Bills Digest no. 14 2007–08
Judges Pensions Amendment Bill 2007
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
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Judges Pensions Amendment Bill 2007
Date introduced: 14 June 2007
House: House of Representatives
Portfolio: Attorney Generals
Commencement: Royal Assent or 1 July
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
amends the Judges Pensions Act 1968 (the Act) to ensure
that the application of the recent reductions in the superannuation
surcharge rate apply to the payment of a superannuation surcharge
debt by retiring Federal Court judges. These judges are all members
of the Commonwealth s Judges Pensions Scheme.
Additional measures in the Bill include
clarifying what is meant by the term salary for the Act s
The superannuation surcharge was announced on
20 August 1996 as part of the first Howard Government s budget. In
his second reading speech, the then Parliamentary Secretary
(Cabinet) to the Prime Minister noted that:
The superannuation system has been inequitably
biased in favour of high income earners. Those high income earners
have been benefiting from the concessional taxation treatment of
superannuation to a much greater extent than low income earners.
The introduction of the superannuation contributions surcharge for
high income earners is this government s response to ensure that
the superannuation system is more equitable for all Australians,
while also ensuring that superannuation remains an attractive
savings option. 
In contrast, the Treasurer, in his second
reading speech to the 2005 Bill abolishing the surcharge, noted
The superannuation surcharge was introduced in
1996 at a time when the budget was deeply in deficit as a result of
Labor s economic mismanagement. It was introduced in 1996 in part
to drive the budget back into balance. The government laid down a
policy in 1996 to drive the budget back into balance from a $10.3
billion deficit which the Labor Party had left in place. 
That is, according to him, the reason for the
introduction of the superannuation surcharge was purely fiscal, and
its restriction to the years 1996 97 to 2004 05 is due only to the
improvement of the Commonwealth s budgetary position.
The income of a superannuation fund, including
contributions made on behalf of a member, is subject to
concessional tax treatment, if the fund satisfies certain
conditions. The principal condition is that the fund satisfies the
Superannuation Industry (Supervision) Act 1993 and its
regulations, which relate to matters such as vesting, the provision
of information to members and financial management requirements.
The concessional tax treatment means that a superannuation fund s
income was generally taxed at the rate of 15 per cent rather than
at the normal company or personal income-tax rates.
introduction of the superannuation surcharge meant that the
concessional tax treatment would be altered and that a surcharge
would apply to contributions that were subject to a tax deduction
(this includes employer contributions as well as contributions made
by members where there is no employer contribution and a deduction
has been claimed).
The surcharge applied when a person s total
income for surcharge purposes exceeded $70 000 per annum.
 The surcharge was
imposed at the rate of 1 per cent for each $1 000 of
assessable income and superannuation contributions up to a maximum
of 15 per cent where assessable income for surcharge purposes
reached $85 000 per annum, or above. These income thresholds
have been indexed since that time and stood at $99 710 and
$121 075 respectively at the time the surcharge was
discontinued. Clearly, a Federal Court judge s salary has always
been above the maximum threshold for surcharge purposes.
The surcharge is levied on:
The surcharge previously applied to accumulated-benefits funds,
i.e. the usual type of superannuation fund where the members
ultimate benefit will depend on the investment performance of the
fund, and continues to apply to defined-benefits funds, which are
funds where the member s benefits are defined, usually on such
matters as the number of years of contributions and final salary.
 The Judges Pensions Scheme
is a defined-benefit scheme.
The maximum surcharge rate was 15 per cent.
The Superannuation (Surcharge Rate Reduction) Amendment Act
2003 and the Superannuation Budget Measures Act 2004
between them reduced the maximum surcharge rate to 14.5 per cent
for 2003 04, and 12.5 per cent for 2004 05. The surcharge was
discontinued on 30 June 2005.
