Senate debates

Tuesday, 27 February 2007

Tax Laws Amendment (Simplified Superannuation) Bill 2006; Superannuation (Excess Concessional Contributions Tax) Bill 2006; Superannuation (Excess Non-Concessional Contributions Tax) Bill 2006; Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006; Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006; Superannuation (Self Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006; Superannuation Legislation Amendment (Simplification) Bill 2007; Income Tax Amendment Bill 2007; Income Tax (Former Complying Superannuation Funds) Amendment Bill 2007; Income Tax (Former Non-Resident Superannuation Funds) Amendment Bill 2007; Income Tax Rates Amendment (Superannuation) Bill 2007

Second Reading

Debate resumed from 26 February, on motion by Senator Scullion:

That these bills be now read a second time.

12:31 pm

Photo of Nick SherryNick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | | Hansard source

The Senate is considering a package of some 11 bills—the Tax Laws Amendment (Simplified Superannuation) Bill 2006 and 10 others—to implement important changes to Australia’s superannuation system. The earlier motion was to provide exemption from what is known as the ‘cut-off’ to allow these important pieces of legislation to be dealt with expeditiously—because they are important pieces of legislation. I indicate, on behalf of the Labor Party, as the shadow minister responsible for superannuation matters that Labor will be supporting these bills.

We support them for a number of reasons. Firstly, Labor strongly supports superannuation. We have championed superannuation for some two decades and the reforms of the Labor government in the 1980s and 1990s were some of the most profound economic reforms in Australia’s history. Compulsory superannuation, and I emphasise the word ‘compulsory’, is still contributing to the economic health of our nation and the impact is compounding—just like the retirement balances of almost all employees.

In addition—and this has not been remarked upon enough in this public debate about superannuation—Labor’s superannuation guarantee has been one of the greatest fairness measures for the distribution of wealth in this country that has been seen since the introduction of a decent industrial relations system 100 years ago. If we, Labor, had not made superannuation compulsory and comprehensive, more than half of today’s workforce—low-middle income, casual, part-time, contract and women workers, in sectors such as hospitality, retail, transport and manufacturing: some 92 per cent of the workforce—would not have superannuation today. It would have remained the preserve of the higher paid, of executives in the public sector, rather than becoming the great national system we now enjoy.

Secondly, we also support this package because it includes measures which will help simplify a very complex system. This government has been unable to resist unwieldy, complex regulation. We have seen it in taxation, we have seen it in financial services reform and we have seen it in superannuation. Red tape and enormous compliance costs, particularly in the area of financial services, have been the hallmark of the Howard Liberal government. So anything that reduces the load that they in part are responsible for is welcomed.

Thirdly, in this area of economic policy, we must plan for the long term. And, with bipartisan support, these reforms will maintain stability and certainty around an area of long-term public policy, the environment for savings and investment, and retirement income planning.

Fourthly, Australia can now boast of one of the strongest funds management industries in the world. We now have the fourth largest volume of savings under management per capita, and we are growing very strongly. Australia—and I can say this proudly—is a world leader in many aspects of financial services because of our long-term strategy of superannuation. These are high value added industries, paying higher than average salaries and enmeshing Australia with the world’s leading economies. This will further underpin our prosperity throughout this century.

Finally, these changes will improve the retirement incomes of many Australians. For the group of Australians I referred to earlier, the majority low-middle income earners, the superannuation savings they see when they read their annual superannuation statement today—although the average balance is still modest at about $19,500—are down to Labor’s introduction of compulsory superannuation. If it had been left to the approach of the current Liberal government, who opposed that fundamental reform, the current balance on superannuation statements for the majority of Australian workers would read ‘zero’.

Despite the changes in this package, Labor believes that fundamental superannuation reform challenges remain, and I will touch on those briefly later. I will put some issues on superannuation in perspective. The primary purpose of the Australian superannuation system is to allow Australians to provide a comfortable standard of living for themselves in retirement. It is fundamentally an add-on to the age pension for most Australians. And a strong superannuation savings system has several economic consequences.

Firstly, by encouraging people to save for their own retirement, an effective superannuation system will increase retirement incomes, thereby improving living standards in retirement. Secondly, in the context of future budgets, these reforms will take off some of the pressures that will be generated by the ageing of our population. And I note the personal assurances of the Treasurer, Mr Costello, that this will occur as a consequence of this package. In this context, Labor would like to see the long-term impact of revenues modelled in the Intergenerational report. We would certainly like to see evidence that would underline the usefulness and fiscal responsibility of this particular package.

As Australia’s population ages, a super system that provides adequate incomes in retirement will ease fiscal pressure and ensure we continue to deliver budget surpluses and lock in our economic prosperity. That is consistent with Labor’s budget rules, the first of which is that Labor will keep the budget in surplus on average over the course of the economic cycle. Secondly, a large and growing pool of superannuation savings has supported the growth of Australia’s equity markets, boosting returns for investors both through superannuation and through other investment vehicles. The total pool of superannuation savings under management is large and growing. APRA reported in September last year that it had reached $945.6 billion, and on one projection it will reach $1.8 trillion by 2011 and $3.3 trillion by 2017.

