Wednesday, 24 June 2009
Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009
Debate resumed from 15 June, on motion by Senator Faulkner:
That this bill be now read a second time.
I rise to speak to the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 on behalf of the coalition. This bill has three schedules.
Schedule 1 is a tax measure that addresses the existing tax exemption for foreign employment income. Currently there is a tax exemption for income that is earned by Australian residents working overseas for at least 91 continuous days. These rules were originally introduced to ensure that people would not be subject to double taxation on their foreign employment income. However, this tax exemption created inequities between people working overseas, particularly those working in low-tax countries, and people working in Australia paying our standard income-tax rates.
The new legislation now proposes that all Australian residents earning income from foreign employment will have their income taxed under the Australian income tax system. They will get a rebate for any tax they have paid on that income to other countries to ensure that they are not double-taxed. This exemption will remain in place for workers undertaking certain aid or charity work, certain government work, and other work that is deemed to be in the national interest.
Whilst I do understand that this measure reinforces the general principle that individuals who are Australian residents for tax purposes should be taxed on their worldwide income, the proposed changes may indeed have some unfortunate results. The measure will place a new compliance burden on the individuals and the companies affected. For example, in the mining industry, most employers are foreign entities, and they are not governed or bound by Australian law. Their accounts are not freely available, nor is information regarding individuals or foreign companies operating in developing countries. In pursuing such information, the Australian Taxation Office would be required to breach various privacy acts on foreign soil. And, given that we do have numerous Australians working offshore—in mines, and as engineers and all kinds of professionals all over the world—these types of compliance issues should not, in our view, be underestimated.
In addition, on a personal level, there is a risk that those Australians working offshore will simply become nonresidents to avoid this taxation change. This would mean that they would no longer bring their money back to Australia to spend. We could also, potentially, lose their talent and experience—a literal ‘brain drain’ could well occur as a result of this measure. The equally unpalatable alternative is that they would give up their work overseas and return to Australia immediately, which would only increase our existing pressures on unemployment, particularly in the mining and finance sectors—sectors already suffering high unemployment, having been heavily affected by the pressures of the global financial downturn.
So we would just pose the question to the government: are either of these solutions the outcome really being looked for here, given that there is a legitimate policy purpose to be addressed? The proposal to make this measure effective from 1 July has given the families and companies affected no time to look at existing contracts and make life-changing adjustments and decisions. So there are certainly some either unintended or unpalatable consequences in the schedule.
The bill, of course, has two other schedules. Schedule 2 and schedule 3 both deal with changes to superannuation. Schedule 2, to my great regret, amends the existing superannuation co-contribution scheme that was introduced by the former coalition government. In fact, in my role as the former Assistant Treasurer I had, I think, the great fortune to develop the original co-contribution policy. The scheme was designed to encourage low- and middle-income earners to set aside some of their earnings for their retirement by providing favourable conditions for contributing to their superannuation.
The existing scheme provides $1.50 for every dollar that a low- or middle-income earner puts aside to look after themselves in retirement and, of course, it has been a very significant success. Regrettably, this bill proposes to, as it is expressed, temporarily cut the superannuation co-contribution scheme to a dollar matched for every dollar contributed, a substantial diminution in the incentive in the co-contribution scheme. The maximum government contribution will be lowered from $1,500 to $1,000. The government will gradually phase the co-contribution rates back up to $1.50 by 2014.
This measure will have a significant impact on the 1½ million Australians who received the superannuation co-contribution in 2007-08. So that is 1½ million low- and medium-income earners who are now going to have superannuation ripped away from them by this government. They are certainly not going to be supported by the government of Australia as they were under the previous coalition government.
There is also a lot of focus on the word ‘temporary’. It is very difficult to accept tha, when the Prime Minister and the government say ‘temporary’ they really mean temporary as in fleeting or certainly of very short duration. I do not think the length of time until 2014 is temporary. Do not forget that we heard that we were going to have a budget deficit for a temporary period of time, but we are going to have a budget deficit, as we now know, for years and years and years to come. The government has now used the word ‘temporary’ in relation to the wind back of this very positive superannuation co-contribution program. We certainly know that we cannot rely on the Rudd Labor government and I think we can take the word ‘temporary’ with a very big grain of salt. If I am passionate about the co-contribution scheme, so be it.
I do want to make the comment that this is a budget measure. It is a casualty, of course, of the mad scramble to make savings following the mad spendathon that this government has embarked upon—$124 billion of new spending since this government came into office. What this measure shows is that people, particularly low-income earners and families, are already paying the price. They are paying the price for Labor’s reckless spending and mounting debt.