The legislation discontinuing the
superannuation-surcharge regime did not simply repeal the entire
suite of superannuation-surcharge legislation.  Retaining the Act  that imposes the surcharge
- the Commissioner for Taxation to collect any outstanding
surcharge amounts in relation to the years 1996 97 to 2004 05
inclusive. The Australian National Audit Office has estimated that
between $360 million and $750 million in surcharge remained
uncollected in 2004 05 due to problems with the computerised
surcharge administration system 
- surcharge amounts to be collected, in respect of the years 1996
97 to 2004 05, from defined-benefit fund members, when they
eventually take their benefit, and
- superannuation providers to continue to report information
necessary for the operation of the superannuation co-contributions
More importantly, maintaining the legislation
maintains equity in the superannuation system. Simply abolishing
superannuation surcharge from 1 July 2005 would have resulted in
defined-benefit fund members, to whom the surcharge would have
applied, not having to pay this tax. This outcome would be unfair,
since accumulation-fund members have already paid this tax in
respect of contributions made on their behalf (or if self-employed,
tax-deductible contributions they made) between 1996 97 and 2004
As pointed out above, any outstanding
superannuation-surcharge amounts are collected from defined-benefit
superannuation funds when a member collects their benefits.
Each superannuation fund is assessed annually
for outstanding superannuation surcharge amounts owed by their
members. Although unfunded defined-benefit schemes, such as the
Judges Pensions Scheme, receive assessments each year, they are not
required to pay the surcharge at this time. Instead, they must
maintain a surcharge debt account for each member of the scheme. If
the member s account is in debit at the end of the financial year,
the provider also debits the account for interest, using the
Commonwealth 10-year Treasury bond rate, on the amount the account
is in debit. 
One of the main provisions of this Bill is the
alteration of various formulas to facilitate the accurate
collection of any outstanding superannuation surcharge debts owed
by members of the Judges Pensions Scheme.
Any unfunded scheme member affected by the
superannuation surcharge may repay their debt account by:
- making a separate annual payment to the scheme in respect of
the surcharge debit amount
- having their final benefits reduced to pay the outstanding
amount (this will often involve the commutation of part of any
pension payable to meet that member s surcharge obligations,
- having any ongoing pension reduced to pay a portion of the
outstanding surcharge amount. 
Both State and Federal Court judges are
members of unfunded pension schemes. That is, a scheme operated by
government where the pension entitlement of a retired judge is not
backed by any assets. Rather, the pension paid on retirement is
paid directly from a government s general revenue fund.
The High Court decided in its decision in
Austin v Commonwealth (2003)  that both Judge Austin of the
Supreme Court of New South Wales and Master Kings of the Victorian
Supreme Court were not subject to the superannuation surcharge. The
basis for this decision was the application of section 51(ii) of
the Constitution, which enables the Commonwealth to make laws in
respect of taxation, but so as not to discriminate between States
or parts of States .
The High Court s decision noted that the
application of this section of the Constitution prevented the
Commonwealth from applying the provisions of the special
legislation in respect of the surcharge obligations of members of
constitutionally protected superannuation funds.  The particular reasons were
- these provisions placed a disability or burden on the
activities of the states. In particular, the High Court noted that
the imposition of the surcharge on the operation of the New South
Wales judicial pension scheme could prevent judges from serving
their full tenure, and
- it was found that judges who were members of the Victorian
state-government unfunded pension schemes before the commencement
of these Acts were outside the operation of the Acts. 
The outcome of this case is that state
judicial officers, who are members of State-government unfunded
pension schemes, are not subject to the superannuation surcharge.
These initiatives were partly announced in the
2007 08 budget papers. 
Some concern has been expressed by the
Chairman of the Judicial Conference of Australia, Justice Bruce
Debelle. He suggests that these changes will not be sufficient to
prevent the retirement of several high-ranking Commonwealth judges.
Justice Debelle notes that several Commonwealth judges intend to
retire as soon as they qualify to receive benefits, due to the
increasing amount of superannuation surcharge they have to pay.