There are important economic consequences which flow from this enormous accumulation of savings. As Australians’ superannuation assets continue to grow—and a brief note of caution with one year in seven on average being a negative rate of return in a defined contribution system—Australian superannuation funds are investing directly in overseas assets and through foreign debt and equity markets. In some ways it is disappointing that some of the funds of Australian workers’ savings go offshore for want of Australian projects to invest in, but this is necessary from a diversification and maximising rate of return perspective. It also demonstrates Australia’s financial maturity and economic power as we invest globally to secure future prosperity.

The fact that superannuation funds today hold assets equivalent to 95 per cent of our gross domestic product—that is, our gross economic output—proves that Labor is the real party of wealth creation. It is fundamentally an outcome of Labor’s introduction of compulsion some 20 years ago. It was only Labor that had the foresight to introduce a superannuation system that would underpin the retirement incomes of Australian families and provide a valued source of capital for Australian business. Along with the micro-economic reforms of the 1980s and 1990s, superannuation was one reform that turbocharged the Australian economy and led to the prosperity we enjoy today. More than anything else, we must recapture that reforming zeal and embrace a new productivity agenda. Labor introduced compulsory superannuation in exchange for wage restraint as part of the historic accord with Australian workers and, in the process, built superannuation into the remuneration package of almost every Australian employee. It is a wealth creation legacy that Labor is proud of.

At a time when households face the burden of the highest ratio of interest payments to household income in Australian history, the contribution of superannuation savings to Australian household balance sheets is very welcome. As I said earlier, it is a fundamental vehicle not just for fairness but for spreading the prosperity of economic reform throughout the whole community.

Australia’s retirement income system is based on three pillars: the government aged pension, indexed to male total average weekly earnings—means tested; the compulsory nine per cent superannuation guarantee; and additional voluntary superannuation contributions underwritten by a range of incentives. These pillars were, in the main, introduced by Labor governments. They were widely recognised internationally as best practice—a fair, affordable, sustainable system for ensuring dignity in retirement and underwriting our economic performance. I watch with amusement as the Treasurer, Mr Costello, desperate to find an economic reform legacy, claims authorship of the superannuation system. The inescapable fact is that he opposed the system. He has called these changes:

… the biggest reform to superannuation Australia has ever seen.

I sat in this place back in 1992 when the then Liberal opposition, including the current Treasurer and the current Prime Minister in the other place, vociferously opposed compulsory superannuation in this country. They voted against it. The Liberal Party’s record on superannuation has been very poor to date. They opposed the introduction of pension means testing, they opposed the initial three per cent compulsory superannuation in 1987 and they opposed the nine per cent superannuation guarantee bills of 1992. Their defeat would have been disastrous both for individuals and for the economy. As I said, both the Treasurer and the Prime Minister vociferously opposed compulsory superannuation and voted against it in the other place.

We have seen a very erratic display with respect to superannuation policies. We can recall the then Liberal opposition’s 1995 pledge to maintain the three per cent government co-contribution system, taking contributions to 15 per cent. They dropped that in 1997. They introduced the failed savings rebate, which only operated for six weeks. The Treasurer also introduced a so-called superannuation surcharge, a tax by another description, on higher income contributions—another broken election promise—and the Treasurer deemed superannuation holdings an asset for social security purposes. Again, that measure was dropped a few years later. They are just a few examples of the Treasurer’s rather erratic policy approach to superannuation.

Despite all that, Labor has had to put up with the Assistant Treasurer’s rather bizarre fortnightly press releases designed to goad Labor into supporting what is a massive set of legislative changes without even being given the ability to see the bills. We have now seen them and have come to the considered conclusion that we will support them. There was a fundamental lack of information provided not just to us, which is par for this government, but also to the public, particularly when it came to the costing of some of these policies. It is still quite scant in providing a breakdown of costing estimates. I am informed the government is resisting a freedom of information application by one of our newspapers for long-term forecasts of superannuation tax revenue. If the Treasurer is so keen to prove his economic management credentials and is confident that his reforms are warranted, there is no reason for him to refuse access to information.

The package contains some important changes. The primary change is that from 1 July 2007 superannuation benefits paid from a taxed fund, either as a lump sum or an income stream such as a pension, will be tax free for people aged 60 and over. Benefits paid from an untaxed scheme, mainly affecting public servants, will still be taxed; however, at a lower rate than they are now. For people aged 60 and over, the application of a 10 per cent rebate will do that.

Reasonable benefit limits will be abolished. Individuals will have greater flexibility as to how and when to draw down their superannuation in retirement. Under the current rules, funds were forced to pay out the benefits of members who had reached age 65 and who did not meet a work test. Under these changes, superannuation funds are no longer forced to pay benefits.

The concessional tax treatment of superannuation contributions and earnings will remain. Age based restrictions limiting tax deductibility concessional contributions will be replaced with a new set of simpler rules. The self-employed will be able to claim a full deduction for their contributions as well as being eligible for the government co-contribution for after-tax contributions. The tax exemption for invalidity payments will also be extended to the self-employed. The ability to make deductible superannuation contributions is extended to age 75. It will be somewhat easier to find and transfer so-called lost superannuation between funds.

