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Tuesday, 12 June 1984
Page: 2867

Senator GRIMES (Minister for Social Security)(9.43) —I thank honourable senators for their contribution to the debate on the Income Tax Assessment Amendment Bill (No. 3) 1984 and the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1984. I have listened to it only tonight. It seems to me that the only subject which really interests people is the proposed changes to lump sum superannuation taxation. I wish that many people here had done what Senator Jack Evans has done, that is, actually looked at the history of this legislation and seen what it is all about. Decades ago, legislation was introduced giving special treatment to lump sum superannuation payments and tax concessions on superannuation contributions. As Senator Evans said, the aim of that exercise was to encourage people in the community to prepare for their retirement by contributing to superannuation funds so that on retirement-and this was from both sides of the Parliament-they would, in fact, have a retirement income and would be less of a burden on the welfare budget. They would not require pensions and benefits.

As Senator Jack Evans said, that situation has become distorted over the years, not necessarily by design of government but by the natural desire of certain groups in the community. By using the capacities of accountants, insurance companies, superannuation funds and others in such a way that the system has become distorted, all too often those privileges and advantages which were granted have been used for other purposes, and the people involved are still amongst the 78-odd per cent of the people in the community who on retirement draw the age pension. So the whole purpose for which the legislation was introduced and for which those benefits were introduced has been subverted.

This evening we have had some rather strange arguments from people concentrating on the section of the legislation relating to lump sum superannuation. For instance, Senator Hill told us that this was all about the ideological approach of the Labor Government with which we were obsessed. He said we wished to discriminate against the middle and upper income groups, the professional groups and those in private insurance and superannuation schemes. He said such people would be affected by this legislation, and we should, and he was echoed by Senator Watson, be encouraging portability and greater participation in superannuation schemes because, as Senator Watson says, despite all the concessions which have been given for decades, only 45 per cent of the population has access to superannuation. Senator Hill said that the Government should be introducing measures to overcome discrimination against women in superannuation schemes. Senator Watson echoed much the same things although I must say that I do not think he mentioned discrimination against women.

The simple fact of the matter is that for 29 of the last 32 years, until 1983, we have had conservative governments in this country. We have had Liberal- National Party governments in this country. We have had Liberal-National Party governments which did absolutely nothing in this regard. Yet representatives of those governments have the gall to get up here tonight and say: 'Why do you not do something about portability? Why do you not do something about the discrimination against women in superannuation legislation? Why do you not do all those things we did not do for all those 30 years?'. They did nothing about it.

Senator Boswell —We did not take 30 per cent off the people.

Senator GRIMES —I will come to Senator Boswell in a minute. His contribution was amazing. Previous governments did nothing about this issue for all those years and the only criticism honourable senators have tonight is the claim that we are apparently discriminating against a group of people. They say we should be taking a certain tack and that we should have done all the things they did not do for all that time. Had we done that, honourable senators opposite apparently would have approved it.

Senator Watson, in his first breath, said that the Government wished to make the people in this community dependent on the age pensions, and that was the whole aim of our exercise. I suggest that what we want people to do is to enter into superannuation schemes which provide a retirement income for them which achieves the purpose for which the legislation was first introduced, namely, to enable them to have the benefits of that retirement income and not at the same time to get social security benefits when they do not need them. Senator Watson then described all the things that he said people do with their lump sums-they buy holiday shacks and go on trips overseas. When they have bought their holiday shacks, been on trips overseas, invested in business or done all the other things he mentioned, they then come and draw the pension and the fringe benefits . This is one of the distortions of the present system.

Senator Boswell got up and condemned the Government because no one in the Government has apparently had anything to do with small business and does not understand it.

Senator Boswell —That is right.

Senator GRIMES —I think even Senator Boswell would agree that my colleague Senator Walsh who sits next to me was one of those farmers about whom he was talking. Senator Walsh, for all the time before he was elected to this Parliament was a wheat farmer, and I understood that he would come into the definition of 'small business' that Senator Boswell gave tonight.

Senator Boswell —I will concede Senator Walsh.

Senator GRIMES —Would the honourable senator concede those of us who have been in private practice and have employed 10 people?

Senator Boswell —No, you are professionals.

