The principles that should underpin social security payments and practical
measures to address inequality
The final chapter of this report addresses the last two terms of
the principles that should underpin the provision of social security
payments in Australia; and
the practical measures that could be implemented by Governments
to address inequality, particularly appropriate and adequate income support
The principles underpinning the provision of social security payments
Since the Asprey Taxation Review of the 1970s, there has been consensus
in Australia that the principles of efficiency, equity (fairness) and
simplicity should inform a well-designed taxation system. What should be the
principles that inform a well-designed system of social security payments?
Some submitters identified the following three principles as important
in the provision of social security payments in Australia:
first and foremost, payments must be adequate. The payment must
provide the recipient with a basic standard of living in the context of
prevailing living standards;
second, the payment should be set at a level that provides an
incentive for recipients to be employed where they are able to do so; and
third, and relatedly, payments should be means-tested to ensure
they are directed to those most in need.
The Australian Council of Social Service (ACOSS), COTA Australia (COTA)
and other peak organisations have identified the following six principles that
should underpin the provision of social security payments in Australia:
The base rates of social security payments for singles and
couples should be adequate to meet socially accepted essential living costs;
that is, to prevent poverty;
The safety net should be there when it is needed, including
for young people who are unemployed.
Income support should be benchmarked to broader community
living standards; - and indexed to movements in wages as well as prices
affecting social security recipients.
Supplements should meet additional major non-discretionary
costs; - including housing rents, costs of disability, costs of sole
parenthood, costs of caring, and retention of a separate system of family
payments for the costs of children.
People with the same financial needs should receive the same
level of income support.
Maximum payment levels should be based on current financial
need rather than ‘deservedness’
No group should be financially worse off as a result of
reform, and those facing the greatest hardship should be better off. - People
should not be moved from higher to lower payments when their financial needs
are the same, and the system should be redesigned to prevent this happening.
Comprehensive action should be taken to make housing
affordable for people on low incomes, including in places where jobs are
available. - Rent Assistance should be adequate and indexed to movements in
rents. - Improvements in Rent Assistance should complement, not replace,
adequate public investment in social housing and reform of incentives for
private investment in affordable housing.
To improve employment incentives for people with barriers to
employment, maximum payment levels should be based on an individual’s current
financial need rather than their future employment prospects. - Payments should
not reduce the closer a person with a disability or caring responsibility comes
to securing paid employment.
Base rates of social security payments should be targeted to
people in financial need through income and assets tests which ignore modest
levels of private income and assets, ensure a fair return to paid work, and can
be readily understood and complied with. Supplements should be less strictly
income tested, in accordance with their purpose (for example to assist with the
extra costs associated with a disability, which do not reduce once a person
The payment system to be as simple and understandable as
possible. The main goal of simplification reforms should not be to reduce
the number of payments, but to: - streamline the system so that people in
similar circumstances receive the same level of payments with the same or
similar eligibility requirements; - remove the hurdles the present system
throws up for people undergoing common life transitions such as employment,
unemployment, different stages in the care of children or other family members.
Social security should be paid as a legislative entitlement
without restriction on its use, unless the recipient or local community elects
to receive payments in a different form (for example, to pool payments to
provide employment in a remote community). - Entitlements and compliance with
any participation requirements should be assessed by a single statutory agency
that is accessible to all. - ‘Income Management’ should not be compulsory and
should not apply automatically to categories of people based on benefit type,
location, or race.
Committee comment on these
The committee considers that the ACOSS and COTA principles are
fundamental to the integrity of Australia's social security payment system.
They are properly centred on the financial need of an Australian citizen, and his
or her entitlement to access a payment when they are in financial need.
In light of the evidence presented in chapter 5 of this report, the
committee is deeply concerned that the proposed 2014 federal budget measures
relating to social security payments abrogate the ACOSS and COTA principles.
The following section on 'principles' begins by presenting the
committee's evidence on the principles of 'adequacy', 'incentives to work' and 'means-testing'.
In the course of this discussion, the committee considers and comments on
the ACOSS / COTA principles of 'employment incentives', 'fairness', 'simplicity'
The first principle: the adequacy
The principle of payment adequacy is fundamental and generally
undisputed. The obvious questions arise however: what is an adequate payment
and how best to determine this level? There are several methods of responding
to these questions. Australia's Future Tax System Review ('the Henry Review')
identified four common measurements of the adequacy of income support payments.
replacement rates, which compare the income of a payment
recipient with that of a worker (such as a minimum wage worker or the median
poverty lines, to which the disposable incomes of payment
recipients are compared;
budget standards, which estimate the amount of income necessary
to sustain a particular standard of living; and
financial stress indicators, which enable a comparison of the
financial wellbeing experienced by payment recipients with that of the
community as a whole.
All four measures seek to define adequacy in relative terms. This is a
long‑established and accepted approach.
As the 2009 Harmer Pension Review stated:
The central question for the Review was the level at which
the full rate of pension should be set.
The Review’s approach to this question was to test whether
current rates of pension are providing a basic acceptable standard of living,
accounting for prevailing community standards. The Review considered that the
full rate of pension should provide a basic acceptable standard of living for
those who are wholly reliant on it, often for extended periods, without any
assumptions about access to private income or assets. In adopting this
approach, the Review notes that while the question of adequacy can be conceived
of in both absolute and relative terms, ultimately it needs to be answered in
the context of contemporary society, and the living standards of others.