To increase further the incentives to save, from 20 September 2007 the pension assets test taper rate will be halved to $1.50 per fortnight for every $1,000 of assets above the assets test free area. The superannuation preservation age will not change.

Let me turn to some of the impacts of the package. The total cost of the package is $7.2 billion over the next four years. The beneficiaries of the tax-free treatment will be those Australians who have or will have $136,000 indexed or more in super savings. For Australians with substantial retirement savings, this package will provide welcome additional retirement income. At present, neither exit tax nor, in most cases, income tax apply to individuals below that level of $136,000 in superannuation savings.

Research from the National Centre for Social and Economic Modelling shows that in 2004, for baby boomers aged between 45 and 60, the average male had $87,000 and the average female had just $35,000 in super savings, with median retirement savings of just $30,700 and $8,000 respectively. To add a dose of reality to this debate: the majority of baby boomers do not benefit from this package because they have relatively low levels of superannuation saving. Effectively, battlers retiring now or in the near future will receive little or no benefit from this particular package. That is not a reason to oppose the package; it is a reason for pointing out that a touch of reality is needed when looking at the impacts of this package. Of course those retiring in future, depending on their age, will receive varying levels of benefit from these measures. The measures in the package both expand and rationalise incentives for small business by applying the same rules and including them in the voluntary co-contribution scheme. Labor welcomes that. These changes will assist people in this vital and growing sector of our economy.

It should be noted that trying to get these costings from the Treasury officials was like extracting teeth. I do not blame the Treasury officials. They do their best but they have their political orders: ‘Don’t provide information to the public or to the opposition of the day about detailed costings.’ They have their orders, and I understand that. Of the estimated $7.2 billion cost of the package, there will be a $4.2 billion direct input to superannuation over four years. That means the government is putting in just over $1 billion extra each year into super. Combine that with a further $1 billion each year from the existing voluntary co-contribution, and a total injection of some $2 billion a year—and that is welcome—is being provided by the government. The incentive approach is likely to see ongoing additional voluntary contributions of $2 billion to $3 billion a year. That is important in helping some Australians to improve their retirement incomes, but it hardly matches the Treasurer’s boast: ‘The biggest reform to superannuation that Australia has ever seen.’

The new flows to super are put starkly into the shade when they are compared to Labor’s compulsory nine per cent superannuation guarantee, which underwrites some $65 billion into superannuation every year. Credit for that achievement should be given to previous far-sighted and visionary reforms, which, I might say, were supported by the Democrats—and Senator Murray is in the chamber. They supported those reforms against the trenchant opposition of the now Liberal government. I think particular personal credit should be given to the vision and drive of the then Treasurer, and subsequently Prime Minister, Paul Keating, in this regard. The reforms laid a strong foundation in respect of our retirement income system and are recognised by the World Bank as global best practice.

The Senate Economics Committee unanimously identified a number of concerns. There is a tax increase in this package. It is quite a nasty tax increase for those to whom it will apply: a rate of 46.5 per cent on contributions—up from 15 per cent—where there is nonprovision of an employee’s tax file number. The Senate Economics Committee looked at this issue very carefully and considered that the exemption rate below which this new tax will not apply, of $1,000 a year, is too low. It represents an annual income of only $10,000. It should be set higher otherwise hundreds of thousands of battlers will face a higher tax rate, not a lower tax rate. That was a unanimous recommendation of the committee.

Labor are not proposing specific amendments to the package in the committee stage. We support the package. Our proposed second reading amendment notes the strong foundations laid by Labor governments in the context of compulsory superannuation, notes the positive nature of the measures, notes the unanimous concerns of the Senate Economics Committee and, I think, is a useful adjunct that should go on the record in terms of this debate. I should also indicate we will be supporting the second reading amendment that Senator Murray is to move in this regard as well. I move Labor’s second reading amendment:

At the end of the motion, add “but the Senate notes:

(a)    that Labor governments laid the foundation for Australia’s modern superannuation system by introducing compulsory superannuation contributions;

(b)    that, in supporting the bills, the measures will:

              (i)    improve the retirement incomes of many Australians,

             (ii)    enhance simplicity of the compulsory superannuation system, and

            (iii)    give certainty and stability in the critical public policy area of savings for retirement;

(c)    notwithstanding support for the bills as a whole, the unanimous concern by the Senate Economics Legislative Committee in respect of:

              (i)    the tax increase from 15 per cent to 46.5 per cent of contributions where an employer fails to provide an employee or member tax file number,

             (ii)    the treatment of Australian Defence Force disability pensions,

            (iii)    the disparity in income tax treatment of non-superannuation income for members aged 60 and above of ‘untaxed’ funds compared to members of other funds, and

            (iv)    the need for a subsequent amending bill before 30 June 2007 to address any issues that require further consultation;

(d)    that both the Government’s own projections of new benefit lump sum and pension outcomes indicate a nil or very small improvement in retirement income for those with small retirement savings; and

(e)    the need to develop and implement further policy to improve the retirement savings of middle- and low-income Australians”.

12:51 pm

Photo of Andrew MurrayAndrew 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.

Photo of John HoggJohn Hogg (Queensland, Deputy-President) Share this | | Hansard source

Senator Murray, you can foreshadow the moving of that as there is already a second reading amendment before the chair.