The coalition are very proud of the co-contribution scheme that we introduced and in fact enhanced, and the sad fact is that this measure—introduced, they will no doubt say, as a matter of necessity to fill this burgeoning deficit in our finances and in our fiscal position—will reduce the capacity of low-income people to save for their retirement. It is a direct consequence and a casualty of this Labor government’s spending and inability to plan for the global downturn with anything other than a reckless spending spree. Cuts to the co-contribution scheme are a clear example of the price being paid for Labor’s huge debt.
The reason that we have such a large debt and that very good policies and low-income people are being impacted by the scramble to try and fill this big gap in revenue is explained as ‘trying to deal with the fact that there has been a very big revision in revenue’. That is true, but the huge impact of spending $124 billion since this government got into office and a debt of at least $315 billion is that two-thirds of that is due to new spending. About $95 billion of that is in stimulus packages. Our quarrel about the stimulus packages, which have had such an impact on a measure such as the co-contribution scheme, is not that there was not a case for stimulating the economy in the light of the reduction in revenue and the impact of the global financial downturn. Our argument with the stimulus packages has been first of all about the magnitude of them and, second, that they are doing so little for the long-term productivity and benefit of this country.
We had the early stimulus packages with the sugar hits, the cash splashes, that have not done anything significant to save jobs. We know in fact that, notwithstanding this huge spending spree, 80,000 jobs have been lost over the past six months. If these stimulus packages have been so effectively targeted to save jobs, why is it that we still see unemployment rising and 80,000 jobs lost over the past six months? It just does not stack up with the government’s claims that the sugar hits were creating jobs.
Then over the past few days we have seen the extraordinary events surrounding the wanton waste and inefficiency of the $14.7 billion splash on schools—dressed up as ‘Building the Education Revolution’, a very Orwellian expression. Of course, what it does is give a lot of schools a lot of facilities that they have not particularly sought and absolutely no flexibility to design what they really need and want.
This massive spending and debt are certainly not justified as supporting jobs in the magnitude claimed by the government. As I said, the trouble with the argument is that 80,000 full-time jobs have been lost in the last six months, with more than 24,000 lost just in May. We are entitled to ask: with such massive spending, why is the number of jobless still increasing?
The point of my discussion with the Senate today about the impact of these stimulus packages and the wanton waste and inefficiencies that we have seen in the second stimulus package—and, in particular, the spending on schools—is that one casualty of this poor planning and indiscriminate spending is a good measure like the co-contribution scheme that directly impacts on the low-income earners of this country, who otherwise, without these sorts of measures, would have had no incentive to save for their retirement. In fact, the reduction in the co-contribution is a direct result of the Rudd Labor government being unable to properly deal with the obvious pressures that have been brought about by the impact of the decline in revenue and the pressures of the global financial downturn. These people are paying the price for Labor’s reckless spending and debt.
Schedule 3 is focused on the area of superannuation concessional contributions. In this particular policy area, the government announced in the budget that it will halve the concessional contribution caps that currently exist for people to put aside superannuation contributions so that they can save for their future. The current provisions cap superannuation contributions at $50,000 for those aged 50 or lower and $100,000 for those aged 50 or older until 2011-12. The amendments propose to lower the cap to $25,000 for those aged under 50 and $50,000 for those over 50 until the financial year 2011-12. After this point, all Australians will be subject to annual contribution caps of $25,000. Of course, with this measure the government is undermining efforts to create self-sufficient retirees and provide retirement incomes for all Australians. It represents, I think, an assault on intergenerational responsibility for retirements. It is the first time in many years that the government has said to Australians, ‘We’re going to ensure that you can’t set aside funds for your own retirement anymore.’ For several years, there has been very much a bipartisan approach to superannuation and a real public policy interest in this nation that I think has been shared by both sides, by and large. But now I think that this measure very clearly says to people, ‘Don’t put aside as much; whatever you put aside, we’re going to support you less for your efforts.’
The end result of these two things will be that Australians will put aside less for their retirements and there will be more Australians calling on the public purse in the future. It is very unclear just what the government sees as the intergenerational pressures on superannuation and what it ultimately proposes. I know that there are many reviews going on, but these kinds of piecemeal measures, where you pull apart some parts of the system without thinking through the consequences, seem to my way of thinking to be very poorly thought out. With respect to Senator Sherry’s role in this, I am quite sure that he was not consulted—or, if he was, he probably did not have the ultimate say in these things—but that does not excuse the Rudd Labor government for not having a coherent approach before putting in place as part of a budget these measures which are so patently and obviously designed to just plug some revenue holes.
