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Wednesday, 24 June 2009
Page: 4101


Senator SHERRY (Assistant Treasurer) (10:28 AM) —In my summing up and closing of the debate on the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 I will attempt, provided I have time, to deal with all of the issues that have been raised by the crossbenches. It may not be possible with all matters, but I certainly want to deal with the matter raised by Senator Xenophon because it goes to a second reading amendment that we will need to vote on at the conclusion of the debate. But firstly I would like to thank all the senators who participated in the debate: Senators Coonan, Milne, Fielding and Xenophon. I particularly make the observation that whatever the criticisms and concerns being raised by the crossbenches, they have looked at the package as a whole and identified correctly one of the overall reasons for the changes that are presented in this package. That is appreciated.

Schedule 1 to this bill limits the current income-tax exemption for foreign employment income to income earned as an aid worker or charitable worker or as a specified government employee, including defence and police force personnel. The amendments will mean that the exemption is better targeted and will remove some inequities which currently exist between Australians working overseas, particularly in low-tax countries, and those working in Australia. An Australian resident working overseas will be entitled to a foreign income tax offset for any income tax paid overseas in respect of any foreign income taxed in Australia. This will ensure that such income will not be subject to double taxation on their foreign employment income.

Senator Milne raised the issue of the impact on backpackers—that is, Australian backpackers working overseas. First of all, under the current law foreign employment income of backpackers is exempt provided they meet the relevant conditions—for example, continuous foreign service of 91 days or more. Backpackers currently have to report their foreign employment income in their Australian tax returns. So even though that income is exempt it is reportable. Thus compliance costs already exist. So there is a compliance cost in regard to backpackers.

The new law means that foreign employment income of backpackers will be taxable in Australia unless they are performing eligible activities—for example, aid or charitable work. Any foreign tax paid will be credited against Australian tax. Where comparable tax is paid overseas, the Australian tax liability would be significantly reduced, and that will obviously vary from country to country. The new law is consistent with the general principle that Australian residents for tax purposes should pay Australian tax on their worldwide income. Not taxing backpackers could create inequity between them and other Australian taxpayers who earn similar amounts of income in Australia. In respect to the question on the 91 days, which Senator Milne raised: yes, it must be continuous, but it may be undertaken with more than one employer. I would also point out that the clause 1(e) provision does allow exemption by regulation of those business entities on application, and that is determined by an executive council declaration. So it is possible for some business entities to obtain an exemption on application.

Schedules 2 and 3 provide necessary budget savings in light of the pension reform. This is an issue that no speaker, from either the opposition or the cross benches, have touched on. This package of changes in respect of the superannuation co-contribution and caps is part of the funding that is necessary to pay for the increase in the age pension. That has been missed so far in the debate. The cost of the increase in the pension, which will be dealt with in another bill, runs to $14.2 billion over four years. It is true that we are changing some of the superannuation arrangements in order to help pay for the increase in the age pension. It does not cover anywhere near the cost of increasing the age pension—which is, as I have mentioned, over $14 billion—but it makes a contribution and it should be seen in that light.

We have been through a debate about the adequacy of the age pension in this chamber, particularly over the last 18 months. Certainly the now opposition—the Liberal and National parties—have been advocating an increase in the age pension, having done nothing about it when they were in government. But of course they fail to indicate any way in which the cost of the increase in the age pension could be paid for. So having done nothing for almost 12 years, they then argue that the age pension should be increased and say, ‘We can’t indicate how it will be paid for.’ And then they criticise us because the budget is in deficit. I just wanted to mention that on the way through.

On these specific superannuation matters, schedule 2 temporarily reduces the government’s superannuation contribution for contributions made in income years 2009-10 to 2013-14. The reduced government co-contribution will continue to provide a matching rate of at least 100 per cent on eligible contributions. It is still a very generous incentive: up to 100 per cent. People in the chamber will know that I am reasonably familiar with superannuation provisions, and I do not want to talk at excessive length—and I notice Senator Xenophon is smiling—but you would be hard-pressed to find anywhere in the world a superannuation incentive of up to 100 per cent. This is a guaranteed rate of return up to 100 per cent. I cannot find anything more generous than that anywhere in the world, and that is on the new reduced rate of co-contribution. That of course is temporary and the phase-in period for the co-contribution going back up to 150 per cent is contained in this legislation. It is true that that generates a budget saving of $1.4 billion over the forward estimates period.

Schedule 3 reduces the superannuation concessional contributions caps from 1 July 2009. The caps will remain generous. Like Senator Fielding, and I take his point, we are not against people at any income level being able to access, usually via salary sacrifice, the benefits of tax concessional treatment of superannuation. We are not against that. I think the debate really is what level of generosity and what level of tax concessionality should apply and whether, certainly in the current circumstances, the current caps are appropriate. I am pleased to acknowledge the contribution of Senator Fielding in this regard. The measure will provide greater equity in the system by targeting reductions in superannuation tax concessions at those with relatively more private resources. This action is consistent with the finding of the Australia’s Future Tax System review panel, commonly known as the Henry tax review, that superannuation tax concessions should be more fairly distributed.

At the recent inquiry into this legislation by the Senate Economics Legislation Committee, questions were raised in relation to the numbers affected by the reduction in the caps. This was also canvassed at Senate estimates committee hearings. I emphasise that some 1.8 per cent of those making concessional contributions will be affected by this measure. So, of the millions of people making contributions via salary sacrifice, 1.8 per cent will be affected because they are predominantly high-income earners. More specifically, it is estimated that, of those affected in 2009-10 who are under age 50, 73 per cent will have a remuneration in excess of $100,000, as will 93 per cent of those aged 50 and over. The reduction in caps will generate budgetary savings of $2.8 billion over the forward estimates period.

