commissioner of superannuation funds because he has been given duties under this Bill to control the destinies of superannuation funds to quite a considerable degree. I do not mind that. However, as we discussed earlier, there are very considerable discretions involved. I believe that the Commissioner will have to pay a great deal of attention to the details of those matters.

The second matter in detail in the Bill that is of great concern to the Opposition is the fact that several groups or types of enterprises, such as banks, credit unions, building societies and so on, which are subject to prudential requirements and control through various Acts of parliament, both State and Federal, have been authorised by this legislation to become approved holders of deposit funds for the purposes of the portability requirements. In general, one would say that was a good thing. However, the group that stands out like a sore thumb that is not so controlled is the trade union movement, which is also given authority to take approved deposit funds. Trade unions are not subject to the same kind of prudential requirements as are the other organisations. Obviously they will be launching into a whole new area of investment management, with very little track record with regard to proven ability for management of funds. I believe that the Government will need to take a great deal of care in dealing with trade unions in that situation. In passing, we should make the observation that it is rather strange that trade unions are allowed to take approved deposits in this way, but employer organisations, especially self-employed organisations, are not. People, by virtue of being members of a particular profession, will not be able to have approved deposit funds under this legislation.

The other aspects of that area that concern us are more detailed. I draw to the Senate's attention the apparent difference in treatment between life insurance companies and other bodies that will be entering into this new arrangement of approved deposit funds. The point is that within normal definitions of company law, as I am led to understand it, life insurance companies, if they adopt this practice, will be required to issue prospectuses in order to attract funds. That will also apply to banks and other bodies which are normally subject to Companies Act requirements. That means that some organisations will be subject to the very stringent requirements of the companies code and will be required to issue prospectuses-which, of course, in itself, is a time delaying aspect-as against bodies like trade unions and other organisations, which will not be subject to those requirements.

I would like to know why it is that the Government sees fit to apply those principles in respect of bodies such as life insurance companies, but does not see the necessity to do so in respect of other organisations such as trade unions. I would like the Minister, in the course of his reply on this matter, to give us some undertaking that he will take up this matter with the National Companies and Securities Commission with a view to seeking exemption for life insurance companies for the particular situation in which they will find themselves. It is a most important matter, as it will deny life insurance companies the opportunity to enter fully the annuity business as is envisaged by this legislation.

The only other matter that I want to mention very quickly is the problem of people receiving credit in respect of past service. The application of the new tax will divide the period of service in which the lump sum is calculated into two parts. In the course of ordinary business dealings, from time to time there are numbers of people who accept employment with one employer and then move on to another employer. As a result of negotiations with the second employer, they are given credit for past employment periods. It is not clear from the Minister' s second reading speech whether full credit would be given for such periods that have been credited in favour of people in that situation. I would like, again, to have the Minister's assurance that in that situation credit would be given in that the application of the tax would operate in exactly the same way as if the person had been employed by the one employer right throughout his working life. It seems to me to be an area that needs clarification. I hope the Minister will be able to give us a categorical assurance that the principle of the law as outlined in the Bill will be applied in those circumstances.

I refer to one other factor, namely, the problem with invalidity of fund members who retire on terms which seem to be somewhat advantageous compared with those terms which are currently settled on most members of superannuation funds. It is obvious that there will be changes in this area as a result of pressure on present superannuation funds to introduce more advantageous invalidity requirements. As a result one can expect a great increase in the cost of administering superannuation funds. In fact, I am advised that the cost could rise by as much as 2 per cent of the value of salaries.

The only other matter that I wanted to mention was the overall criticism of the principle. We in opposition believe that the Government is entirely on the wrong track. We do not believe that taxing lump sums in the way that is thought of at present is in any way different from the taxation of goodwill which is built up by people as a result of their labour, for example, by running a newsagency or a milk round or something like that. Under the present law goodwill is not taxable since it is a capital gain. This Bill taxes labour by ensuring that lump sums which are built up through the labour of people over their working lives are taxed at a rate of 30 per cent. We believe that is an entirely inconsistent approach from this Government. We do not believe that the legislation is headed in the right direction. It is obviously not part of any overall plan for a retirement income system, which the Government claims it is in the process of developing, but fails at every opportunity to explain to us in what way it is doing that.

I enter just one plea. If the Government is to reconsider any part of this legislation it might well consider exempting those people who are already members of superannuation funds and entered into those funds in good faith. They will now find themselves taxed at a rate of 30 per cent of their lump sum without ever having been advised at the time they became members of funds that this would be the case. If the Government removed retrospectivity in that respect we on this side would be only too happy to accommodate that kind of approach. Perhaps the Government will not pursue that option since it is so ideologically committed to this legislation.

Finally, we on this side fail to understand why the Government seeks to introduce this legislation. First, we have been told and assured by the Minister for Finance, Mr Dawkins, that only one per cent of superannuitants who receive lump sums receive more than $100,000. Three-quarters of people getting such funds get less than $5,000. That means that those people receiving only such a small sum as $5,000 will be taxed at a rate of 30 per cent on such a piddling amount of money. The option which the Government in the legislation has given those people to avoid that tax is to buy an annuity. If we consider people going out to buy an annuity with $5,000, having retired at age 65, we can judge just how silly this legislation is in that the amount of the annuity would be so small as to keep only flies alive. That is a direct result of such an ill thought out piece of legislation which has been put down by the Government in this place. It certainly does not have the Opposition's support.