Paul Fletcher (Bradfield, Liberal Party, Parliamentary Secretary to the Minister for Communications) Share this | Hansard source

I am pleased to rise to speak on the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014, an important bill which will amend various taxation laws to implement a range of improvements to Australia's tax system. In the time that I have available to me this morning, I want to focus specifically on the amendments in this bill which give effect to the coalition's measure included in the 2014-15 budget to allow individuals the option of withdrawing superannuation contributions in excess of the non-concessional contributions cap made from 1 July 2013 and associated earnings, with these earnings to be taxed at the individual's marginal tax rate. I want to make three points in my contribution. Firstly, prior to the introduction of this bill, there has been a nasty problem in the tax system which has led some Australians to face marginal tax rates of up to 93 per cent; secondly, while the previous Labor government sought to address this problem, they did so in an inadequate way; and, thirdly, the Abbott government is acting to solve this problem.

Firstly, I will speak about the nature of this problem and the fact that, as the tax laws have stood, Australians could be exposed to extremely high rates of penalty tax in circumstances where they made an innocent and inadvertent mistake in the amount that they contributed to superannuation. As we know, there are limits on the amount that any Australian can contribute to superannuation so as to enjoy the benefits of concessional treatment—the concessional treatment, of course, being that moneys which are paid into a superannuation fund are taxed at the rate of 15 per cent rather than the individual's marginal tax rate. The policy reason underlying this concessional treatment is to encourage people to make provision for their own retirement through building up a significant superannuation balance which, in turn, means that they are not reliant or not entirely reliant on a government funded pension.

The important point is that the concessional tax treatment is only available up to the concessional contributions cap, which in 2014-15 is $30,000 for those under the age of 50 and $35,000 for those 50 and above, but in previous years, under the Rudd-Gillard-Rudd government, was $25,000. The position was that individuals were taxed on any superannuation contributions in excess of their cap at the top marginal tax rate. The combined effect of a number of provisions under the law as it previously stood was that the total tax that could be applied to some breaches was as high as 93 per cent. This was an exceptionally punitive rate of tax, and it could apply in circumstances where an Australian made an innocent error.

Let me describe a number of ways in which it was possible for people to innocently find themselves in the position where they were exposed to this very high tax rate. One scenario would be that a person was salary sacrificing a large amount of money into their superannuation fund and made a calculation error at to the amount that they were able to contribute without attracting the excess contributions tax. Another scenario was that an employer could make additional concessional contributions to the employee's superannuation fund in ignorance of other contributions made by the employee, and the combination of the two sets of contributions could potentially trigger the excess contributions tax. Another scenario was one where a person had a windfall and made an error by contributing too much of that to superannuation without realising the serious consequences that may follow.

Another scenario—and one that occurs not infrequently—is that Australians make a decision in terms of contributing to superannuation in reliance on advice from a financial adviser or an accountant and it is possible for people to receive bad advice. So, if you make a contribution which exceeds the limits and you end up, through a range of circumstances that I will describe shortly, being in the position of facing marginal tax as high as 93 per cent, you could find yourself in that position not because of any conscious decision you have made but because you acted in reliance on advice and it turned out that the advice was flawed.

The particular scenario where you could end up, under the law as it previously stood, facing a marginal tax rate as high as 93 per cent was that, if you made a contribution and you exceeded the cap—which, as I said, used to be $25,000—the position used to be that you were then exposed to the excess concessional contributions tax of 31.5 per cent. But if you were also making a non-concessional contribution—that is, a contribution made out of post-tax income—you also faced a limit, which in previous years was $150,000 or you could bring forward two additional years and in practical terms have a limit of three times $150,000. But, if you exceeded the non-concessional contribution, then any excess amount attracted a tax of 46.5 per cent.

When you put those two sets of provisions together, the position was that, in certain circumstances, Australians could be exposed to a marginal tax rate of up to 93 per cent on a superannuation contribution, because in some circumstances you would make a payment that exceeded the concessional contribution cap but also happened to tip you over your limit for non-concessional contributions. Once you were over that limit, you faced, as I have mentioned, potentially a marginal tax rate as high as 93 per cent. So it is a very poorly drafted set of provisions which visited upon Australians who made an innocent mistake extremely harsh and unfair consequences.