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

That is quite right, Mr Deputy President; I knew that really! So I foreshadow my second reading amendment, which has been circulated as item 5204, and I will indicate, before sitting down, that I will be supporting Senator Sherry’s second reading amendment. (Quorum formed)

1:14 pm

Photo of John WatsonJohn Watson (Tasmania, Liberal Party) Share this | | Hansard source

The Treasurer, Peter Costello, took the superannuation industry and financial markets by surprise in the May 2006 budget with his policy of simplifying and streamlining superannuation. People moving into retirement have been actually handed the biggest tax break on superannuation since the time of the five per cent tax on lump sums. Unlike most other countries, Australia has taxed super three times: on entry into a fund, 15 per cent; on earnings from the fund, 15 per cent less dividend withholding tax; and on exit from the fund, anywhere from zero to 47 per cent. In the future, as a result of these monumental changes by the Treasurer, there will be only two levels of taxation, with exit taxation being abolished in the case of a taxed fund, where most of the members reside. So the effect of this simplifying of superannuation by the Treasurer is that gone are the eight very complex stages of computation of tax on what is known as an eligible termination payment, often referred to as an ETP. This means that the financial planners of this world will now focus on investment earnings rather than on planning around the age based and reasonable benefit limits to minimise tax. Too much time in the past was spent on minimising tax rather than on maximising returns.

Commenting on his superannuation budget initiatives, Treasurer Costello said that the measures had effectively made superannuation one of the best possible investment options for Australia and that they would encourage Australians to remain in the workforce. It is interesting to note that, following that announcement, many senior people in the union movement commented that it was the Liberal coalition government that was now the party for superannuation.

Earlier, Senator Sherry waxed lyrical on what the government of his day did in the early nineties, but times have moved on and the initiative has now been taken by the Liberal Party, which is handing out the biggest benefit in known memory. Approximately 85 to 90 per cent of superannuants in Australia are in what is known as a tax fund. When they are aged over 60, they will receive a lump sum with very few strings attached that will essentially be tax free. What is even more important and attractive is that, when this sum is invested in a pension, the income stream following that pension will be tax free. There is another group which comprises the 10 or 15 per cent of superannuants who are in a Commonwealth fund or are state employees, but their super is not taxed to begin with and they will be subject to a separate concessional taxation regime.

For many years now people have been saying that the nine per cent superannuation contribution from employers was not enough to derive a reasonable retirement income. But, as a result of these measures, the capital accumulation which will now be required to produce an effective income stream will, because of the impact of no tax on the stream, be so much lower than it was previously. This will minimise the adequacy issue. This is a great simplification of the accumulation and the draw-down.

Because the tax on superannuation has been reduced for people receiving benefits from tax sources, taxes will also be reduced on benefits paid from untaxed sources for people who are aged 60 and above. Under the plan, it is proposed that the 30 per cent tax on lump sums will be reduced to 15 per cent for amounts up to $700,000, with any excess taxed at the top marginal rate. Pensions received from an untaxed source will be taxed at the marginal rate but will receive a 10 per cent offset. Again, this is a very generous arrangement.

I will give an example of how the system will work. Say a person receives a pension of $56,000 per annum with a deductible amount of $6,000; that $6,000 would represent contributions made from that pensioner’s after-tax income. As a result of that, there would be a taxable pension of $56,000 less the $6,000 that he put in himself—$50,000. The deductible amount of $6,000 would naturally be paid tax free. The tax offset would be 10 per cent of the $50,000, which is $5,000. So the amount of tax payable by the person would be reduced by up to $5,000 depending on the person’s circumstances. In the case that I have outlined, it would be reduced by $5,000. That is a very generous and helpful contribution courtesy of the Liberal coalition.

Some of the other budget changes include the abolition of the reasonable benefit limits, often known as RBLs. These will be replaced with a flat pre-tax maximum of $50,000 in a salary sacrifice type of arrangement and an after-tax contribution of $150,000 per annum with a facility for deductibility up to $450,000 in any one year but still within that three-year arrangement. Members aged over 50 will be able to contribute $100,000 pre tax in one year for five years and this new $150,000 per annum limit on the undeducted contribution applies with effect from 9 May 2006. The Treasurer also confirmed that the tax will exclude the capital gains tax component from the sale of a small business. This will allow each small business owner to contribute up to $500,000 of capital gains into a superannuation fund in addition to contributions allowed under the cap. It is a very generous arrangement and it will be very helpful to small businesses.

Current allocated pensions require a draw-down within both minimum and maximum parameters. What will happen as a result of these significant changes is that a new type of pension will be introduced which requires only a statutory minimum—no maximum—payment to be made. People will be able to take a pension and also work at the same time. That is very valuable in circumstances where we are encouraging people to work after reaching normal retirement age. So there will be a facility for people to be able to have an income which has a taxable component and a tax-free component.

Another very important facility that is given to individuals is that they will have far greater flexibility as to how and when they draw down their superannuation in retirement, and there will be no forced payment of superannuation benefits. In effect, a person could maintain their superannuation account with their industry fund, or wherever it might be, and it will act almost as a bank account does, because they could draw out the money—draw down their funds—as and when they require.

