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Thursday, 6 May 1993
Page: 219

Senator BELL (10.40 a.m.) —I move:

  That this Bill be now read a second time.

I note that Senator Patterson has introduced a very similar Bill and the debate on it has been adjourned. I suggest that we proceed with this motion now, for the sake of efficiency, because there is no need to rehearse the arguments again in this chamber. In fact, the coalition has made its position public. According to convention, I would incorporate in Hansard my second reading speech, and Senator Lees and I would not speak to the Bill. The matter of convention arises because, normally in this situation, a private member's Bill cannot be guaranteed the support of the chamber. But we know, as Senator Patterson has just demonstrated, that there would be support for our Bill. I suggest that, to save a lot of time and to have cleared up a matter which the coalition is on the public record as stating that it supports, we could do it right at this moment.

  It would be ridiculous if, later in the day, Senator Patterson were to introduce a similar Bill to achieve exactly the same purpose. If the coalition really believes in what we are attempting to achieve here, then its members will not play political games but will actually debate this matter now. In fact, if anybody suggests an adjournment of this debate, as convention would require, what they would be doing would be denying the passage of something which is held to be quite dear by, and very important to, a number of people who have contacted me on this matter. I invite coalition senators to make any slight amendments that they think are possible or necessary, I invite them to do anything they like to this Bill, but I invite them to pass it now.

  Senator Lees and I are not being precious about the content of our Bill at all. We would be quite happy if the coalition were to move to delete the words in our Bill and replace them with its words but we should debate it now—

Senator Reid —Why don't you put up our Bill?

Senator BELL —I am quite happy to do that. As a matter of fact, if Senator Reid were to propose that and to bring on the debate now, I think we would accommodate that. What we are interested in is achieving a change to the ridiculous situation where what is stated coalition policy was voted against by the coalition in December and is now an unfair law which affects 86,000 shareholding pensioners in Australia. We want this matter to be resolved on behalf of those pensioners, without anyone playing silly political games. We will not play those games. If the coalition wants to come to a resolution of this problem now, to bring the matter on, debate it and achieve that result, we will all be happy.

  To save rehearsing the argument again, I will seek leave to incorporate in Hansard what would have been our second reading speech. It is a demonstration of our genuineness that Senator Lees and I are offering to have the second reading speech incorporated, to save time and to allow the coalition to come to the party—without wanting to make an original pun—to achieve a result, to end the nonsense and to resolve the matter quickly.

  I seek leave to have the second reading speech incorporated in Hansard.

  Leave granted.

  The speech read as follows

  This Bill is a very straightforward piece of legislation: by repealing Division 18 of the Social Security Legislation Amendment (No.3) Act 1992, it has the effect of reversing the Government's decision to treat unrealised capital gains on listed shares as income for the purposes of obtaining a pension.

  The Australian Democrats have consistently opposed this move since the Government announced its intentions in last year's Federal Budget.

  I remind Honourable Senators that the Australian Democrats voted against the relevant provisions of the Social Security Legislation Amendment (No.3) Act 1992 when it came before the Senate in December last year. Senator Meg Lees (the Democrat spokesperson on Social Security) had closely studied the Government's proposal and had consulted extensively with pensioner and retiree organisations and concerned sections of the finance industry.

  She concluded there were serious questions hanging over the Government's proposal and, in conjunction with Senator Cheryl Kernot, she referred the issue to the Senate Select Committee on Superannuation for further consideration.

  Senator Kernot subsequently submitted a detailed minority report from the Select Committee which recommended the relevant clauses be rejected.

  Unfortunately, the Coalition (despite public comments from several Opposition Senators and Members condemning the measure), voted for the clauses—claiming they would "review the legislation when in Government".

  It is now May 1993 and the Coalition are not in Government, but the changes to the treatment of unrealised capital gains remain on the statute books. The Democrats want it removed and this Bill does precisely that.

  I set out our specific objections to the proposal in some detail—and, in doing so, acknowledge that much of the substance of these comments comes from Senator Kernot's minority report from the Senate Select Committee on Superannuation.

  Essentially, the Government proposes to change the way in which pensioner investments in shares are to be treated from September this year. At present, only the dividends paid to shareholders are taken into account for the purposes of the income test for social security payments, while the actual capital value of the shares is included in the assets test.

  Until now, the capital growth on listed shares has been disregarded. The Government wants to change all that and provide for net unrealised capital gains on listed securities (other than bonds and debentures) to be taken into account under the income test. Under these changes, losses accrued on listed shares (or similar investments) can be offset against the capital gain over the same assessment period, but cannot be carried forward. When it introduced these changes, the Government claimed it was bringing listed shares into line with managed investments—where capital growth on the investment is treated as income.

  There are several aspects of the proposal which are highly unsatisfactory. Firstly, it continues the questionable practice in the social security area (which is at odds with taxation practice) of treating an unrealised accretion to capital as income, rather than assessing it under the assets test.