These changes, we think, are very short sighted. They may suit the government in the short term because they might claw back some $4.3 billion worth of tax savings for the government—which, of course, it desperately needs given that it has got this country into such a terrible situation with debt. We are back on the debt treadmill, so we know that these measures are designed very much to try and get us off the treadmill at some stage, although we cannot be very confident as to when that will be and what consequences this is going to have both for these measures and no doubt for others as the government realises the consequences of this ill-thought-out debt binge. These measures might serve the government’s short-term objectives; we acknowledge that. It is not that we are going to stand in the way of them, because we do understand that the government has created a big hole of its own making with debt, but in the long term they are going to mean that more people will end up dependent on the public purse—the public pension system—which is precisely what the government that I was a member of and a minister in for several years had very much sought to avoid. It is, I think, the first time that a government of Australia has sent such a negative signal to the people of Australia regarding savings for the future, and I am very surprised that the government was not able to find other ways to try to shore up its debt hole.
It is short-termist, I think. A grab of over $4.3 billion in these policy changes will no doubt help the government to rip back some savings from people seeking to provide for their retirement and will no doubt help the government, in the short term, to repay some parts of the monstrous debt that we are all now facing. But you really have to ask yourself: what is it going to do in the long term? What is it going to do to our objectives in the national interest to make as many people as possible self-sufficient in retirement, and what is it going to do in terms of undermining Australians’ confidence in saving for their future—the incentive to make whatever provision you can for your own retirement rather than be a burden on taxpayers? Yet again the superannuation goalposts are being moved, and uncertainty in superannuation undermines the system’s credibility and safety. It is, I think, disappointing in the extreme to allow measures to pass which hamper the ability of low-, middle- and high-income earners to provide themselves with an adequate retirement income. However, the perilous state of the budget requires such action. Australians impacted by these measures should know that this is a direct result of Labor’s reckless spending, and it should not be excused.
I rise today to support the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 on the whole because it does provide for a more equitable sharing of the tax burden between all Australian taxpayers. We note that in recent years Australia has not done so well in terms of equity, and I think this is an important measure.
However, I just question the government in relation to one aspect of this. It is really about equitable income distribution and targeting high-income earners overseas, but one group of people that appears to be caught by this is young Australians backpacking in Europe. This is an important part of Australia’s culture, in my view. Many young Australians take the opportunity to go overseas for periods as long as 12 months—or sometimes six months—and help to support themselves while they are there by working.
I think it is incredibly important that young Australians do take this opportunity to expose themselves to different languages, arts, music, food and the whole cultural context. I put it to the minister that, if you were overseas for a year as a student or a young person, it would not be unrealistic to have three weeks in a ski field in Austria, a week as a waitress or waiter on a Greek island, three weeks working in a pub in London, three weeks fruit picking in Spain, a couple of weeks working in a vineyard in France and a week making beds in Ireland. If you did that, you would have worked for more than 90 days while you were overseas. I understand that, as this bill is written, if you work overseas for 90 days or more you would be caught by this particular legislation.
For high-income earners, there would be additional paperwork under this legislation but the compliance costs would be commensurate with the quantity of money that would be recouped by the government. But in the case of backpackers—young Australians who do undertake this kind of casual work while on an overseas cultural experience—the compliance costs relative to the income earned are likely to be much larger. I put it to the government that right now there would be thousands of young people overseas in this position, and they will be caught because it is unlikely that they will even be aware of this at this point and will not be doing the paperwork that is necessary in order to comply.
I would really like the government to address this issue and explain whether it has to be 90 consecutive working days—so you would need to work three months in one type of employment or with the one employer before this counts—or 90 days in a 12-month period, in which case I think we run into all kinds of compliance difficulties. But even with 90 days in the one establishment, if you manage to spend three months or so working in London, you are still likely to be earning a relatively small amount and the compliance cost is likely to exceed the tax benefit that is likely to be recouped for the taxpayer.
I really want to defend the cultural tradition we have in Australia and defend the ability of young people to work in these circumstances. I do not know what the tax regimes in all the different European countries or the Americas or whatever are in terms of who pays tax and under what circumstances, but with casual work there is often a lack of compliance anyway, particularly with things like fruit picking. There is often a negotiated wage for the week and it is just paid in cash.
While I am on that subject, I might just say to the government what I think about the way this operates with backpackers in Australia at the moment, where the superannuation contribution is made by the employer at the time they employ the fruit pickers. Whether they be Swiss, Austrian, French, German or whatever, the problem is that very often they do understand that superannuation was paid on their behalf. They go home and they never claim it. It ends up being a windfall gain for the government, with the funds being transferred from employers in Australia to the government coffers. I really think we need to consider that in terms of how we deal with superannuation contributions. But that is another matter.
