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Thursday, 25 May 1989
Page: 2678


Senator PARER(12.47) —I rise to speak about the method of taxing trust funds as handled by funeral directors for people who pay money to funeral directors so that when they die their funeral costs will be covered. There is a longstanding practice among many elderly people in Queensland and throughout Australia of paying money to a funeral director while they are still alive to cover their funeral. I think all honourable senators will have met old people who feel very strongly about this. It gives them peace of mind to know that their funeral is paid for and that they will not be a financial burden on their families when it comes to paying their funeral costs. Regrettably, it appears that this is about to change.

Thousands of elderly people in my State and throughout Australia who have put their savings into a prepaid funeral plan operated by funeral businesses are about to be notified that their contributions will not be enough to pay for their funeral after all. Because of a recent ruling by the Australian Taxation Office, income earned by the funds on their contribution will be taxed at the highest taxation rate of 49c in the dollar. On top of that, the fund money will be further whittled away because the funds will be required to pay, of all things, the Medicare levy and provisional tax with the 12 per cent inflationary factor. The burden, of course, ultimately will be passed on to the contributor.

Thousands of Queenslanders are going to be adversely affected by this ruling. The cruel irony is that many of them are at the stage of their lives where they no longer pay tax. From the information that I have, the vast majority of people who are concerned about their own funeral costs come from the lower socio-economic groups. They are going to be financially disadvantaged at a time when they can least afford it. The initial contribution which has been reinvested by the funeral benefit fund in a trust to keep pace with the cost of living will no longer cover their expenses. Unless this situation is rectified straight away, the elderly will have to increase their funeral contribution, if they still wish to be independent, or else the extra money will have to come out of the deceased's estate or be paid by the deceased's family.

Honourable senators will be aware that in most cases when people make those contributions they go away with a feeling in their hearts that they have done something which will mean that they will not be a burden on their families. This situation will cause widespread concern to those who prepay their own funerals. It will affect those in the community who are least able to look after themselves. A leading funeral director in Brisbane, Alex Gow Pty Ltd, advised me that 88 per cent of those contributors are 65 years or over. Very often many of those people suffer from ailments associated with growing old.

I will give the chamber an example of how the taxes will affect those funds. If, for example, 10 members each contributed $1,000, totalling $10,000, and the trust account was invested at, say, 12 per cent, the income from that would be $1,200. If the management fee, which is a reasonable figure of 2.5 per cent, accounts for $30, the income tax is assessed at 49 per cent, which represents $573.30, and there is a Medicare levy of 1.5 per cent, the net result is a return of about 5.8 per cent. On top of that, provisional tax, plus the 12 per cent, has to be paid. It is patently obvious that, with inflation the way it is, there is no way in the world that, after a period, that prepayment of the estimated cost of the funeral benefit will pay for the funeral when it occurs.

The way the system worked in the past was that the contribution was paid into a funeral benefit prearrangement plan and was reinvested in order that the amount kept up with the cost of living, which it usually did. Then, in 1982, the Queensland Government legislated with the State Funeral Benefits Business Act to require funeral benefits businesses to place contributions paid to them in a trust fund. This was quite a responsible move by the Queensland Government, because it put the funds into the trust fund, which made them safer. This is where the first problem arose, however, because it made them liable for tax.

The Act came into effect in 1984 and operators of funeral benefits schemes registered under the Friendly Societies Act automatically became registered under part (iii) of the new Act. Any previously unregistered and new schemes were required to register under part (iv) of the State Funeral Benefits Business Act. Prior to that legislation, businesses operated under the Friendly Societies Act. Under the new Act, only corporations can be registered to carry on a funeral benefit business and the maximum amount of benefit which may be applied to a funeral expense is $3,000. So there is no question of people using it as a tax haven.

Ever since these changes were made, funeral benefit businesses have been applying for a tax exemption for income generated by a funeral benefit fund, while it remains in the fund or is used for funeral expenses. It has taken until February this year for the Australian Taxation Office to make a ruling, and yet the original letters from the funeral businesses to the Tax Office were made in November 1986. It has taken nearly two years for that response to come in. Most funeral benefit businesses in Queensland still have not been officially informed of their tax liability. All they have received is a tax assessment.

Members of the industry have not been officially informed that they will be liable for the Medicare levy and provisional tax. The Tax Office has merely started sending in assessments, with the charges included in the total liability. The industry even took the matter to the Ombudsman in an effort to have the tax position rectified, but with no success.

The industry is calling for a change to section 23 of the Income Tax Assessment Act specifically to include a funeral benefits business as registered under part (iii) and part (iv) of the Queensland Act 1982, and other similar Acts in other States, to obtain exemption on such funds. They believe, quite rightly, that prepaid funerals should enjoy a tax exempt status. After all, under the Social Security Act 1947, with the application of the assets test, a cemetery plot acquired for the person or funeral expenses paid in advance by the person, or the person's spouse, is disregarded.

The consumer has, in real terms, bought a commodity, a prearranged funeral, and, therefore, should not pay tax on the investment earnings. Funeral directors who hold the funds in trust cannot touch the money until the service is carried out. At this point they will be paid by the trustees and the money received will become part of general taxable income and will be taxed accordingly on the profits incurred, if any. It is believed that, should a contributor wish to withdraw from the fund, the income component of his or her account should be liable to taxation. No-one would dispute that. That tax could be deducted by the funeral director and forwarded to the Tax Office at the time of refund. It is suggested that in cases where there is an excess of a contributor's account after funeral expenses have been deducted, a pro rata income component of that excess, based on the original ratio of income versus principal before funeral expenses were deducted, should be taxed. The remainder of the excess would then be forwarded to the estate of the deceased.

Funeral directors all over the country, both small and large, have for many years been approached by people to hold money for them to cover their funeral expenses. Often funeral directors say to people who come to them, `Why do you not just put the money in a building society?. In the majority of cases it would not be taxed because of their stage of life. Or they suggest that people go to an insurance company, which is an avenue used in some States. The answer they get invariably is, `No, I want to be able to say that I have paid here and now for my funeral, so that I can go away and say that I am not going to be a burden on those who may have to cover that expense'. They should be allowed to continue to do so without fear of what I believe is a grossly unjust, unfair tax levied upon them. It is not as if the Government has not had some warning of this. As I said earlier, in November 1986 approaches were made to the Australian Taxation Office. People who run these trust funds in Queensland and in other States have approached members of this Parliament. The Hon. Ben Humphreys, Minister for Veterans' Affairs, wrote to the Taxation Office and received a reply on 30 September 1987. It is worth quoting the reply from the Deputy Commissioner of Taxation:

The matters which have been raised involve complex questions of taxation and commercial law and therefore have taken time to consider. Similar inquiries have also been received from other areas within the funeral benefits industry . . .

And so it goes on-typical bureaucratic gobbledegook. It is a simple matter: are these funds to be taxed or are they not? As I mentioned earlier, we have an incredible situation where people pay for their funeral and the taxation system is such that when that time comes, five, 10 or 15 years hence, the money that they paid is not sufficient. I think this an incredible injustice. People have written on behalf of contributors to the Treasurer, certainly in more recent times. The attitude of the Government is to ignore what is a patently fair and just approach. I understand that throughout Australia there are in excess of 100,000 people who want to pay their funeral expenses in advance. Their ability to do so is now at risk. It is up to the Government to make the amendment as suggested so that we can bring some justice to bear on this issue.