As a result of these changes, the self-employed will be able to claim a full deduction for their superannuation contributions as well as be eligible for the government co-contribution on their personal post-tax contributions. The ability to make deductible superannuation contributions will be extended to the age of 75. Let me give you an example of just how significant these changes can be. For somebody who is earning $1,000 per week, the lump sum saving over 40 years will be $37,000, or an extra $136 per week in pension. I will repeat that to show the impact that simplifying and streamlining superannuation will have on an individual: if an individual is on $1,000 per week, lump sum savings over 40 years will be $37,000, or an extra $136 per week in pension.

To further increase the incentives to save for retirement, from 20 September 2007 the pension asset test taper will be halved to $1.50 per fortnight per $1,000 dollars of assets above the threshold. The effect of this is that it will allow a single retiree homeowner to have around $165,000 in additional assets before they lose the age pension, while a couple can have around $275,000 in additional assets before losing the age pension. This will have a very significant impact on providing security for older people in our society because the benefits and the side benefits of the age pension, in terms of access to the Pharmaceutical Benefits Scheme, are very significant.

But not everything has changed. The 15 per cent contribution tax will remain, although any taxable contributions over the new $50,000 limit will be taxed at the top rate. Our friends on the other side of politics believe that the way to tackle this is to reduce the contributions tax by some amount—by how much was never stated—but, while that could provide some benefits, the problem with that approach is that it would not reduce much of the red tape. In fact, according to the Labor Party proposal, instead of having eight stages of computation for an eligible termination payment, you would have nine—further complicating the arrangements that we have sought to eliminate.

The government provided an opportunity for submissions to be made, which were passed to Treasury. This was a massive undertaking. It is a big change and has a big impact on the budget: $2 billion every year for the next three years at least. The matters that the coalition looked at favourably included exiting the existing pension arrangements and so on. In summary, the aspects of the reform are as follows: it will significantly lower the tax impact on superannuation in terms of a tax fund; the replacement of the age based limits with streamlined contribution rules will certainly simplify matters; it will improve the co-contribution incentives for the self-employed; it will halve the asset test taper; and it will rewrite superannuation law to present a much clearer picture. The removal of taxes from three levels—on entry, on earnings and on exit—to only two levels will certainly bring us to the forefront of the lower taxation regime that applies throughout the world.

It is not surprising that around the world people are looking to Australia for taxation reform. I know from experience in Asia that it is Australia they are looking to for reform and for guidance as to how they should shape their retirement incomes. There is a situation where, particularly in Asia, the family unit is breaking down, there is a lot more mobility and, in China’s case, there is a one-child policy. They are undergoing some fundamental rethinking of retirement. The Asians are particularly good savers. At the present time, most of this money just goes into bank accounts. They are looking to get larger returns. They are looking to find an environment and a regime that will provide the security that is absolutely necessary for saving over a 30- to 40-year period. It is to Australia that they are looking.

Australians are at the forefront in providing the IT facilities and the expertise that the Asians are looking for. To the credit of Australia, Australian companies, executives and experts are providing that information and assistance and are contributing to the stability of pension regimes right across the world. I thank them for that, and I thank the Treasurer for his foresight in introducing such a marvellous incentive and initiative.

1:31 pm

Photo of Andrew BartlettAndrew Bartlett (Queensland, Australian Democrats) Share this | | Hansard source

I want to speak to just a couple of issues surrounding the Tax Laws Amendment (Simplified Superannuation) Bill 2006 and its 10 related bills which were raised during the Senate Economics Committee inquiry into the bills and have also been raised with me by a number of constituents. Before I do that, I would like to reinforce the key role the Democrats have played over the years in strengthening Australia’s superannuation system and being pivotal in the development of the superannuation system in Australia. It is probably fairly fashionable these days to deride my Queensland Democrat predecessor Cheryl Kernot, but she played a key role as a Democrat senator in the formulation and expansion of the superannuation system under the former Labor government. That is a positive legacy of hers that is still being felt today, and I think it should be acknowledged.

More recently, the Democrats played a key role in negotiating constructively with the current government, as we often attempt to do, in developing a massive expansion in the amount of assistance for low-income earners in maximising their superannuation savings. As part of that, quite wisely, we required regular quarterly reports to be tabled in this parliament about the amount of money being provided to low-income earners through government payments as supplements to their superannuation contributions. The amounts that have been provided to supplement and expand the superannuation savings of low-income earners have proven to be much larger than was originally anticipated. I am fairly sure it now goes well past the $1 billion mark of extra money that is in the superannuation savings of many thousands of Australian low-income earners. Those are just a couple of examples amongst many of the constructive, very important and direct legacy of the Democrat contribution to our superannuation system.

My colleague Senator Murray has spoken to this particular legislation at some length, so I will not go over some of the points that he raised. If I were still in a balance of power position in this chamber I would insist that much more detailed costing projections be provided by the government. I appreciate these things are always an estimate, but when you are making changes of this magnitude there should be at least some effort to project the longer term costings and the scenarios and cameos for different people in different circumstances.