I am really concerned to make sure that we are not capturing a whole lot of young Australians, who are attempting to enjoy themselves, in a mass of paperwork in foreign languages and so on, in which case we would be making a mess of things. Whilst I support the government’s intent, there are always perverse outcomes if these things are not thought through. I would be very keen to hear the government explain how we are going to exempt young people who are in those kinds of arrangements working overseas.
I also want to ask the government for some sort of explanation pertaining to Senator Xenophon’s amendment and what appear to be, again, special arrangements being made for politicians and some public servants. That is in relation to the notional tax contribution in terms of schedule 3 and the concessional contributions cap for superannuation. It appears that, because the contribution will be assessed as a notional tax contribution, it will be interpreted as a concessional cap for these taxpayers for the purposes of the bill. And where the notional tax contribution is greater than $25,000, these taxpayers, as with politicians, will continue to be allowed to put more than this amount into superannuation at a concessional rate. Senator Xenophon has drawn the attention of the parliament to what appear to be special privileges for politicians and public servants as opposed to the rest of the population. As we are targeting equity and high-income earners, I would like to hear the government’s response to that particular criticism of the legislation. Could the minister also respond in relation to those thousands of young people whose parents and families I am sure are very concerned about what this legislation means in terms of capturing them.
I indicate my support for the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009. As Senator Milne indicated, I will confine my remarks largely to schedule 3 in terms of superannuation matters, although I would like to raise the changing of taxation arrangements for overseas workers—and I do not think Senator Sherry would mind if I say that I have raised this briefly with him. There has been some concern raised that by changing the taxation arrangements for Australians working overseas there could be some quite significant unintended consequences, that firms would rather employ locals overseas than Australians overseas.
My questions to Senator Sherry are broadly along these lines. Firstly, to what extent do the tax gains in respect of this take into account that there will be a leakage, so to speak, whereby workers will lose their jobs or, alternatively, firms will use local workers overseas rather than Australian workers who are lured to these jobs to a large extent by virtue of the more favourable tax arrangements but are still Australians who have a job not here but overseas? Secondly, how would any exemptions work? What would the criteria be for any exemptions? Thirdly, further to the issue of exemptions, how will transitional arrangements be dealt with? For instance, how would an Australian worker who is working overseas with a contract for three or four years be caught up by this? Would that simply be a factor for the exemption or would that be a significantly material factor that would give comfort to those workers and firms who have arrangements in terms of working overseas? Whilst I understand the government’s policy intent in relation to this, what will the consequences be? Will it deliver as much in revenue as the government thinks it will, if it simply causes a shift from employing Australians with particular expertise on overseas projects, and result in Australians not getting a job at all and firms employing locals on these overseas projects? Senator Sherry is more than aware of this and I look forward to his response in respect of that.
I move the amendment standing in my name on sheet 5832:
Omit all words after “That”, substitute “this bill be withdrawn and redrafted in a form that does not protect politicians from the taxation implications of the superannuation changes the Government is imposing on the broader community”.
The amendment is self-explanatory. It essentially says that this legislation not be further considered unless and until it is redrafted in respect of what I see as preferential treatment that politicians get in relation to these changes.
If I could just go back a step. What the government is intending to do, and I think Senator Coonan outlined this well, is that there will be a change in the concessional contributions cap from $50,000 to $25,000 for those under 50 and from $100,000 to $50,000 for those over 50. The explanatory memorandum sets that out. It allows for contributions for those aged over 50 at any time between the financial years 2007-08 and 2011-12. The $100,000 cap will continue for the current financial year but will go down to $50,000. There has been a debate about the rationale for that. It will be a revenue saving measure. I think the government was concerned that it was unfair that that level of concessional contribution was as high as it was, and I know the philosophical debate between the coalition and the government in respect of that.
My concern is that those who are in a defined benefit scheme will be exempt from that. The most obvious example of a defined benefit scheme relates to politicians elected to this parliament before 2004 and also for politicians elected I think prior to 2004 in virtually every other state and territory. I should disclose that, since I was elected to the South Australian parliament in 1997, I have been in a defined benefit scheme. I have previously indicated publicly that I seek to opt out of that scheme to go into a scheme that is in line with community standards. So far, the government of South Australia has been unwilling to let me do that, but I will persist in relation to that because I think it is fundamentally unfair that the politicians’ scheme is so out of kilter with what the rest of the community gets. I think one of the reasons politicians are not held in high regard amongst some sections of the community is that people feel that they get a special deal.
