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Monday, 10 May 1993
Page: 363

Senator MacGIBBON (4.01 p.m.) —I move:

  That this Bill be now read a second time.

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

  Leave granted.

  The speech read as follows

In December last year the Opposition announced it would review those sections of the Social Security Legislation Amendment Bill (No 3) 1992 relating to unrealised capital gains on listed securities.

The Opposition has adhered to that commitment to undertake a review following the Federal Election.

As a result of that review a Private Members Bill was introduced last week namely the Social Security Amendment Bill 1993. It was made clear at that time that a companion Bill would be introduced to make similar amendments in regard to the veterans affairs portfolio.

These amendments are to ensure that certain proposed changes made by Veterans' Affairs Legislation Amendment Bill (No 2) 1992 concerning the treatment of shares and other listed investments do not come into operation.

This Bill, the Veterans' Entitlements Amendment (Listed Securities) Bill 1993 makes virtually mirror amendments to those proposed in the Social Security Amendment Bill 1993.

Firstly is amends Section 5J of the Veterans' Entitlements Act 1986 dealing with definitions.

Secondly is omits the words "and listed securities" from the heading to Subdivision AA of Division 8 of Part 111 of the Principal Act.

Thirdly it amends Section 46 by omitting some words and figures from the table "STRUCTURE OF DIVISION" and omits subsection (2).

At present the value of share dividends is regarded as income for pension purposes. However capital growth is ignored.

The effect of the governments 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.

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 veterans' affairs 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 test for pensioners.

Budget Paper No. 3 1992-93 lists the net savings resulting from the ongoing assessment of capital gains and losses of listed shares and other securities of $20.3m in 1993-94, $24.1m in 1994-95 and $24.9m in 1995-96.

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 permitted 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's 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 would result in different pension entitlements under the veterans' affairs income test.

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

Firstly 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 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 the very least, it would ensure capital gains and capital losses would be treated on an equitable basis. Pension entitlements 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 identical managed and unmanaged investments are treated differently under the income test. Also of concern to the Coalition is the fact that pensioners with identical portfolios would be subject to differing outcome 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 subjected 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 veterans' affairs 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 income test is fundamentally flawed.

It is questionable whether the estimated savings from this initiative will ever be realised, and it will not result in any greater equity or fairness in the social security income and assets test which the Coalition contents 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.

I commend the Bill to the Senate.

  Debate (on motion by Senator Schacht) adjourned.