Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Tax Laws Amendment (Simplified Superannuation) Bill 2006 and 10 related bills implement the coalition government’s simplified superannuation reforms announced in the 2006 budget. They are sweeping reforms with a potential to significantly affect over 10 million people, 1.3 million employers and more than 310,000 superannuation funds. The new system will apply from 1 July 2007.

As I have intimated, the purpose of this collection of related bills is to simplify what is presently an extraordinarily complex task—that of assessing one’s current and future superannuation savings and tax obligations. With this purpose in mind, the three legislative purposes that the government is seeking to achieve with these superannuation reforms can be summarised as follows: firstly, to simplify superannuation arrangements for retirees by simplifying and streamlining the underlying legislation so that it can be more easily understood and so that there is greater clarity regarding future income streams; secondly, to improve incentives to work and save; and, thirdly, to introduce greater flexibility in how superannuation savings can be drawn down in retirement.

Interestingly, the Democrats were onto the simplification issue long before the coalition. Former Democrats senator Michael Macklin remembers campaigning for simplification in the eighties, on behalf of the Democrats, with a scheme which did not provide any reduction of tax for moneys paid into a super scheme but for the earnings in such schemes to be tax free and for the payments out of that scheme to also be tax free. The proposed scheme that we are dealing with today goes some way towards Senator Macklin’s Democrats proposals. At that time, the Democrats were attacked by the Liberals, as well as by the Labor government, but did get support for the Democrats view from industry.

More specifically, these proposed measures address a number of more complex social and economic issues that the government has previously highlighted. This includes a forecast population imbalance by 2042, with more than half of the Australian population predicted to be aged over 55, according to the 2002 Intergenerational report, which is due to be replaced by the updated 2007 Intergenerational report. In light of these forecasts, these superannuation reforms also address the increasing fiscal burden of the abovementioned changing demographic in terms of both cost—especially health-care related costs—and the shrinking taxation revenue base.

Another underlying policy initiative of these reforms is that they address the forecast shortfalls in the labour market by providing incentives to work beyond what was traditionally known as retirement age, thus improving the capacity for workers to fully or at least partly self-fund their retirement and thereby minimising the public cost via our unfunded government pension scheme, which is paid through general taxation receipts. Thus, weighing the proposed legislative changes against these broader social and economic changes is an appropriate means of measuring the relevance and quality of the government’s superannuation reforms. The question is: are the government’s propositions socially acceptable, equitable and legislatively responsible?

While the Democrats recognise that this simple super package of 11 bills makes a genuine and systematic effort to simplify superannuation rules and taxation and to encourage older Australians to work and save more, they are still inadequate because they only address part of a much larger problem. The problems remaining in the superannuation system and the broader income taxation system include: those who are retiring in the near future and who have inadequate superannuation funds; the need to significantly improve the disposable income of low-income Australians both in work and in retirement; the need to address the markedly lower super funds accumulated by women overall; and the continuation of unjust discrimination in superannuation against same-sex couples. There is also the opportunity-cost issue and the question of the desirability of spending $7.2 billion on this measure over the next four years, given the other more pressing demands on revenue.

I welcome the government’s package as a genuine attempt not only to simplify and streamline a complex system but also to provide considerable incentives to encourage increased levels of work and saving. That does not mean that I am without caution. In part, that caution is prompted by the difficulty I have in fully assessing the consequences of these changes. Unlike the new tax system that brought in the GST and related reforms, there is a decided lack of modelling, cameos and detailed projections from the Treasurer and Treasury. Treasury has not provided a long-range forecast of tax revenue effects beyond the forward estimates period, which is obviously needed, so there is much uncertainty as to how these measures will play out and affect Australia’s financial future. While I am mentioning the GST in passing, Australian pensioners should remember that they enjoy age pensions being indexed to average male weekly earnings because of the Democrats insistence on that occurring during the GST negotiations. If it were not for the Democrats they would not be as well off as they now are.