We can have a debate at another time about what is an adequate level of remuneration for politicians and the like. The fact is that the arrangements for politicians’ superannuation prior to 2004 are extraordinarily generous and out of step with what the rest of the community can expect to get from their superannuation. There is an exception, of course, in terms of senior public servants and older schemes and other defined benefit schemes. I am grateful to the minister and his office and the officers of the Treasury for the briefing I received yesterday that set out very clearly the government’s position and concerns in relation to this. I believe it ought to be possible to note what the notional benefit is. Whilst defined benefit funds are a completely different creature from an ordinary superannuation fund, it is quite reasonable there be a deeming method to work out the notional level of the contribution. Whilst there is a different taxation arrangement for these defined benefit schemes, those in a defined benefit scheme are still much better off than anyone else in the rest of the community who is not in a defined benefit scheme.
The intent of this amendment is to say that politicians ought not be exempt from the effect of these changes in relation to contributions. That is what this amendment is about, insofar as it can be deemed that the notional contribution is in excess of $25,000 for those aged under 50. Who would that be in this parliament? The member for Sturt, I imagine. It is not a criticism of the member for Sturt; he just happened to be a very young man when he entered into federal politics. He is under the old scheme and he is well under 50, so to what extent is there a notional benefit there that is in excess of what this legislation is seeking to do?
Whilst defined benefit funds are quite different in the way that they are structured, it seems to me quite inconsistent that you would have a situation where the government is seeking to trim back what the concessional benefit is in terms of the cap but those in a defined benefit are exempt from that. I believe that with some political will it could be redrafted. The reason I have done it in this form is that I have been advised that I could not move an amendment on this because it would be seeking to impose a tax. The ball is really in the government’s court, but I hope the government can at least acknowledge that politicians in the pre-2004 scheme are a special case. They get benefits way above the rest of the community. Insofar as the government is seeking to tighten that up for the rest of the community, that should also apply to members in a defined benefit scheme—that is, members of parliament in the pre-2004 scheme.
To me it is about equity, it is about fairness and it is about some consistency with the intent of the government’s legislation in relation to the concessional contributions cap. I will not hold my breath on that amendment passing, but I think it is important that we have that debate and that the government explains why it is that there is no concomitant effort for there to be a tightening up of the defined benefit schemes when the rest of the community is facing a tightening up of their scheme in terms of the concessional contributions cap.
The Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 sets out changes to the tax system and superannuation system that will see the government pocket $675 million. These changes will be felt by many families and will come as a blow to them. In particular, this bill will cause significant changes to the superannuation scheme and will have substantial consequences for future years. One such change is to the co-contribution arrangements which are presently available. Under the proposed changes the government will temporarily reduce the government’s superannuation co-contribution for eligible contributions made between 1 July 2009 and 30 June 2014. This will mean that low-to-middle-income earners who have in the past enjoyed government contributions of up to $1,500 to their superannuation will now be entitled to a maximum of $1,000 for voluntary contributions.
The contribution measures introduced under the Howard government were reforms which I believe put Australia on the correct path for dealing with the issue of our ageing population. It is no secret that in future years Australia will be faced with the problem of a larger non-working population and will need to find money to support them. A strong superannuation scheme will mean that more Australians will become self-sufficient and will not rely so much on pension payments from the government to get by. This will significantly reduce our future liabilities and leave more money to be invested in other important areas such as education, health and social services. The current reforms are therefore a step backwards from that design. They will reduce the incentives for low-income earners to save more money and invest in their future. They will ultimately result in greater costs to the government. However, I am mindful that these changes are only temporary and are necessary to help pull Australia out of the enormous debt which threatens to become a burden for future generations. Therefore, Family First will support these changes—with the understanding that they are not a reflection of the government’s long-term policy.
This bill will also see a reduction in the concessional contributions cap. These changes will have the greatest impact on high-income earners who currently use the generous superannuation rules to reduce their tax liability. Family First is not anti-wealth. We do not believe in punishing the rich and taxing them so heavily that we reduce all incentive to achieve success. Family First believes that success ought to be applauded and rewarded. However, Family First also believes that those with a greater capacity to assist Australia should do so in times of need. And now is a time of need. When we are facing a massive deficit of $57 billion, we need to ask those who can afford to do a bit more to actually do a bit more. These changes will achieve some of this. The bill also contains changes to the taxation of income earned overseas by Australians. As it stands at the moment, Australian residents are exempt from paying tax in Australia on any income earned overseas where they have been engaged in continuous foreign service for a period of not less than 91 days. This is an important exemption which ensures that Australian firms can remain competitive when tendering for overseas projects that will involve the employment of Australian residents.
