The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello


11 March 1996 - 3 December 2007

Transcript of 04/10/06

Q&A Session
CEDA Conference

Zinc, Federation Square

Wednesday, 4 October 2006
9:30 am

SUBJECTS: Superannuation changes and their impact after 1 July 2007


Cathy Walter from (inaudible) Super, (inaudible) Treasurer, thanks very much for elucidating what was of course the bombshell in the Budget in terms of the (inaudible) unpredicted changes to  superannuation and also for bringing home the trifecta in terms of boosting savings and participation rates and best of all simplicity.  You made passing reference to the need to capture the attention of younger people in terms of their super, and in my (inaudible) capacity as a parent of two Generation Y children, the notion of saving in their 20s is just an anathema but can I add to that just the question that these have been such dramatic changes that if you were in your 20s and you set about a course of action of saving, would you be concerned that future parliaments, assuming that you are not going to be there forever, that future parliaments might wind back some of these changes and the impact that therefore that might have on Generation Y?


It is a very good question. Can I just make a preliminary point. I have noticed this too in a private capacity and kids have got a whole lot of part-time jobs and every time they go to a new part-time job they seem to get a new industry super fund which send them messages, that you have now got $50 in your fund and account keeping fees are $5, and I am appealing to the industry here:- we have to ease the ability to amalgamate small amounts.  And I know that there are some steps that are being done but you know, super will lose its appeal if it is difficult.  And you know what I mean, I mean sometimes the forms they have to fill in to amalgamate these sums - and Generation Y don’t worry about forms - we have to ease the ability to amalgamate.  This is why I want freedom of choice and the ability to amalgamate, to bring these funds together, to swap funds, and we have to also reduce transactional costs. This is absolutely essential for credibility in superannuation in the years which lie ahead and I will probably have a bit more to say about that in the future.

I said earlier that I noticed there were some comments in the newspaper on the weekend from a former Treasurer trying to cast doubts on superannuation. I took that as a very bad sign because (a) he is probably trying to steel the Opposition up to voting against  these reforms, and they are still to announce their position, and (b) I saw as an attempt to open a window to counteract some of these reforms in the years which lie ahead.  Here is what I think.  If we can get this system up and operating on the 1st of July 2007, and we can get serious numbers of people engaged in it, the practicalities of reversing it will become much more problematic.  But we have to get it up and running on the 1st  of July and we have to get many, many people taking decisions on the back of it.  If there is anybody that wants to circumvent it, obviously the earlier they get to it, the easier they will find it.  And that is why I am also looking for an unequivocal statement from the Opposition that they are committed to these reforms.  And people say, oh well, they haven’t announced their position, that doesn’t matter, you will be able to legislate it. But if they haven’t announced their position, that does matter because it means that they are reserving freedom in future years to change the system.  It matters absolutely that they haven’t yet said they are supporting these reforms because they are not on the record.  And why you wouldn’t do that unless you were wanting to preserve some kind of flexibility for the future is beyond me.  So I will be doing my best, particularly when the legislation comes into the Parliament, to get unequivocal statements because we need unequivocal statements and bipartisan support if we are going to encourage people to have long-term confidence. 


Treasurer I think you would have to be daft not to applaud these changes, the single biggest change we have seen since, for those who have been around for a while, since the 1980s when we had taxation introduced on super, etcetera.  I requested a question, from superannuation administration viewpoint this is certainly going to help, but help us also on the APRA and ASIC front because I mean that is causing an immense amount of headache.  Question, we seem to be out of kilter with many of our OECD colleagues in that we’re now no longer taxing end benefits but we are taxing the benefits or the benefits effectively going upfront. Was there consideration given to abolishing contribution tax and instead taxing end benefits?