Senator GRIMES —I thank Senator Boswell for calling me an academic, but I would have thought that a person running a private general practice and employing 10 people, as Senator Boswell claimed to have employed, could have been classed as a small businessman also, as could some of the lawyers here who have run their own business, as could Mr Cohen, who happens to own a couple of clothing stores, and as Mr John Brown-

Senator Boswell —I said 'in the Senate'.

Senator GRIMES —So the honourable senator does not take any notice of our representative in the other place. Mr John Brown ran a meat processing business.

Senator Gareth Evans —It is a big business actually.

Senator GRIMES —It is a big business, actually. Let us face it, plenty of people on this side have run what would come under Senator Boswell's definition of ' small business'. We are well aware of Senator Boswell's claim that small businessmen are concerned about inflation. Of course they are. Of course they are concerned about the provision of a retirement income. They are certainly concerned about the effect of inflation on their income, as they would be concerned about the fact that Senator Boswell during his speech tonight managed to inflate the 30 per cent lump sum taxation to 33-1/3 per cent which was the greatest example of inflation that we have seen here tonight.

The simple fact of the matter is that if we are to overcome the distortions which the previous Government made no attempt to overcome, if we are to move to a situation where the majority of the people in this community, rather than 45 per cent, have the opportunity to provide for their retirement income, we must take note of the Asprey Taxation Review Committee, the Hancock National Superannuation Committee of Inquiry and probably every committee that has looked at this matter in the last 20 or 30 years. Those committees have pointed out that as long as we have in the system distortions which are created by the situation where by people can receive tax deductions for their superannuation contributions, whereby the superannuation funds are not subject to tax and whereby only 5 per cent of the final lump sum is subject to tax, superannuation will not be available to all people in the community.

To get to the substance of the legislation and some of the matters that were raised by honourable senators-I will try to cover most of them, if not all of them-the Opposition, through Senator Dame Margaret Guilfoyle and I think Senator Messner, expressed concern that the amendments to section 26 (a) proposed by clause 10 vest in the Commissioner of Taxation too wide a discretion as to the profit to be included in assessable income in situations where a taxpayer shall share an interest in a partnership or trust which effectively transfers ownership of underlying property acquired for the purpose of profit making by sale. That concern, as I understand it, is that the Commissioner could range free in determining the amount of assessable profit and, for example, might fail to make allowance for elements going to the value of the taxpayer's shares or interest from accumulated profits or reserves of the entity being sold. I think that I can immediately assure the Opposition that this is in fact not the case.

As indicated in the second reading speech, the sole purpose of the amendments proposed by clause 10 is to rectify defects revealed by the courts over the years in the operation of section 26(a) which, to the extent relevant, includes in assessable income profits derived by a taxpayer from the sale of property acquired by the taxpayer for the purpose of profit making by sale. These amendments will have application only in circumstances where the property answering that description has been acquired but is effectively disposed of in a manner which avoids the clearly intended operation of section 26(a). Against that background, the measure to which the Opposition, and Senator Dame Margaret Guilfoyle in particular, has referred will ensure that the application of section 26(a) is not avoided in situations where a taxpayer uses, for example, a private company to purchase speculative property, underlying property, but instead of allowing the underlying property to be sold by the company after it has appreciated in value sells his or her controlling shares so as effectively to realise the profit.

This measure is very similar to a provision enacted by the previous Government to ensure that section 26AAA, which operates to tax profits on short term property transactions, could not be avoided in an identical way. In those cases where the provision in question, that is new section 25A (2), does apply to deem the shares or interests sold by the taxpayer to have been acquired for resale at a profit, proposed new section 25A (9) will bring to account as assessable income any profit arising from that sale. For this purpose sub-section 25 A specified that the profit is to be so much, if any, of the amount of the proceeds of the sale as the Commissioner determines to be appropriate. In exercising this power, however, the Commissioner must have regard to the criteria specified in sub-section 25A (10). These make it abundantly clear that the amount of profit determined by the Commissioner, in accordance with sub- section 25A (9) cannot exceed that part of the sale proceeds which is attributable to the increase in value of the underlying property during the period in which the taxpayer held the relevant shares or other interest.