Senator Fielding raised an important issue when he said that he was concerned about the impact this measure would have on future age pension claims. We do not expect it to be in any way significant, Senator Fielding, because the group of people who are contributing this level of superannuation are overwhelmingly excluded from the age pension anyway because of the means test. That is why we do not believe there is going to be any significant impact. Because of their current level of savings in super and the current generosity of the concessional tax treatment—and they may have investments in addition to their own home, which of course is not included—the means test takes them out of the age pension anyway. So it makes little difference, as I am told. I raise that because Senator Fielding raised it and I know it has been raised more broadly in the debate around this measure.

I want to go to the issue raised by Senator Xenophon, which is the claimed favourable treatment of some politicians, and to outline some background material in respect of the treatment of defined benefit funds, which some members of parliament are in—the funds are closed to new members. Of course, it is not just members of parliament who are in closed defined benefit funds. Certainly, judges and members of the military defence forces are in defined benefit funds—and theirs is not a closed scheme, by the way. So we are not just talking about politicians who are in the old defined benefit funds; we are talking about military personnel and we are talking about judges.

It is a much broader group of people, Senator Xenophon, if we look at defined benefit funds in the private sector. In the private sector, in total open and closed funds—and most are closed, other than that of the military; there are very few open defined benefit funds—we are talking about some 640,000 employees. I have mentioned those in the public sector, but in the private sector the ‘Xenophon principle’, if I may call it that, would apply to 640,000 workers. Among these hundreds of thousands of employees in the private sector who are in DBFs you are dealing with Qantas—so flight attendants, pilots, ground workers. In the hospital sector you are dealing with nurses and attendants. In the car industry you are dealing with auto workers. If Senator Xenophon were being consistent, he would apply his proposed change to all people in defined benefit funds, but he has confined his argument to politicians. If he were being consistent in his approach to caps he would apply it to the 640,000 workers. I know he would not do that, because if Senator Xenophon applied this principle to all the workers whom I have outlined he would, I suggest, have a somewhat strong reaction from car workers, doctors, flight attendants, nurses and the whole range of people I have outlined. Of course he will not do that; he is seeking to apply it just to members of parliament.

Members who were elected prior to October 2004, who are in the old parliamentary scheme, the PCSS, are in what is known as an untaxed scheme. As contributions are not made into such a scheme annually they cannot be subject to annual caps and hence cannot be subject to the reduced caps; rather, they are subject to benefits taxation. This is in contrast to members in schemes under which they receive tax-free benefits from age 60. Also, members of this scheme are not allowed to salary sacrifice into any super fund, so they have not been able to take advantage of the large salary sacrifice contributions which are the target of the changes.


Senator Williams —Poor devils.


Senator SHERRY —Well, they are simply not allowed to. These people are not allowed to take advantage of the concession. While the lump sum benefit cap in these schemes is just over a million dollars, it is worth noting that this roughly equates to some 40 years of $25,000 contributions.

Members elected after October 2004 have contributions made into an accumulation fund and they have the ability to salary sacrifice. However, they are subject to the caps and subject to the reduced caps, the same as anyone else. Older public servants are also in untaxed schemes, like the PCSS, and thus are subject not to annual contributions caps but, rather, to benefits tax. While the cap reduction thus does not affect their entitlement in the untaxed scheme to the extent that they salary sacrifice elsewhere into a private scheme, those contributions will now be limited by the reduced caps.

The grandfathering arrangements apply to private sector defined benefit funds. As contributions are made into these schemes regularly they are subject to the annual caps. Given that the nature of these schemes is that the contributions are pooled rather than made for individual members, an actuary determines an annual notional contribution each year. Also, private sector DB schemes often have contribution rates predetermined and these cannot be adjusted by the members. When contribution caps were first introduced, which was as a consequence of Better Super, it was decided by the previous government—and we supported the previous government’s approach—that these schemes would be grandfathered.

So I say to Senator Xenophon that the exclusion, if you like, does not just apply to politicians schemes. The effective exclusion applies to all defined benefit funds. This means that they are still subject to caps but, to the extent they were predetermined contribution levels that exceeded the caps, they would have those contributions set as equal to the cap, whatever the cap is. For example, if their contributions were predetermined at $55,000, they were deemed to be $50,000. Similarly, under the new changes, if contributions had been predetermined prior to the budget announcement as being, say, $30,000, they would be deemed under the new grandfathering to be $25,000. This means they would not breach the caps by virtue of the predetermined defined benefit contributions. However, if they then in addition salary sacrifice to another fund, they would exceed the caps. They lose the grandfathering if they move to further increase benefits outside the grandfathered private sector fund. For that reason I would argue that the second reading amendment of Senator Xenophon is inappropriate.

I do not have the time to deal with Senator Fielding’s amendment, but we will deal with that in committee. I have taken the time at the conclusion of the second reading debate to outline our reasons for opposing Senator Xenophon’s amendment to the second reading and to provide some further information to Senator Milne with respect to current and new law, and the way in which it would apply to backpackers. I thank all senators for their contribution to the debate. This is important legislation and the government will be opposing the Xenophon second reading amendment.

Question put:

That the amendment (Senator Xenophon’s) be agreed to.