The failure of the government to do that work and to provide those projections is pretty sloppy, frankly. It is the sort of thing that has happened more and more since the government got control of the Senate. That shows that having an independent Senate that can properly review what the government is doing is not just a matter of saying, ‘That’s bad policy and we’ll stop it,’ or, ‘That’s bad law and we’ll stop it’; it is actually a matter of ensuring that the job is done thoroughly and properly the first time around. Even if you support a policy intent, there is a big difference between just letting it roll through without proper examination or proper work being done and looking at it in the necessary detail to make sure, as much as possible, that you get it right the first time and that you have a broad idea of all of the potential effects. The flow-on, long-term effects of all of these changes are hard to predict in lots of ways, but that does not mean that you cannot do a bit of work trying to do so.

A specific area I want to touch on is detailed in chapter 3, I think, of the Senate committee report and relates to the tax on additional assessable income, particularly the way some of these changes interface with the situation for people in military service schemes. The committee report—and it was unanimous on this matter, as I understand it—noted possible inequities associated with members of taxed and untaxed schemes who receive assessable income in addition to their superannuation benefits. One submitter suggested that these changes result in a further inequity for many individuals who have other sources of income or who receive higher superannuation pensions, because it taxes the residual end benefits tax at marginal rates rather than subjecting it to a separate 15 per cent flat tax.

For members of tax schemes receiving a superannuation income stream, additional income is taxed at a marginal rate from a starting point of zero. This category of recipients is therefore able to take advantage of the tax-free threshold and the overall progressiveness of the income tax system when tax is calculated on their additional income. Pension recipients from untaxed funds are taxed at marginal rates and additional income earned by these fund members is combined with their superannuation income stream to determine their assessable income. Consequently, more tax is paid on this additional income by those in untaxed schemes than those receiving a benefit from a taxed scheme. The committee came to the view that this was an anomaly that applies inequitable tax treatment to the same type of assessable income and urged the government to reconsider the way in which total taxable income is classified for those in untaxed schemes.

This links to some extent with concerns specifically relating to the Defence Force Retirement and Death Benefits Scheme. These were also touched on in the Senate committee’s report. The concerns that have been raised with me by a number of veterans relate to the way these benefits are being excluded from the new schemes on the basis that they were untaxed and unfunded. Certainly, some contributors to the scheme state that they did contribute a portion of their salary to the scheme. It was a taxed portion under a compulsory 5.5 per cent contribution, and for a period the government did make a co-contribution of 11 per cent until this scheme was changed.

A number of veterans argued in their submission to the committee that the Defence Force Retirement and Death Benefits Scheme should be considered as at least partly funded so that they could have some of the benefits available to other superannuants. I note that Treasury officials—and I think the Treasurer himself—indicated a commitment that veterans would not be paying more tax under the proposed new regime. But the fact remains that, under this proposed new regime, a lot of other people will be paying less tax and these veterans will not. So there are certainly some grounds for the concern that was expressed, reflected in the view put forward by the committee. The report said:

The committee recognises the unique circumstances in which veterans find themselves. Military personnel rarely have the opportunity to work until the usual age of retirement, especially given the inherent physical risks associated with serving in the ADF. Further, as a consequence of military service many former ADF members are left incapable of undertaking further employment.

That is a factor relating to service in the defence forces that I have spoken on a number of times in this place before. We should realise that it does not just apply to veterans—people who are wounded in action in the theatre of war. Being in the Defence Force is an inherently risky business in general. There are many people injured in peacetime whether in non-warlike service or as part of their day-to-day activities in the ADF.

I have spoken a number of times about how I believe on many occasions, although not all, we are still not adequately assisting ex-service personnel whether they be war veterans or other ex-service personnel who have been injured or wounded in the line of duty. The committee indicated its sympathy for the financial circumstances of veterans, particularly those unable to work. But—and I am paraphrasing here—it indicated the view that, whilst there was some understandable concerns being expressed by those veterans with respect to the treatment of the Defence Force Retirement and Death Benefits Scheme, it did not believe that this was the best place to fix it up. The report stated:

... the committee is not persuaded that the tax free treatment on benefits should be further extended. However, the committee strongly encourages the government to examine the adequacy of financial protection that military superannuation schemes provide for incapacitated ADF members, particularly in comparison with other public sector superannuation schemes.

The committee felt that, if veterans are at a relative financial disadvantage due to the inadequacy of their military superannuation funds, redress should not occur through special tax exemptions. In the committee’s view, this would negate the purpose of the legislation and potentially create other inequitable treatment for people facing the same hardships by different circumstances. I can understand the view the committee has put. They basically said, and I am paraphrasing, ‘We agree that some of you are in an unfair position, but this process is not the best way to fix it.’ That is probably correct. But the problem is that, when you are the person in the unfair situation, particularly if you are a veteran or ex-service person, a statement like, ‘Yes, we agree you are getting a bit of a rough trot but this isn’t the best way to fix it; we need to convince the government to do something else,’ is the sort of thing they tend to hear time and time again. Even though this might not be the best way to fix it through the mechanism that is suggested, it does redouble the obligation on government to seek to fix it. It is cold comfort to have your concern acknowledged and then be told that you have to find another way to address it. I think that on all sides of politics we need to be particularly cognisant of the unique type of contribution that Defence Force members make, particularly those who have been injured and those whose injuries are sufficiently severe that they are unable to work again.