The Government is satisfied that the measures I have outlined today, and which are contained in this Bill, are adequate to ensure that the Commissioner will not be at large in exercising his discretion to determine the amount of profit to be included in a taxpayer's assessable income in the circumstances to which Senator Dame Margaret Guilfoyle has referred. I can therefore assure the Opposition that there is no basis for the concern expressed by honourable senators on behalf of the Opposition in this matter. I add that any taxpayer who is dissatisfied with any determination by the Commissioner may have that determination reviewed by a taxation board of review which may substitute its determination for that of the Commissioner or the courts, which may review the exercise of discretion in question.

Senator Dame Margaret Guilfoyle also expressed concern along similar lines about the discretions contained in the amendments proposed by clauses 18 to 20 of the Bill. As indicated also in the second reading speech, these amendments follow a decision of a taxation board of review which allowed a deduction for the whole of the cost of repairs to a car, although the car was used only partly for business purposes. That decision gives a result that is not in keeping with the previously understood and long standing principles that expenditure is deductible only to the extent that it is incurred for purposes of producing assessable income. In his administration of the provisions of the income tax law being amended by clauses 18 to 20 it has always been the practice of the Commissioner to give effect to this principle by limiting the quantum of deductions to reflect the extent of use in assessable income producing activities. The particular amendments are modelled closely on other provisions of the law-for example, section 61 relating to depreciation, which specifically authorises the Commissioner to reduce the amount of a deduction that might otherwise be allowable in circumstances where the property or item to which the deduction relates is not used wholly for the purpose of producing assessable income. The application of those provisions has not given rise to any difficulties over the years. The amendments proposed by clauses 18 to 20 will not alter in any way what has been a long standing and accepted practice of the Commissioner but will merely provide him with statutory authority to continue that practice. Of course the avenues for review of the exercise of the Commissioner's discretion outlined earlier are available also in these areas.

Senator Messner asked for an undertaking that the Government will take up with the National Companies and Securities Commission the possibility of exempting life insurance companies in their capacity as trustees of approved deposit funds from the requirements of the companies code that provide for the issuing of prospectuses in relation to invitations to the public to deposit money with the corporation. I will refer that matter to the Treasurer (Mr Keating), who I am sure will take it up with the Attorney-General (Senator Gareth Evans) to see whether the prospectus required of company law would have an inappropriate effect in this case. As presently advised I am not at all sure that the difficulties foreseen by Senator Messner are of practical concern. Senator Messner also asked for an assurance that where a person has changed jobs, the total period of service will be taken into account in the application of the before and after formula. The assurance can be found in paragraph (a) of the definition of 'eligible service period' in section 27A of the new sub-division AA of the Income Tax Assessment Act, which is to provide that 'the period, or the aggregate of the periods, of the employment to which the relevant eligible termination payment relates' will be the period of employment that is adopted under the new taxing rules.

Senator Messner —It still does not answer the point.

Senator GRIMES —The honourable senator can have another go later. I will come to the amendments moved by the Opposition and by Senator Jack Evans for the Australian Democrats. Paragraph (1) (a) of Senator Evans's amendment calls on the Government in its implementation of this legislation to:

ensure that the threshold figure of $50,000 in the definition of 'residual amounts' in clause 52 is indexed to the Consumer Price Index and adjusted annually;

In reply to that part of the amendment, let me say that the first $50,000 of a lump sum received after a taxpayer reaches age 55 years is to be taxed at the concessional rate of 15 per cent. The Treasurer stated on 7 August 1983 that the $50,000 figure would be reviewed annually. Movements in the consumer price index would obviously be a major factor that the Government would take into account in such reviews. Other factors, however, bear on the appropriateness of the threshold figure. These include changes in the size of distribution of a lump sum after taking account of inflation, information on the forms in which superannuation benefits have been taken under the new arrangements, changes in the personal taxation rate scale applying to remuneration in the form of an income stream and, of course, budgetary considerations. Hence, the Government sees an annual review as the most appropriate mechanism for making adjustments to this figure.