Australian firms, particularly in the mining and construction sectors, often employ workers for overseas projects on a net salary basis. This means that their wage is calculated after tax, with their expenses being paid for by the employer. Under the proposed changes, Australian employees will become more expensive to employ and, as a result, less attractive when compared to employees from other locations with lower tax rates or more generous exemptions for working abroad. This includes countries such as the US, the UK, New Zealand, Germany and many countries located within Asia. Family First is disappointed with these changes and believes it will have an unfair impact on Australians working for short periods of time overseas. As with the other changes to this bill, Family First also recognises, however, the need for tough decisions to secure our long-term future.
There are still two unintended consequences of this bill which Family First believes need to be rectified. As a result of the removal of this overseas income exemption, Australian workers employed overseas will have their tax automatically withheld by the Australian employer as well as by the country in which they are employed. In some cases this will lead to 85 per cent of their pay cheque going towards taxes. Withholding tax is currently payable in numerous countries within the Asia-Pacific region as well as in the United States and the United Kingdom. This means that Australian residents working in any of these countries will be affected. While these workers will be entitled to a refund for any tax paid overseas, they will only be able to recoup this money at the end of the financial year, in some cases a full 12 months later. Family First believes that this is grossly unfair and has included an amendment to that effect.
Under the amendment, the pay-as-you-go requirements would not apply to Australian workers overseas. This would mean that the tax would only be collected by the government where there is a shortfall at the end of the financial year when the tax return is lodged rather than taking up to 85 per cent of someone’s take-home pay. This will still result in the same amount of tax being collected by the Australian government but will ensure that workers living overseas are not double taxed and then asked to wait 12 months to get their money back. The government has flagged to me that in such cases employers can apply to the Australian Tax Office for an exemption to withhold this tax at a lower rate. However, this is not a good solution. This will create more red tape and additional administrative costs for businesses. Family First’s amendment therefore provides a more efficient and workable solution.
The government has also raised with me concerns that this amendment will affect what expenses will be taxable under the fringe benefits tax arrangements. This is correct. As it stands at the moment, an employee sent overseas by an Australian company and who has their medical insurance paid for by the employer is required to pay fringe benefits tax. This is paid by the employee in the country where the benefit is incurred. However, what the government is now seeking to do is double dip. It is asking employees to pay tax on their fringe benefits overseas and then asking the employer to pay the tax again on the benefit in Australia. This is unfair. No-one likes paying tax but collectively as a nation we accept that this is important in order that our country can function properly. However, few people would accept that it is fair to pay tax on the same benefit twice. This is wrong.
The government itself has accepted that this is a significant issue and has suggested that the Australian Taxation Office address this concern. The Senate Standing Committee on Economics, which conducted an inquiry into this bill, also recommended that measures be adopted to prevent double taxation from occurring. Now we are being asked to vote on a bill in the chamber—one which by the government’s own admission contains flaws—without seeing the solution which it proposes to introduce. This is not how good decisions of such importance should be made. It is incumbent on the government to present a solution before it asks us to lend our support to its measures.
Family First’s amendment is that solution. Family First’s amendment will result in a far more equitable system and warrants the full support of the Senate. Family First will continue to support the government in its efforts to tackle the enormous debt we are facing as a country. However, we will not write the government a blank cheque. At the forefront of our mind will always be whether the government’s actions are giving Australian families and businesses a fair go.
In my summing up and closing of the debate on the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 I will attempt, provided I have time, to deal with all of the issues that have been raised by the crossbenches. It may not be possible with all matters, but I certainly want to deal with the matter raised by Senator Xenophon because it goes to a second reading amendment that we will need to vote on at the conclusion of the debate. But firstly I would like to thank all the senators who participated in the debate: Senators Coonan, Milne, Fielding and Xenophon. I particularly make the observation that whatever the criticisms and concerns being raised by the crossbenches, they have looked at the package as a whole and identified correctly one of the overall reasons for the changes that are presented in this package. That is appreciated.
Schedule 1 to this bill limits the current income-tax exemption for foreign employment income to income earned as an aid worker or charitable worker or as a specified government employee, including defence and police force personnel. The amendments will mean that the exemption is better targeted and will remove some inequities which currently exist between Australians working overseas, particularly in low-tax countries, and those working in Australia. An Australian resident working overseas will be entitled to a foreign income tax offset for any income tax paid overseas in respect of any foreign income taxed in Australia. This will ensure that such income will not be subject to double taxation on their foreign employment income.
Senator Milne raised the issue of the impact on backpackers—that is, Australian backpackers working overseas. First of all, under the current law foreign employment income of backpackers is exempt provided they meet the relevant conditions—for example, continuous foreign service of 91 days or more. Backpackers currently have to report their foreign employment income in their Australian tax returns. So even though that income is exempt it is reportable. Thus compliance costs already exist. So there is a compliance cost in regard to backpackers.
