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Thursday, 6 May 1993
Page: 215

Senator PATTERSON (10.38 a.m.) —I move:

  That this Bill be now read a second time.

I table the explanatory memorandum to the Bill and seek leave to have the second reading speech incorporated in Hansard.

  Leave granted.

  The speech read as follows

  During my second reading speech on the Social Security Legislation Amendment Bill (No. 3) 1992 on 16 December 1992, I gave notice that the Coalition would review in government, Division 18 of that Bill relating to unrealised capital gains on listed securities.

During the Senate Select Committee on Superannuation's inquiry into Divisions 16-19 of this Bill, a number of important organisations including the Council of the Ageing and the Australian Stock Exchange expressed very significant concerns about this initiative which is due to come into effect on 20 September 1993.

From the start, the Coalition has doubted the validity of the principle underlying the government's proposal. However we were effectively prevented from opposing these amendments due to the political difficulties entailed in disaggregating this proposal from other beneficial measures in such a social security omnibus bill. However we have adhered to our commitment to review this legislation after the election. After undertaking this review, we have decided to seek to repeal these amendments to the Social Security Act. This Private Senator's Bill is the first step in that process. A companion Bill which will make similar amendments in relation to the veterans' affairs portfolio will be introduced at a later date.

At present, the value of share dividends is regarded as income for pension purposes. However capital growth is ignored. The effect of the government's proposal was to extend the current rules applying to managed investment to capital gains and losses during the previous 12 months on shares and other securities listed on the stock exchange.

According to the Explanatory Memorandum for the Bill, this measure would realise estimated program savings of $44.5 million in 1993-94 emanating from reductions in pension payments. On the basis of material provided to the Shadow Minister by the department of social security last year, it is estimated that annual savings would be in excess of $60 million although annual estimated savings as high as $85 million have been quoted.

The government's main argument when introducing this measure was that it would mean that listed shares and securities would be treated in the same way under the social security income test as managed investments. Central to the government's argument was the fact that in 1988 the parliament had moved to prevent pensioners from circumventing the income test by treating unrealised gains from managed investments as income.

From its consultations with affected groups and individuals, it has become obvious to the Coalition that this measure will neither result in the estimated savings claimed by the government nor introduce any greater degree of equity or fairness into the income and assets tests for pensioners.

According to Budget Paper No. 3 1992-93, the ongoing assessment of capital gains and losses of listed shares and other securities would result in net savings of $44.1 million in 1993-94, $61.8 million in 1994-95 and $64.1 million in 1995-96. The Explanatory Memorandum for the Bill estimated that net savings from the initiative in 1993-94 would be $44.5 million.

Information provided by departmental officials to the Shadow Minister late last year indicated that 60,000 social security pensioners would be affected by the measure with an average pension reduction of about $1,100 a year. These assumptions indicate that annual savings would be in the vicinity of $66 million a year.

However none of the financial estimates for this proposal include an assessment of the inevitable impact it would have on investment behaviour. The Senate Select Committee on Superannuation quoted the chief economist of the Australian Stock Exchange as stating that a "significant number of pensioners" would sell, adding that he doubted the government's ability to reach its projected savings of more than $85 million a year, "because no-one will have the shares''.

Given the angst in the pensioner community about this proposal and the very high effective rates of tax that it would impose on affected individuals, the Coalition contends that it would result in a very significant movement of pensioner assets away from listed securities to less productive and less liquid investments such as real estate and collectibles.

The Coalition believes that this proposal, if allowed to go ahead, would have a similar end result as the government's luxury car tax. That is, the disincentives against pensioners' investing in listed securities would become so great that the benefit of any savings derived by the government would be more than offset by the detrimental impact on the Australian securities industry. What is more, this measure would encourage both current and future pensioners to dispose of productive assets to maximise their pension entitlement. This is a highly undesirable scenario at a time when Australia's savings ratio is at a record low level.

The government's argument that this measure would result in the more equitable treatment of pensioner investments is fundamentally flawed. Not only would the government's proposal mean that listed securities would be treated more harshly than investments in other areas such as real estate, art works, antiques, non-listed securities and offshore securities. It would also result in the bizarre situation whereby identical investments in identical listed securities could result in different pension entitlements under the social security income test.

It is important to point out a number of the unforeseen consequences of this hastily conceived government proposal.

First, this proposal perpetuates the questionable practice in the social security area whereby unrealised capital gains are treated as income under the income test rather than being assessed under the assets test. This approach is in stark contrast to the treatment of capital gains under taxation law. The proposal runs counter to the Senate Select Committee for Superannuation's recommendation "that the Treasurer and the Minister for Social Security form a working party to examine income tax and social security legislation with a view to maximising the consistency of definitions and treatment of matters of common concern to the two systems and that the report be tabled in Parliament by the end of 1993." (December 1992: page 50)

It is important to recognise that unrealised gains on shares are often largely illusory and based on short term, extraneous matters rather than underlying value. More than any other group, pensioners and retirees place great importance on achieving a maximum degree of certainty in relation to financial decisions. The Coalition contends that this proposal would seriously undermine the certainty in investment decisions relating to listed securities for pensioners. We contend that this erosion in investor certainty, resulting from pensions being increased or reduced on a quarterly basis due to temporary fluctuations in the share market, would be the primary reason why significant numbers of pensioners would divert their financial assets away from listed securities into other often less productive avenues of investment.

If a government was putting forward such a proposal, one would think that, at very least, it would ensure that capital gains and capital losses would be treated on an equitable basis. Pension entitlement should not change if capital losses offset capital gains over the assessment period. However the formula proposed by the government maximises capital gains (and hence pension reductions) while minimising capital losses (and pension increases). This means that a pensioner may have his or her pension entitlement reduced even though there has been no net change in the capital value of the share portfolio. It also means that identical managed and unmanaged investments are treated differently under the social security income test. Also of concern to the Coalition is the fact that pensioners with identical portfolios would be subject to differing outcomes simply as a result of the arbitrary assessment dates.

Not only would this measure result in the inequitable treatment of listed securities compared with other investments such as real estate and collectibles. It would also mean that pensioners who invest in publicly listed companies would be subject to this additional income test while those who invest in non-listed companies would not. For example, the Chairman of the Australian Stock Exchange has argued that a pensioner who invests in TNT (listed company) would be subject to the unrealised capital gains income test while a pensioner who invests in Linfox (an unlisted company) would not.

There is also a strong argument that this proposal could have the effect of moving many small investors offshore. The Australian Stock Exchange has pointed out that unrealised capital gains on investments on overseas stock exchanges would not be subject to the social security income test. The Australian Stock Exchange has made considerable headway recently in attracting small investors into the local share market. This proposal has the potential to discourage small scale investment in Australian companies at a time when such investment is desperately needed.

The Coalition contends that the government's proposal to treat unrealised capital gains and losses on listed securities as income under the social security income test is ill-conceived, fundamentally flawed and poorly researched. It is questionable whether the estimated savings from this initiative would ever be realised and it will not result in any greater equity or fairness in the social security income and assets tests which the Coalition contends are in urgent need of a thorough review. After carefully considering this proposal in line with our pre-election commitment, we intend to move expeditiously to ensure that it is repealed prior to the government's proposed 20th September 1993 start-up date.

  Debate (on motion by Senator Foreman) adjourned.