I have noted Senator Evans's comments concerning the question of imposing uniform safeguards over bodies that are eligible to set up approved deposit funds. He talks about this in paragraph (1) (b) of his amendment which calls on the Government to:

provide that bodies which issue Approved Deposit Funds have uniform financial safeguards to protect Approved Deposit Fund investors;

In formulating the relevant provisions, the Government took the view that it was important to ensure that there would be wide competition amongst the institutions that are eligible to establish approved deposit funds. I point out to Senator Watson that there are considerably more institutions which have that provision than the trade union movement groups which only he chose to mention. The arrangement means that those seeking approved deposit fund facilities will have a choice as to whether to place their lump sum with institutions which are subject to stringent regulations or those which are subject to less stringent control. This is, of course, the situation that applies to savings generally. In essence, it will be a matter for each individual to consider the kind of institution with which he or she wishes to place a lump sum and the terms and conditions on which approved deposit fund facilities are being offered. Given the range of regulated bodies that will be operating in the market, the Government does not believe that there is a need to widen the scope of regulation in the financial area to take account of the role to be performed by approved deposit funds. I add that while the legislation will impose certain minimum rules that will provide some safeguards to depositors, these rules will include the keeping of appropriate accounting records and the audit of compliance with those rules by a registered auditor. These rules apply without discrimination to all institutions which set up an approved deposit fund.

Paragraph (1) (c) of Senator Evans's amendment calls on us to:

Amend the Social Security Act 1947 so that it is compatible with changes in this legislation to ensure that annuity holders are not disadvantaged through having capital repayments treated as income for pensions; and

The Government announced on 19 May 1983 a review of the current arrangements under which the return of capital component of the payment stream received by the holder of the annuity is taken into account in the income test used to determine eligibility for age pensions. The Government understands and recognises the concerns behind this amendment. As the Senate is aware, the Prime Minister (Mr Hawke) announced on 1 June 1984 a new assets test for pensions eligibility. The treatment of capital component of annuities is currently under consideration in the light of that test. On 4 June I undertook in answer to a question from Senator Evans to advise him of the Government's decision as soon at it had been made.

Paragraph (2) of Senator Evans's amendment states that the Senate:

calls on the Government not to proclaim this legislation until a system of indexed bonds has been introduced.

The Treasurer has indicated that the Government sees indexed securities as having a potentially important role in the context of its policy on retirement incomes, particularly encouraging the development and use of fixed indexes annuities as a means of providing incomes for retirement. The Treasurer announced on 20 December 1983 that the Government had decided to issue indexed securities along the lines recommended by the Martin group. Discussions have now been held with market participants regarding the detailed forms of the security and consideration of these issues is continuing. Market participants have suggested that there would be merit in the initial issue of indexed bonds awaiting the passing of the March and June quarters in which the CPI is Medicare affected. There is really little logic in why the date of effect of the new measures should await the introduction of indexed bonds.

There is already a range of mediums into which lump sums can be invested or rolled over. The Government expects that to flower gradually over time as the new arrangements take effect as, in fact, I might interpose, the market for annuities has increased over the years in other countries with similar systems. Because of the before-after transitional arrangements, the volume of lump sums subject to the new taxation arrangements will be modest in the initial years. The Government has made it abundantly clear that the new measures are to start from the beginning of the current financial year. Community expectations and all the administrative arrangements are geared to that.

Senator Dame Margaret Guilfoyle, on behalf of the Opposition, also moved an amendment. Paragraph (a) deplores the Bill's attack on the retirement aspirations of hundreds of thousands of ordinary Australians. The major reason for the new taxation arrangements for lump sums is taxation inequity. Prior to these changes, a glaring inequity existed between people who received remuneration in the form of an income stream-that is, a pension or regular superannuation payments-and those who received it in the form of a lump sum payment. Income streams were, and are, fully subject to tax while lump sums were largely exempt from tax.

Senator Messner —That is rubbish.

Senator GRIMES —This differential tax treatment has been recognised as unfair and anomalous by a succession of committees of inquiry. There has been the Asprey Taxation Review Committee, the Hancock National Superannuation Committee of Inquiry and the Campbell Committee of Inquiry into the Australian Financial System. I would rather take their reviews on the matter than Senator Messner's. A line of thought common to all of them was that while taxpayers should retain the option of taking a lump sum on retirement, the taxation system should not provide an incentive for taking retirement benefits in that form rather than as a pension. In other words, the tax system should neither encourage nor discourage people from choosing a lump sum ahead of a pension. The Government's new proposals recognise this.