The new law means that foreign employment income of backpackers will be taxable in Australia unless they are performing eligible activities—for example, aid or charitable work. Any foreign tax paid will be credited against Australian tax. Where comparable tax is paid overseas, the Australian tax liability would be significantly reduced; and that will obviously vary from country to country. The new law is consistent with the general principle that Australian residents for tax purposes should pay Australian tax on their worldwide income. Not taxing backpackers could create inequity between them and other Australian taxpayers who earn similar amounts of income in Australia. In respect to the question on the 91 days that Senator Milne raised, yes, it must be continuous; but it may be undertaken with more than one employer. I would also point out that the clause 1(e) provision does allow exemption by regulation of those business entities on application, and that is determined by an executive council declaration. So it is possible for some business entities to obtain an exemption on application.
Schedules 2 and 3 provide necessary budget savings in light of the pension reform. This is an issue that no speaker, from either the opposition or the cross benches, have touched on. This package of changes in respect of the superannuation co-contribution and caps is part of the funding that is necessary to pay for the increase in the age pension. That has been missed so far in the debate. The cost of the increase in the pension, which will be dealt with in another bill, runs to $14.2 billion over four years. It is true that we are changing some of the superannuation arrangements in order to help pay for the increase in the age pension. It does not cover anywhere near the cost of increasing the age pension—which is, as I have mentioned, over $14 billion—but it makes a contribution and it should be seen in that light.
We have been through a debate about the adequacy of the age pension in this chamber, particularly over the last 18 months. Certainly the now opposition—the Liberal and National parties—have been advocating an increase in the age pension, having done nothing about it when they were in government. But of course they fail to indicate any way in which the cost of the increase in the age pension could be paid for. So having done nothing for almost 12 years, they then argue the age pension should be increased and say, ‘We can’t indicate how it will be paid for.’ And then they criticise us because the budget is in deficit. I just wanted to mention that on the way through.
On these specific superannuation matters, schedule 2 temporarily reduces the government’s superannuation contribution for contributions made in income years 2009-10 to 2013-14. The reduced government co-contribution will continue to provide a matching rate of at least 100 per cent on eligible contributions. It is still a very generous incentive: up to 100 per cent. People in the chamber will know that I am reasonably familiar with superannuation provisions, and I do not want to talk at excessive length—and I notice Senator Xenophon is smiling—but you would be hard-pressed to find anywhere in the world a superannuation incentive of up to 100 per cent. This is a guaranteed rate of return up to 100 per cent. I cannot find anything more generous than that anywhere in the world, and that is on the new reduced rate of co-contribution. That of course is temporary and the phase-in period for the co-contribution going back up to 150 per cent is contained in this legislation. It is true that that generates a budget saving of $1.4 billion over the forward estimates period.
Schedule 3 reduces the superannuation concessional contributions caps from 1 July 2009. The caps will remain generous. Like Senator Fielding, and I take his point, we are not against people at any income level being able to access, usually via salary sacrifice, the benefits of tax concessional treatment of superannuation. We are not against that. I think the debate really is what level of generosity and what level of tax concessionality should apply and whether, certainly in the current circumstances, the current caps are appropriate. I am pleased to acknowledge the contribution of Senator Fielding in this regard. The measure will provide greater equity in the system by targeting reductions in superannuation tax concessions at those with relatively more private resources. This action is consistent with the finding of the Australia’s Future Tax System review panel, commonly known as the Henry tax review, that superannuation tax concessions should be more fairly distributed.
At the recent inquiry into this legislation by the Senate Standing Committee on Economics, questions were raised in relation to the numbers affected by the reduction in the caps. This was also canvassed at Senate estimates committee hearings. I emphasise that some 1.8 per cent of those making concessional contributions will be affected by this measure. So, of the millions of people making contributions via salary sacrifice, 1.8 per cent will be affected because they are predominantly high income earners. More specifically, it is estimated that, of those affected in 2009-10 who are under age 50, 73 per cent will have a remuneration in excess of $100,000, as will 93 per cent of those aged 50 and over. The reduction in caps will generate budgetary savings of $2.8 billion over the forward estimates period.
Senator Fielding raised an important issue when he said that he was concerned about the impact this measure would have on future age pension claims. We do not expect it to be in any way significant, Senator Fielding, because the group of people who are contributing this level of superannuation are overwhelmingly excluded from the age pension anyway because of the means test. That is why we do not believe there is going to be any significant impact. Because of their current level of savings in super and the current generosity of the concessional tax treatment—and they may have investments in addition to their own home, which of course is not included—the means test takes them out of the age pension anyway. So it makes little difference, as I am told. I raise that because Senator Fielding raised it and I know it has been raised more broadly in the debate around this measure.