Oh certainly, I and my advisers looked at all of the options.  One of the options was to abolish the contributions tax and to pick it up at the end benefits stage.  In my view what that would have required is it would have required every person’s account to be assessed as to how much contributions tax they paid, which they would have had to got a credit against their end benefits, and then an assessment of how much they have contributed and earned on those contributions from zero tax.  And so you would have had to have gone through everybody’s account who had been in contributions tax and try and dis-entangle pre-2006 contributions which have been subject to contributions tax which would retain their credits on end benefits and you would have to try and work out earnings on that. From post-2006 which presumably wouldn’t have had tax on contributions which, the earnings of which would be different and then would be subject to full taxation on the end benefits. The complexity of that scheme would have been unbelievable.  And if you were shooting for making it simple that was not the answer.  And so we were faced with a situation where we had contributions tax, earnings tax and end benefits tax. If you wanted to get rid of one of them, getting rid of contributions tax would have led to doubling, tripling, quadrupling complexity; getting rid of end benefits would have cut through it and that is why we took the attitude that we did and I have no doubt if we were out there trying to explain to people all of that system plus another complication, isolating and allocating between pre-2006 and post-2006, I have got no doubt you would have been looking at me with even more glazed eyes than you are.  


Just to follow up on that previous question from (inaudible) I would like you to comment on. If there had been a reduction or abolition of the contributions tax, it didn’t necessarily have to have a complementary end benefit if it tax compensation, I mean the removal of tax on the end benefit if it had been balanced with an increase somewhere else, so the amount of money that is being used in terms of the reduction in revenue by removing that tax could have been applied to the contributions tax which would have applied to all Australians.  And I guess that was the point of a question I wanted to ask about that public policy option.  This one doesn’t apply to the majority of Australians because the majority of Australians didn’t have access to super to the late 80s so they don’t have pre-80 contributions, a lot of those tax rules don’t apply and if I can give an example from my fund.  Last year we make 4,000 payments to people over 60, five of them paid a tax because they don’t get to the tax free threshold that is already there but that would apply for quite a few years to probably the majority of Australians.  So in a public policy sense I think it is great this is simplified for those people who have had super for a long time and those rules apply but for the majority of Australians that is not going to be the case, and so I guess just a further comment maybe on that.  And secondly if removing the tax on lump sums as well as pensions, do you think that would have an adverse effect of  reducing the burden on the age pension because people will still be able to take lump sums and spend them and also be able to access the aged pension whereas if there has been some incentive for people to take pension options rather than lump sum options that may have been more in keeping with the sort of things that have been talked about I guess through the Intergenerational Report in terms of the ageing of the population. 


Well at the moment of course you could take a lump sum and if you want to spend your lump sum and dissipate your savings and come back on the aged pension, which is the current system, won’t change under the reforms.  I don’t think that there is evidence of people doing that on a widespread basis.  I think the aged pension is about $12,000 - $13,000, something like that. The idea of working your way through $50,000 or $100,000 of savings so you can get yourself an income of $12,000 per annum doesn’t appeal to most people.  $12,000 per annum, that is not a lot of live on. There may be some people that say, well I will dissipate $50,000 or $100,000 and get a huge benefit of living on $12,000 or $13,000 but I think once you think about it, by the time you have got to pay rent and power and light and everything else, it is not a high benefit. It is not a high benefit and I don’t think there is any great evidence that people are taking advantage of it in that way. 
In relation to the other point, well if you have paid contributions tax of course you would have to be given a credit on the way out. If you hadn’t had been subject to a contributions tax of course you would have been subject to full tax on the way out.  And people would have had to have tried to work out which is which including earnings.  So I think our superannuation system was irrevocably changed with the introduction of the contributions tax. I didn’t do it incidentally, the Labor Party did it.  I inherited it but I had to fix it.  And I think that this is the most creative fix imaginable.  Can I say, nobody, no political party at least in the last ten years ever suggested the abolition of the contributions tax.  I think the Opposition at one point suggested reducing from 15 to 14 per cent.  No political party ever advocated the abolition of the contributions tax and that is why I think this was a much more creative solution. I think as time goes by you will see that and I think it has been widely applauded. For all those reasons as being a real cut through major structural reform which will be good for the Australian economy.  Thank you.