Throughout the period of the Rudd-Gillard-Rudd government, the coalition called on Labor to address this matter. Unfortunately, Labor made an inadequate and half-hearted attempt to deal with this problem. Let me spend a moment talking about the way that Labor responded. The first response was in 2010, when the then Labor government passed legislation which allowed the Commissioner of Taxation to exercise a discretion for the purposes of excess contributions tax before an assessment was issued. This was an inadequate response to this very serious problem.

Recognising the inadequacy of the response, in 2013 the Labor government had another go, introducing legislation which allowed individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund without penalty. So, in a year when the concessional contributions cap was $25,000, as it was for most of the years of the Rudd-Gillard-Rudd government, if you inadvertently put in $28,000, for example, this new law would have allowed you to remove the excess $3,000 without penalty, and instead you would have that amount subject to tax at your ordinary marginal tax rate. This was a partial solution to the problem I have described.

It was a partial solution because the law was not changed in relation to excess non-concessional contributions. It was changed in relation to concessional contributions but not in relation to non-concessional contributions, so the problem remained that, if you inadvertently made a non-concessional contribution and you went beyond the limits in doing so—and that could occur for any of the many innocent reasons that I have explained—there was and, prior to the passage of the bill before the House today, there remains no capacity to correct that problem.

This matter was dealt with in a report by the Inspector-General of Taxation in March 2014 entitled Review into the Australian Taxation Office's compliance approach to individual taxpayers—superannuation excess contributions tax. That report made a number of points. It observed that, while a smaller population of taxpayers exceeded the non-concessional contributions cap as opposed to the concessional contributions cap, the impact on those taxpayers was more severe. Further, the tax office statistics showed that, across all years, approximately half of taxpayers who exceeded their non-concessional contributions cap were within the lowest taxable income range. In other words, it is incorrect to assume that people who were caught by this measure were necessarily wealthy. The statistics show that around half of taxpayers were within the lowest taxable income range. For this reason, the report recommended that the government consider whether the current treatment of excess non-concessional contributions should be aligned with that of excess concessional contributions to minimise adverse impacts on affected taxpayers.

That brings me to the final point I want to make in my remarks this morning. The Abbott government are acting to solve this problem, and we are acting in a way which gives effect to the policy commitment that we took to the last election: that we would develop appropriate mechanisms to address all inadvertent breaches of the superannuation contribution caps where the error would result in a disproportionate penalty. The measure that is contained in the bill today was announced as part of the 2014-15 budget.

The amendments in this bill deliver on that commitment. The change that will be given effect to if this bill passes into law will allow people the option of withdrawing excess contributions and any associated earnings, and the earnings will be taxed at the individual's marginal tax rate. This measure will apply to non-concessional contributions made from 1 July 2013.

This is an important measure which gives Australians an opportunity to correct an inadvertent mistake and in turn to avoid the punitive aspects of the existing excess contributions tax regime. These changes will ensure that the treatment of excess concessional contributions and of excess non-concessional contributions is broadly consistent. So, unlike Labor's half-baked approach to this problem, the coalition is introducing a comprehensive solution. The amendments are expected to affect around 1,000 individuals in 2013-14. Those individuals will now be relieved of facing a very difficult problem—a problem which, frankly, resulted in a capricious and unfair response to what was in many cases an inadvertent error.

The measures in this bill deliver on the government's election commitment. We said we would develop an appropriate process which addresses inadvertent breaches of the contribution cap where the error would result in a disproportionate penalty. We said we would do that, and in this bill we are giving effect to that commitment. These amendments are consistent with our economic strategy to drive growth, to create jobs and to have a more flexible, dynamic and competitive economy. We have identified a serious design flaw in the tax system and, with the measures in the bill before the House this morning, we are acting to correct that design flaw.

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