The tax treatment of pensions is, of course, the same as that of any other forms of income, such as wages. It is the treatment of lump sums that has been out of step. Accordingly, the Government has decided to change the taxation arrangements relating to lump sum payments, both superannuation and other forms of lump sum payments. These changes to the tax law do not mean that the major tax concessions for superannuation are removed. In fact, superannuation remains a very attractive form of saving. What the changes do mean is that superannuation lump sums are treated in a way broadly similar to superannuation pensions and that tax avoidance, through the provision of remuneration in lump sum form, is restricted. The measures involve no element of retrospectivity. There is no diminution of any benefit relating to employment before 1 July 1983. Lump sums paid after 30 June 1983 will continue to attract the previous tax rules to the extent that they relate to service before the changeover date.

Paragraph (c) of Senator Dame Margaret Guilfoyle's proposed amendment refers to the trade unions. It condemns the privileged status conferred upon trade unions in relation to deposit funds. Given the very wide range of institutions that will be eligible to offer approved deposit fund facilities and the diversity of standards applicable to those institutions, the Government does not accept that trade unions will be in a privileged position. It is clear that trade unions, along with other eligible institutions, will be facing considerable competition in this field. It is, of course, relevant that trade unions are already eligible to engage in activities that are not unlike the business of establishing approved deposit funds. In this context I mention that, under the existing provisions of the Life Insurance Act 1945, trade unions may provide life insurance benefits to their members. In addition, trade unions are involved in the operation of superannuation funds already.

Paragraph (d) of the proposed amendment regrets the Government's failure to produce a coherent approach to retirement security policy. One may well question the validity of the Opposition making that remark. This Bill contains measures to tax more fairly superannuation benefits received in different forms, to make annuities more attractive methods of providing for retirement incomes, to introduce approved deposit funds, and new institutions for providing portability for superannuation benefits. These steps represent major improvements to retirement incomes policy. The legislation is part of a coherent scheme to bring security to old people of this country. The measures are being supplemented by other government initiatives.

The Government will legislate to give effect to the new assets test. It has introduced an incomes test for pensioners aged over 70 to ensure that the provision of retirement income from the public purse is directed to those in need. This Bill will enhance the market for annuities by removing double taxation. In addition, the Government will shortly make the supply of annuities more attractive to life offices by changing the minimum valuation basis prescribed in the fourth schedule of the Life Insurance Act. This change to regulations will make possible an annuity that provides larger income payments to be purchased with a given lump sum. The Government has also announced its intention to issue indexed bonds which will facilitate the supply by financial institutions of indexed annuities and pensions.

The Government places a high priority on developing a national retirement incomes package. There are three major elements to the package: Improvements in occupational superannuation; increases in the rate of age pension; and consideration of a national superannuation scheme. There are widely acknowledged deficiencies in existing arrangements for occupational superannuation. These include the extent of coverage, and thus the access to taxation benefits for retirement saving; the portability of superannuation benefits; and the conditions relating to the vesting of employer contributions. The Government has a good deal of work in hand relating to these issues. The area is complex. We do not pretend that there are easy answers but we are at least taking steps towards getting those answers. The Government is proceeding with an assessment of the report of the Commonwealth Task Force on Occupational Superannuation in the light of views received from the States, the superannuation and insurance industries and other interested parties.

With regard to pensions, the Government has a commitment to raising the standard pension to 25 per cent of average male weekly earnings. We hope to be able to move further towards this target in the coming Budget. We also expect in the near future to receive a paper prepared by an interdepartmental committee canvassing options in relation to improvements in the provision of retirement incomes, including possible national superannuation alternatives. The Government will also give careful consideration to the views of the Senate Standing Committee on Social Welfare when it reports on its inquiry into the incomes system.

This legislation, as I have pointed out, is part of an attempt to make the retirement income provisions in this country more comprehensive and more equitable, to remove only some of the anomalies which exist and which have been acknowledged to exist in the superannuation provisions in this country, by the Asprey Taxation Review Committee, the Hancock National Superannuation Committee of Inquiry and the Campbell Committee of Inquiry into the Australian Financial System. We believe that this is an important step as part of a wide reform of the superannuation system. We believe that the end result will be that all income earners in Australia will be able to prepare for their retirement in the certainty that when they retire they will be able to get a retirement income to which they have a right, and a retirement income which will not be put at risk by distortions in the system which now exist. I thank honourable senators for their contributions to the debate and commend the legislation to the Senate.

Question put:

That the words proposed to be added (Senator Jack Evans's amendment to Senator Dame Margaret Guilfoyle's proposed amendment) be added.