Generally speaking, politicians like to wrap themselves in the flag. They like to hang out at military parades, give out medals, be at services, wave off troop ships, welcome them back home and all those sorts of things, but, when it comes to the ongoing day-to-day treatment for those service personnel for the rest of their lives, it often tends to be governments that are the ones missing in action. We need to be doing a lot better in that regard. I think it is doubly important given some of the willingness to use political rhetoric to encourage and promote military activities around the place.

I want to take the opportunity to put that on the record and particularly to urge the government to take into account the committee’s recommendation No. 4 regarding the separate assessment of superannuation income streams and additional assessable income and also the committee’s view regarding the treatment of people in military service schemes. One of the things that can happen with committee inquiries into legislation—unlike committee inquiries into policy areas where governments are meant to provide responses to the various recommendations—is that there is often very much a feeling that, once the legislation has been dealt with, recommendations that do not directly relate to the legislation just disappear into the ether.

Having said that, the government’s record of responding to any committee report is spectacularly appalling, especially since they have gained control of the Senate. It seems like other people’s views no longer need to be even acknowledged let alone responded to. But these are important issues; they were unanimous findings of the committee. I think it is particularly appropriate that the efforts to redress some of the concerns be redoubled, for both the unique aspects of the tax treatment of benefits and, more broadly, the continuing difficulties that many ex-service personnel face.

1:45 pm

Photo of Ruth WebberRuth Webber (WA, Australian Labor Party) Share this | | Hansard source

I rise to continue where Senator Bartlett left off. But, before commencing my contribution to the debate on the Tax Laws Amendment (Simplified Superannuation) Bill 2006, as a member of the Senate Economics Committee I would like to place on record my thanks to all the secretariat staff and those who contributed to our inquiry. As is often the case with many Senate committees, but particularly the Economics Committee these days, we have a particularly congested time line within which we are to consult with the affected public on potential legislation and then report to the chamber, because the government seems to be in a great hurry to get some of its legislation through. Sometimes we are inquiring into legislation that, when the inquiry commences, the opposition has not really even seen. We have often only seen the title. I place on record my thanks to the secretariat and other staff, and those who submitted to our inquiry on legislation that it took a while for us to see.

Senator Bartlett raises some legitimate points. My colleague Senator Sherry has expanded on the opposition’s general concerns about the costings of this package. The specific concerns that I want to focus on are those that affect our former military personnel and particularly our veterans. Senator Bartlett has outlined the committee’s unanimous recommendation—recommendation No. 4. The committee was moved by the witnesses who were retired from the Defence Force. I particularly want to place on record my thanks to Mr Colin Wade from Mandurah in Western Australia, who is retired from the Defence Force. He gave extended and distinguished service to the Australian Defence Force and retired on the grounds of ill health. Some of the things he endured while in the Defence Force have obviously severely impacted on his day-to-day living. Government policy does not really take into account the impact that it has on people like Mr Wade and his colleagues within the Defence Force.

It seems to me that a good public policy principle would be to look at these people as a separate category. It is, after all, the government of the day, no matter what its political persuasion, that decides to put these people in harm’s way. Therefore, we have a great duty of care to look after those veterans at the end of that service and to recognise the particular physical and psychological impacts that service has had not just on them but on their families. I do not think anyone on the committee failed to be moved by Mr Wade and his evidence. It took an incredible amount of courage and bravery for him to travel across the country. He had to bring support with him to appear before the Senate committee. Interstate travel is something that we in this chamber may take for granted as pretty easy, relaxed and informal. But it is not always that way, particularly if you have suffered severe impacts on your health. It can be a pretty traumatic experience, and it is always a traumatic experience to expose your personal life and history to a roomful of strangers and on the public record. So it is worth acknowledging him and thanking him for taking the trouble to do that, thus allowing the committee to consider the wider implications of legislation like this.

When members of the committee quizzed departmental officials about the impact of this legislation and with whom they had consulted, we were told that they had consulted with ComSuper on the subject of people receiving Commonwealth superannuation and that that was about it—ComSuper are the peak body. I do not in any way want to belittle the contribution that any public servant makes or any of the people who work for ComSuper, but these veterans, these people who have served in our Defence Force, are in a different category. Yes, their superannuation is looked after by ComSuper, but they have a unique set of circumstances. It would not seem unreasonable that the department actually go and consult separately with their representative body rather than just the peak organisation that serves to look after everyone who receives a ComSuper benefit. After all, those veterans, those retired Defence Force personnel, would comprise a very small percentage of the overall ComSuper membership, but they do have unique circumstances. There are not that many other ComSuper beneficiaries that governments of the day can choose to put in harm’s way. Our veterans often suffer long-term physical and psychological consequences from the policies of the government of the day.

When considering legislation like this it is important that we look at the impact in its totality on the entire membership and composition of the membership of ComSuper rather than opt for the standard consultation with the peak organisation. The concerns they would have raised would have reflected the circumstances of a significant proportion of their membership. For the committee members, it was only through meeting with Mr Wade and some of the other witnesses who appeared that we came to understand some of the other implications and impacts of this legislation, and some of the potential solutions that there are to the concerns of these people. I believe that next time we need to hasten a bit more slowly—get the consultation right and look at all the impacts rather than the impact on the vast majority, and every now and then concede that there may be some special circumstances and some people who have had very traumatic lives and deserve special consideration.