In part, my caution also arises from the question of priority. Is spending $7.2 billion on superannuation over the next four years the right priority? That is a hard question to answer, given the competing demands that always exist on taxpayer funds. By their nature these reforms are selective in impact: not everyone benefits or benefits equally. Taxpayers over 60 years of age will benefit most, and wealthier retirees and better-off Australians will benefit more than the less well off. For example, in its submission to the committee inquiry into these bills, the Australian Council of Social Service highlighted its concern that wealthy Australians were the true beneficiaries of the provisions contained in the legislative changes, thereby perpetuating income inequality in retirement. Note that it used the word ‘perpetuating’. These bills do not actually change the situation that those people with more money will continue to have more money. In my opinion these are not, of themselves, faults with respect to these bills. What is important is whether any other measures—strong compensating programs and reforms—are available that will significantly improve the lot of Australians who are not in these retirement categories and who are not beneficially affected by these bills. Unfortunately, there are not.

In part, too, my caution is prompted by a sense of a lack of policy balance. These reforms will benefit many Australians but will particularly benefit better-off Australians. Policy balance and equity require structural reform in the rest of the income tax system, particularly to benefit low- and middle-income earners. That should accompany and follow these superannuation tax reforms. While recognising that Australians will be grateful for the tax relief provided in the 2006 budget, the Democrats remain disappointed that the government has failed to provide a strategic income tax reform plan. Structural tax reform is essential to make the tax system simpler, fairer and transparent. Our income tax system is complex, inequitable and inefficient. It is widely criticised for its churning effect.

The Treasurer has adjusted rates and thresholds within the existing income tax system. He needs to change the system to be simpler, broader based and more equitable. The Democrats say that a structural income tax reform plan should include raising the tax-free threshold significantly to take millions of Australians out of the income tax system. I note a recent OECD report again supported this stance of the Democrats.

The Democrats say that a structural income tax reform plan should include indexing the rates to account for bracket creep; broadening the base by cutting out tax concessions that are inequitable, inefficient, outdated, unnecessary or distortionary; reforming the tax-welfare intersects to encourage welfare to work and remove inequities; and ensuring nominal and effective tax rates remain fair and competitive. If that tranche of measures were to accompany this tranche of measures, then you would have a completely rounded package.

One frequently expressed concern about the Simplified Superannuation plan has been the large potential revenue forgone as a result of the reform. I have, however, been intrigued by the prospect of this reform being a large revenue earner over the longer term rather than a large revenue loser. Unfortunately, I do not have the means to model this theory, but it is a theory that is worthy of debate, especially given the forecast demands on our future tax with our changing demographic profile. Demographically speaking, we are indeed an ageing population. This social phenomenon throughout the developed world presents a number of specific challenges. Perhaps the most challenging of those is the means by which an increasing number of retirees are able to fund their existence at an affordable public cost. The combination of retirement and an ageing population and retirement funding dilemmas are all inextricably linked. The role of government in managing this complex socioeconomic trend is twofold: it must ensure policies and regulatory mechanisms are in place to enable Australians to effectively save for their retirement whilst at the same time ensuring that increased concessions to superannuation do not jeopardise future government revenue that will pay for our nation’s health care, education, infrastructure and other expenses.

So has the Tax Laws Amendment (Simplified Superannuation) Bill 2006 and related bills struck the right balance? Does it offer the best system for partly and wholly self-funded retirees, low-income pensioners and taxpayers alike? How will it fit within Australia’s regulatory and tax framework? These are big questions. I am afraid I do not have the answers and only time will tell.

Striking a balance between protecting taxation revenue and establishing taxation concessions to encourage Australians to save for their retirement is a delicate, difficult and important task. Although not immediately obvious, this trade-off is representative of the socioeconomic divide that continues to grow within our nation. On the one side of the divide sits wealthy Australia, which is empowered to save for its future through a superannuation system that is now well designed for this purpose. On the other side of the divide is low-income Australia—in retirement reliant on welfare via a means-tested general age pension. To fund the retirees of low-income Australia or to subsidise the retirees of wealthy Australia, taxes must be generated.

The critical issue with regard to this funding dilemma is how the government proposes to generate the requisite tax income from a projected shrinking taxable working population to meet the expenses of a retiring population which is forecast to grow substantially. The prospect of raising corporate or personal income taxes on a tax base maintained by a smaller proportion of the population is an alternative that is both politically unsavoury and economically unviable. A more politically and economically sound alternative is to generate additional tax revenue through incentives to encourage Australians to save for retirement and to work beyond the traditional retirement age of 60. That is because if you work longer and you save more, taxes are generated.