  Secondly, it discriminates against shares as an investment, because similar treatment is not meted out to other investments (such as antiques, art work, collectibles and other less liquid investments where there could also be an unrealised capital gain which is not to be treated as income).

  Thirdly, shareholder pensioners in similar assets and income positions will be treated differently because of the type of share asset owned. In a submission made to all Senators last year, the Chairman of the Australian Stock Exchange, Mr. Laurence Cox, pointed out this would mean shareholders in a publicly non-listed company (such as Linfox) will not be affected by the change, but investors in a listed company (such as TNT) will be affected.

  Fourthly, it is possible that investors will be encouraged to invest overseas and not in Australia, as those investments are unaffected by the proposed change. For example, Mr. Cox has suggested investors may elect to invest in IBM shares listed on the New York Stock Exchange purchased through an Australian broker, rather than invest in BHP. Accordingly, this move may well discourage small scale investment in Australian companies at a time when such investment is desperately needed.

  The likely outcome of the Government's move is that many, if not all, of the 85,000 pensioners presently holding share portfolios will sell their shares. Mr. Michael Heffernan, the Stock Exchange's chief economist, stated his belief last year in the Age (5 December 1992) that a "significant number" of pensioners will 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''.

  Fifthly, the formula to be used in assessing gains and losses is seriously flawed which, when operating in the volatile world of the share market, will result in substantial inequities. The potential for inequity is graphically illustrated by the examples Senator Kernot used in her minority report—examples which a large number of pensioners and retirees have informed me are a precise reflection of their own situations.

  Example 1: A share portfolio increases in value from $10,000 to $12,000 over the 12 month period prior to the day of assessment and pays a dividend of $500. The return (for social security purposes) is $2,500: the increase in capital value ($2,000) plus the distribution ($500). The return expressed as a percentage of the value of the asset at the start of the review year is 25%. Under the formula, the past rate of return is applied to the current assets value. So the past percentage value is applied to the asset value on the day of assessment—that is, 25% of $12,000, or $3,000.

  In this situation, the DSS calculated income figure of $3,000 is $500 more than the actual return.

  Example 2: Where share prices fall, the dollar amount of the loss relates to the value of the assets at the start of the review year and the resulting percentage is applied to the lower closing price. For example, in the situation above, if—in the subsequent year—the asset value reverts to $10,000, the $2,000 capital loss is related to the $12,000 opening value and the result is a negative rate of return of 16.67 per cent. That percentage is applied to the closing value of $10,000 and a negative return is calculated ($1,667) which may be offset against gains on other securities, but not other source of income.

  What these two simple examples illustrate is that the formula magnifies gains and minimises losses.

  In the example above, a $2,000 gain was assessed as $2,500; however, a $2,000 loss attracted a credit of only $1,667. This problem is exacerbated where a shareholder has two parcels of shares, one of which rises in value and the other falls in value. If the shareholder's two parcels are each valued at $10,000 and one goes up by $2,000 and the other falls by $2,000 (assuming no dividends are paid), the shareholder's DSS calculated income will be $800 ($2,400 income offset by a $1,600 loss), despite the fact there was no capital gain across the entire portfolio.

  The greater the variation in the price, the greater the calculated income (irrespective of whether or not any actual gain has accrued). In other words, pension losses caused by share price increases cannot be fully offset by the same drop in share prices. The Democrats do not believe this can be construed, in any way, as being fair.

  But it also demonstrates another inequity in the treatment between a person with an "individual" share portfolio and a person who has invested in a managed investment with an identical shareholding. Each gain and loss on the individual's shareholdings are going to be separately assessed and will result in assessable income even if there is no overall net change in the asset value. But the managed investment will have no assessable income where there is no net capital gain.

  It is also quite clear that, unless DSS reviews are all carried out on the same day (and there has been no suggestion this will occur), pensioners with identical share holdings and the same dividend income could have markedly different pension outcomes.

  The operation of the formula makes a mockery of statements by the Government that the move is "fair" because reductions in share values will be able to be offset against gains. That is clearly not a strictly accurate statement—as many pensioners, retirees, financial journalists and investment advisers have been pointing out since August last year.

  Another concern we have is that the unrealised gains are being assessed on the basis of a market assessment and that assessment could actually bear very little relationship to reality—for example, individual shareholders may not be able to obtain the quoted market price. We are, after all, talking about relatively small shareholders who are likely to be holding unmarketable parcels or parcels of unusual sizes. There may also be family or personal reasons as to why a small shareholder could be restricted in their ability to divest their shares.

  Finally, this measure may not only fail to realise the expected savings for the Government (because many pensioners will move to divest their shares prior to the commencement date), it may in fact result in significant additional administrative costs for the Department of Social Security as it tries to keep abreast of market fluctuations.

  In short, the Government's proposal is poorly conceived and manifestly inequitable. It did not, and does not, deserve the support of the Parliament.

Senator BELL —When I return to my seat I hope that my challenge to anybody to adjourn this debate is not met.

  Motion (by Senator Foreman) put:

  That the debate be now adjourned.