1:51 pm

Photo of Grant ChapmanGrant Chapman (SA, Liberal Party) Share this | | Hansard source

The legislation that we are debating today, the Superannuation Legislation Amendment (Simplification) Bill 2007 and a raft of related bills, implement the Howard government’s groundbreaking reforms to superannuation. These bills simplify superannuation arrangements for retirees and make the provisions for superannuation much easier to understand. They improve the incentives for people to work and save and they introduce greater flexibility in how superannuation savings can be drawn down in retirement.

In introducing these major superannuation reforms, the Howard government is significantly improving the adequacy of retirement incomes. The raft of bills that we are debating today simplifies the current complex tax arrangements with regard to superannuation and removes restrictions that have previously applied to superannuation benefits. The bills provide retirees with much greater flexibility as to how and when they draw down their superannuation benefits. More than 10 million Australians with superannuation accounts, in addition to the many future account holders who will establish superannuation savings in future years—in many respects as a direct result of the incentives that this legislation introduces—will benefit significantly through these reforms.

To summarise some of those very important reforms: firstly, there is the abolition of the reasonable benefit limits so that there is now no limit on the amount of capital that a person can accumulate through superannuation or put into a superannuation fund. The age based contributions whereby a person can make a contribution to a superannuation fund that is tax deductible and have that taxed at 15 per cent in the superannuation fund, which previously varied according to age, is now set at a flat rate of $50,000 per year irrespective of age.

In addition to that, people under this legislation are able to make an undeducted or after-tax contribution now limited to $150,000 per year. Previously, undeducted contributions were unlimited; people could put as much after-tax capital into superannuation funds as they chose and were able to do. But these measures place an annual limit on that of $150,000, or you can put $450,000 in on one occasion and then not make any after-tax contribution for three years. That ensures an element of fairness with regard to superannuation savings.

Importantly, this legislation ensures that, as from 1 July next year, once a person turns 60 years of age there will be no tax on the benefits they draw down from their superannuation fund. Whether those benefits are drawn down in the form of a regular pension, in the form of a lump sum or through a combination of those there is no tax on the benefits drawn down from a superannuation fund. This is an amazing and major reform to superannuation. Importantly, the provisions made for transition to retirement mean that people can keep working part-time as they approach retirement age and make contributions from their earnings into a superannuation fund, and gain the tax advantages of that for their retirement savings purposes, but at the same time draw down their superannuation either in lump sum form or by way of pension on a tax-free basis. That is a very significant reform among the major reforms under this legislation.

Also, until 30 June this year people can make a one-off contribution of $1 million to their superannuation fund. As I mentioned previously, under the existing regime there was no limit on the after-tax contributions that people could make to a superannuation fund as part of their transition to retirement. Quite fairly, the government in this legislation has allowed a $1 million limit up to 30 June this year, which takes account of that and of the subsequent introduction of the $150,000 per year limit on undeducted contributions. They are very important initiatives.

But one of the most important initiatives with regard to this legislation is the provision that has been made for small business, and I want to focus some remarks on that particular benefit. Small business owners for a long time have been amongst the most enthusiastic supporters of superannuation, particularly in the form of self-managed superannuation funds. The fundamental logic of their enthusiasm is easily understandable. Many people decide to set up their own businesses to ensure their independence, and it is the same motivation that encourages many of them to establish their own self-managed superannuation fund. Under this legislation the link between small business and self-managed superannuation funds, I believe, will become even closer through 2007 and beyond because of the way in which this legislation makes superannuation simpler and more tax effective. It is only one of the many changes that this legislation initiates. It is a policy initiative of the Howard government which this legislation introduces and I want to focus on it today, because the small business sector is of great importance to our economy and to our community.

One of the changes in relation to small business is to allow full tax deductibility for personal contributions made by self-employed business owners as compared with employees of incorporated businesses. No longer does a small business owner have to be the employee of their own incorporated business; they can be in a partnership or some other business ownership structure and as a self-employed person can now gain full tax deductibility for their contributions to super up to that $50,000 per year limit. That is a very important reform as far as small business people are concerned.

But the most important reform, I think, is the exclusion from the annual cap on undeducted superannuation contributions of the proceeds from the sale of small business assets or farm assets that qualify for the standard small business capital gains tax exemptions up to an indexed lifetime limit of $1 million. That applies in addition to the annual cap on undeducted contributions of $150,000 a year or $450,000 on a three-year cycle. This is a very important reform for small business. I welcome its introduction. It was not part of the original package announced in last year’s budget, to which this legislation by and large gives effect. It was an initiative taken during the refinement and consultation process of this legislation. It is an issue that I raised very strongly in the government members Treasury committee and I welcome the fact that the Treasurer finally acceded to including this as part of the package. It is a very important initiative.

It means that when a small business person retires and sells the business for the purpose of retirement they can put in $1 million of the proceeds of the sale of the small business as an after-tax contribution, and if it is a husband and wife business then obviously they can put $1 million each into that fund in addition to the $450,000 on a three-year cycle. So it does make a substantial difference to small business and I think it is an important initiative

Debate interrupted.