I want to go to the issue raised by Senator Xenophon, which is the claimed favourable treatment of some politicians, and to outline some background material in respect of the treatment of defined benefit funds, which some members of parliament are in—the funds are closed to new members. Of course, it is not just members of parliament who are in closed defined benefit funds. Certainly, judges and members of the military defence forces are in defined benefit funds—and theirs is not a closed scheme, by the way. So not just are we are talking about politicians who are in the old defined benefit funds; we are talking about military personnel and we are talking about judges.
It is a much broader group of people, Senator Xenophon, if we look at defined benefit funds in the private sector. In the private sector, in total open and closed funds—and most are closed, other than that of the military; there are very few open defined benefit funds—we are talking about some 640,000 employees. I have mentioned those in the public sector, but in the private sector the ‘Xenophon principle’, if I may call it that, would apply to 640,000 workers. Among these hundreds of thousands of employees in the private sector who are in DBFs you are dealing with Qantas—so flight attendants, pilots, ground workers. In the hospital sector you are dealing with nurses and attendants. In the car industry you are dealing with auto workers. If Senator Xenophon were being consistent, he would apply his proposed change to all people in defined benefit funds, but he has confined his argument to politicians. If he were being consistent in his approach to caps he would apply it to the 640,000 workers. I know he would not do that, because if Senator Xenophon applied this principle to all the workers whom I have outlined he would, I suggest, have a somewhat strong reaction from car workers, doctors, flight attendants, nurses and the whole range of people I have outlined. Of course he will not do that; he is seeking to apply it just to members of parliament.
Members who were elected prior to October 2004, who are in the old parliamentary scheme, the PCSS, are in what is known as an untaxed scheme. As contributions are not made into such a scheme annually they cannot be subject to annual caps and hence cannot be subject to the reduced caps; rather, they are subject to benefits taxation. This is in contrast to members in schemes under which they receive tax-free benefits from age 60. Also, members of this scheme are not allowed to salary sacrifice into any super fund, so they have not been able to take advantage of the large salary sacrifice contributions which are the target of the changes.
Well, they are simply not allowed to. These people are not allowed to take advantage of the concession. While the lump sum benefit cap in these schemes is just over a million dollars, it is worth noting that this roughly equates to some 40 years of $25,000 contributions.
Members elected after October 2004 have contributions made into an accumulation fund and they have the ability to salary sacrifice. However, they are subject to the caps and subject to the reduced caps, the same as anyone else. Older public servants are also in untaxed schemes, like the PCSS, and thus are subject not to annual contributions caps but, rather, to benefits tax. While the cap reduction thus does not affect their entitlement in the untaxed scheme to the extent that they salary sacrifice elsewhere into a private scheme, those contributions will now be limited by the reduced caps.
The grandfathering arrangements apply to private sector defined benefit funds. As contributions are made into these schemes regularly they are subject to the annual caps. Given that the nature of these schemes is that the contributions are pooled rather than made for individual members, an actuary determines an annual notional contribution each year. Also, private sector DB schemes often have contribution rates predetermined and these cannot be adjusted by the members. When contribution caps were first introduced, which was as a consequence of Better Super, it was decided by the previous government—and we supported the previous government’s approach —that these schemes would be grandfathered.
So I say to Senator Xenophon that the exclusion, if you like, does not just apply to politicians’ schemes. The effective exclusion applies to all defined benefit funds. This means that they are still subject to caps but, to the extent they were predetermined contribution levels that exceeded the caps, they would have those contributions set as equal to the cap, whatever the cap is. For example, if their contributions were predetermined at $55,000, they were deemed to be $50,000. Similarly, under the new changes, if contributions had been predetermined prior to the budget announcement as being, say, $30,000, they would be deemed under the new grandfathering to be $25,000. This means they would not breach the caps by virtue of the predetermined defined benefit contributions. However, if they then in addition salary sacrifice to another fund, they would exceed the caps. They lose the grandfathering if they move to further increase benefits outside the grandfathered private sector fund. For that reason I would argue that the second reading amendment of Senator Xenophon is inappropriate.
I do not have the time to deal with Senator Fielding’s amendment, but we will deal with that in committee. I have taken the time at the conclusion of the second reading debate to outline our reasons for opposing Senator Xenophon’s amendment to the second reading and to provide some further information to Senator Milne with respect to current and new law, and the way in which it would apply to backpackers. I thank all senators for their contribution to the debate. This is important legislation and the government will be opposing the Xenophon second reading amendment.
That the amendment (Senator Xenophon’s) be agreed to.
Original question agreed to.
Bill read a second time.