Core measures contained within this bill, such as the removal of taxation on superannuation benefits from taxed funds after 60 years of age and scrapping the compulsory superannuation payout provisions, certainly encourage Australians to work longer and save harder, but this is only half of the story. While many of the provisions contained within this compendium of bills will encourage more savings to flow into superannuation accounts and Australians working longer will delay the shrinking tax base, the problem that must ultimately be faced by government is how to fund a growing unfunded general age pension and how to continue to subsidise the growing cost of our hospitals, schools, roads, ports and other resources upon which Australians will continue to universally depend.

Does this simplified super bill possibly establish a channel that can, in part, bridge the divide between rich and poor Australia? Surprisingly, from a counterintuitive perspective, my view is that the answer to this question could be yes. By removing the benefits tax on superannuation which only applies to wealthy retirees and making a number of other structural changes, the government is also removing a significant hurdle to investment in superannuation. With significantly greater investment in superannuation the government could stand to gain substantially from taxation revenue through both the once-off contributions tax and a tax on earnings with concessional rates of 15 per cent at an estimated 7.1 per cent return, respectively.

This could mean that with money pouring into super and a vast sum of money invested—which will grow to trillions of Australian dollars—the government has potentially crafted a growing taxable base that could dwarf the present personal income tax base. The generosity and clarity of the simple super bills is intended to encourage a massive injection of funds into superannuation, which then could turn out to be a very significant revenue earner. In turn it could provide the mechanism by which the government proposes funding the savings gap of low-income retirees and the accompanying plethora of subsidised social costs.

Having said that, an obvious question arises: if this is so, why has the government not expounded more on the forecast growth of investment and therefore tax revenue in superannuation as a result of the changes contained within these 11 bills? The answer may be a simple and a valid one: until the behavioural effects become apparent, one would have to be cautious in predicting the consequence of enhanced savings investment, particularly if it is thought the investment effect might be modest if funds are simply switched from existing investment vehicles to others in superannuation.

Scrapping the benefits tax and cleaning up the legislation are the two big carrots that have been proffered, both of which could carry a negligible expense relative to the tax gains that stand to be made from a burgeoning and taxable national superannuation pool. Maybe this package of bills will turn out to be the government’s secret future cash cow; maybe not—time will tell. From a big picture perspective, Australia could progressively experience a conversion from a taxation system focused on revenue raising via personal incomes, with a tax base estimated at $450 billion presently, to an increased reliance on a superannuation system forecast to have $2 trillion-plus under management by 2015 and growing rapidly. The system works because superannuation is a function of both personal income and growing capital; it is a much bigger taxable base, so it can be taxed at a lower ‘concessional’ rate and still cover the forecast shortfall in personal income tax raised. If this thesis of mine is accurate, then the simple super bill has struck an adequate balance between encouraging more work and encouraging those that can save for their retirement to do so whilst at the same time preserving the means to raise taxation revenue to meet forecast welfare and social costs.

Neither the government nor the explanatory memorandum has attempted to discuss this possibility. Understandably, the government is focusing on what taxpayers stand to gain rather than on what they may lose in the form of future increased taxation revenue. Broadcasting the value and importance of the national superannuation pool as potentially a progressively more important source of taxation is not likely to be part of the government’s spin, particularly if such potential gains are uncertain at this stage. I am of the view that the superannuation system, by its very design, is structured to serve Australians with incomes substantial enough to set aside funds for retirement. This is the essence of self-funded retirement. For low- and lower middle-income Australians, their reliance on the superannuation system will be of a very different nature. Their indexed pension will, indirectly, be reliant upon the same superannuation system for the taxation returns that the reformed system will offer, as opposed to the generation of an income stream substantial enough to self-fund their retirement. So there is a neat intersect between the need to raise taxpayer funds to fund future age pensions and this package of bills, which, by delivering a simplified super system by encouraging greater work and greater savings, will end up, I think, delivering additional taxation revenues, which in turn will help fund the pension system. It is an interesting thesis. As you would have gathered, I rather like the overall effect of these bills. I say that without diminishing those areas about which I have expressed caution. In conclusion, I would like to move my second reading amendment.