 Further press
comment suggests that the proposed measures give an inequitable
outcome (i.e. a raw deal ) due to the eventual payment of the
surcharge obligations by retiring Commonwealth judges. 
The proposed measures allow Federal Court and
other Commonwealth judges some flexibility in paying their
superannuation-surcharge obligations upon retirement. Without these
measures, a member of the Commonwealth Judges Pensions Scheme would
pay their superannuation-surcharge obligations by way of an ongoing
reduction in their pension payments.
Further, the proposed changes allow the
calculation of a retiring Commonwealth judge s surcharge
obligations to take account of the reductions in the superannuation
surcharge rate mentioned above. The current provisions of the
Judges Pensions Act 1968 do not allow this to occur.
However, some may argue that the fact that
some judicial officers who are members of State unfunded pension
schemes are exempt from superannuation surcharge requires equitable
treatment for members of the Commonwealth Judges Pensions Scheme.
Clearly, the proposed changes do not abolish the obligation for
members of the Commonwealth Judges Pensions Scheme to pay the
required amount of superannuation surcharge.
The ALP s Shadow Minister, Senator the Hon.
Nick Sherry, noted that the provision of special assistance of $0.5
million to the Attorney-General s Department for surcharge debt
repayment required investigation at Senate estimates committee
hearings.  The
proposed allocation was subsequently discussed at the Senate
Estimates Hearing of the Senate Committee on Finance and Public
Administration on 23 May 2007. No views were expressed at that
hearing, or a subsequent hearing of the Senate Standing Committee
on Economics. 
The Explanatory Memorandum notes that where a
retiring federal judge elects to have their pension reduced under
the commutation, rather than under the formula for calculating the
ongoing reduction in the pension, the pension cost would be
marginally greater. However, the expected total additional costs of
including this option in the Judges Pensions Scheme has been
estimated to be less than $1 million. 
As already mentioned,
the Budget allocated an additional $0.5 million to the
Attorney-General s Department to pay the estimated surcharge
liability incurred by retiring members of the Judges Pensions
Item 14 of the Act
appropriates the Consolidated Revenue Fund, to pay any outstanding
superannuation-surcharge debts on the occasion of a judge s death
in office or retirement.
The key issue in this bill is the equitable
application of the superannuation-surcharge regime to Commonwealth
judges of both the Federal and High Courts. Without the provisions
of this Act, a higher rate of superannuation-surcharge debt would
be imposed on these judges than has been imposed on other
Item 1 of Schedule
1 inserts a definition of the term salary into
subsection 4(1) of the Act. This definition is not
present in the current version of the Act.
A judge s salary for the purposes of the Act
is defined as the rate determined by the Remuneration Tribunal,
excluding any allowances paid in lieu of any other entitlement. But
salary, for these purposes, includes the value of benefits received
under any salary-packaging arrangements entered into by a
Most, if not all, of the rules governing the
operation of government superannuation schemes include provisions
that define what is meant by the term salary for the purposes of
calculating a member s entitlements. It is surprising that such a
definition has not yet been inserted into the Act. This change is
Items 2 to 7
of Schedule 1 replace the existing formulas and
supporting definitions of terms in these formulas in the Act that
calculate the rate of a retiring judge s pension, when their
surcharge debt account is in debt. The new sections allow the
calculation of a retiring judge s pension to take account of the
above-mentioned reductions in the rate of superannuation surcharge
and its discontinuance from 1 July 2005.
Item 8 inserts new
section 6C into the Act. This new section allows a
retiring judge to commute part of their pension entitlement to pay
any outstanding surcharge debt. Commutation is the conversion of a
pension entitlement to a lump sum. This procedure is an alternative
to the ongoing reduction of a judge s pension in order to pay a
retiring judge s outstanding superannuation-surcharge debt in
Items 2 to 7 above.
Items 9 and
10 allows the surviving spouse of a judge who dies
in office to have part of their pension commuted in order to pay
any outstanding superannuation surcharge debt, rather than have the
rate of the pension worked out under the provisions of
Items 2 to 7 above.
Items 11 and
12 deal with the calculation of a pension paid to
the surviving dependent children of a deceased judge in
circumstances where a superannuation-surcharge debt remains unpaid.
These provisions allow the rate of pension to be paid in these
circumstances to take account of the commutation of part of the
pension entitlements to pay any outstanding surcharge debt. Again,
this is an alternative to the calculation of a pension under the
provisions of Items 2 to 7
Item 14 appropriates the
Consolidated Revenue Fund to pay any superannuation-surcharge debt
outstanding on the occasion of a judge s retirement or death in
This item does not mean that a judge has their
superannuation-surcharge debt paid for them.
A particular quirk of the Commonwealth
constitution has allowed certain State judicial officers to escape
the imposition of the superannuation surcharge. However, these
provisions applied to all other high-income earners who had
surchargable superannuation contributions made on their behalf.
Thus, Commonwealth judges are being treated no differently in this
matter to the great bulk of those on comparable incomes.
Those who would argue that Commonwealth judges
should not be subject to this impost because their State
counterparts are not subject to it would be better served arguing
why State judicial officers should be exempt when all their
judicial and non-judicial peers are subject to this impost.
. The Hon. Chris
Miles MP, Parliamentary Secretary (Cabinet) to the Prime Minister,
Second reading speech: Superannuation Contributions Surcharge
(Assessment and Collection) Bill 1997 , House of Representatives,
Debates, 13 February 1997, p. 887.
. The Hon. Peter
Costello MP, Treasurer, Second reading speech: Superannuation Laws
Amendment (Abolition of Surcharge) Bill 2005 , House of
Representatives, Debates, 26 May 2005, p. 4.
. Total income for
surcharge purposes is made up of tax-assessable income,
superannuation contributions, fringe benefits (if any) and
superannuation lump sums paid to individuals (if any). (Definition
of income for surcharge purposes contained in sections 7A & 7B
of the Superannuation Contributions Tax (Assessment and
Collection) Act 1997.)
. If a
contribution to a superannuation fund is tax-deductible, that means
that the amount contributed is not included in either the business
assessable income for tax purposes, or, in the case of the
self-employed, their personal assessable income for tax
Superannuation Laws Amendment (Abolition of Surcharge) Act
Superannuation Contribution Surcharge (Assessment and
Collection) Act 1997.
. Liang P. Leow
and Shirley Murphy, Australian Master Superannuation Guide
2005/06, CCH, Sydney, 2005, p. 518.
legislation in question is the Superannuation Contributions Tax
(Members of Constitutionally Protected Superannuation Funds)
Imposition Act 1997 and Superannuation Contributions Tax
(Members of Constitutionally Protected Superannuation Funds)
Assessment and Collection Act 1997.
. Liang P. Leow
and Shirley Murphy, op. cit., p. 522.
. The writer
understands that the Tasmanian judicial pension scheme is funded,
that is, amounts have been put aside to pay the pension.
Accordingly, the decision in Austin does not apply to this
scheme. Source: Chris Merritt, It s time to stop this rort ,
Australian Financial Review, 6 February 2003, p. 6.
Priest, Judges exodus threat forces super rethink , Australian
Financial Review, 2 March 2007, p. 63.
Merritt, Prejudice Surcharge discharged , The
Australian, 11 May 2007, p. 23.
. Senator the
Hon. Nick Sherry, Shadow Minister for Superannuation and
Intergenerational Finance; Banking and Financial Services,
Superannuation Measures Welcome, media release, 10 May
Committee on Finance and Public Administration, Senate Estimates
Hansard, 23 May 2007, pp. F&PA 88 9 and Senate
Standing Committee on Economics, Senate Estimates Hearings,
Hansard, 29 May 2007, p. E46.
Explanatory Memorandum, p. 2.
7 August 2007
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