The Australian Council of Trade Unions (ACTU) noted in its submission to
this inquiry that the replacement rate of Australia's unemployment benefit is
the lowest of any advanced economy. As it explained:
An Australian worker on average wages who loses his or her
job and claims Newstart Allowance will suffer a larger negative income shock
than his or her counterparts in any other [Organisation for Economic
Co-operation and Development (OECD)] country...
The Australian replacement rate is also at its lowest level
in several decades. The indexation of allowances to [Consumer Price Index (CPI)],
while wages rise in real terms, ensures that these replacement rates will
continue to fall.
The ACTU presented a chart showing that the ratio of Newstart payment to
the full-time minimum wage is currently at 40 per cent. The ratio has
essentially been falling (from around 45 per cent) since the mid-1990s. The
ratio of Newstart payment to average full-time earnings is now at around 17 per
cent. It too has progressively fallen since the mid-1990s (when the ratio was
around 24 per cent).
Payments and the 'budget standards
In 1998, Professor Peter Saunders of the Social Policy Research Centre
at the University of New South Wales derived a monetary amount that aligned to
two standards of living: a 'modest but adequate budget standard' and a 'low
cost budget standard'.
The former was described as:
One which affords full opportunity to participate in contemporary
Australian society and the basic options it offers... lying between the
standards of survival and decency and those of luxury as these are commonly
understood...(falling) somewhere around the median standard of living experienced
within the Australian community as a whole.
The 'low cost budget standard' was described as:
A level of living which may mean frugal and careful management
of resources but would still allow social and economic participation consistent
with community standards and enable the individual to fulfil community
expectations in the workplace, at home and in the community... corresponding to
a standard of living which is achievable at about one-half of the median
Professor Saunders and his colleagues found that the low cost budget
standard equated to $302.80 in February 1997 for single adults in the private
rental market. The ACTU adjusted this figure for the growth in the CPI
unto the June 2012 Quarter. The adjusted amount is $481, which is $163 more than
the current Newstart payment of $318 a week.
Payments and poverty lines
Another way of looking at the issue of payment adequacy is to compare
payment rates with the Henderson Poverty Lines (HPL) and the 50 per cent of
median income poverty line. The poverty line is based on a benchmark income of
$62.70 for the December Quarter 1973. For a single person not in the workforce,
the poverty line for the June 2012 Quarter was $384.51 per week (including
This was $66 higher than the level of Newstart payment.
With reference to the figures below, the ACTU highlighted that the
income of a single, adult Newstart recipient is now more than $100 per week
below both the HPL and the 50 per cent of median income poverty line. It added:
The gap between Newstart and the poverty line (be it the
Henderson line or the 50% of median income line) is large and growing. This is
a strong indication that the payment rate is inadequate. A basic function of
the safety net is to protect households from poverty. Although the choice of
any particular poverty measure involves some degree of subjectivity and value
judgement, a payment rate that is less than two-thirds of the level of either
of the main relative poverty lines for a single adult is clearly inadequate.
Figure 6.1: Newstart, the HPL and the 50% of median income poverty line
Source: Provided to the committee by the
Australian Council of Trade Unions, 25 November 2014.
Figure 6.2: Newstart as a proportion of two poverty lines
Source: Provided to the committee by the
Australian Council of Trade Unions, 25 November 2014.
Professor Peter Whiteford of the Australian National University told the
committee that the relative financial position of a person living on the Newstart
allowance today is lower than what it was in the early 1990s. As he put it:
the poorest 10 per cent are 40 per cent better off than they
were in the early nineties...But if you are on Newstart the real increase in your
payment is negligible...
...somebody who is at the 10th percentile...is 40 per cent better
off but a person on Newstart, compared to somebody who was on Newstart in the
early nineties, is not 40 per cent better off. The reason is that people on
those payments are moving down the income distribution. Back in the early
nineties if you were a single person on Newstart you were about $6 to $10 a
week below this 10th percentile point. You are now about $160 a week below that
point. People on those payments are falling down, so to speak...
I would have thought that a person on Newstart or youth
allowance is now right at the bottom, the real bottom, of the income
Financial hardship approaches
The 'deprivation approach', a fourth way of assessing the adequacy of
payments, is more qualitative in approach. Professor Saunders has explained
The deprivation approach seeks to identify who is unable to
afford items that are widely regarded as essential. In order to achieve this,
it is necessary to conduct a survey in which people are asked which of a list
of items they regard as essential, where that term is defined as covering
‘things that no-one should have to go without in Australia today’ — thus, they
are asked which items are essential for people in general, not just for
themselves. The items included in the list should not be arbitrarily selected
but should reflect the experiences of those living in, or close to, poverty.
The figure below is from Professor Saunders' research on deprivation.
It compares the values of two deprivation measures across seven income
groups. Professor Saunders summarises the findings shown in this figure as
On average, those reliant on the Age Pension were deprived of
about one essential item, similar to the level of deprivation among service pensioners.
In contrast, there was almost no deprivation among the self-funded retiree
group, a finding which provides reassuring evidence that the pension income and
assets test are doing their job, and that the mean deprivation scores do indeed
track the living standards of each group. However, the most striking
aspect of the results in Figure 1 is the high levels of deprivation among the
other groups included in the analysis. Thus, in round terms, low-wage workers
were deprived of around two essential items, disability pensioners of around
three items, Newstart allowees of around four items, and sole parents of close
to five items. All of these latter levels of deprivation are significantly
higher than that experienced on average by the age pensioner group.
Figure 6.3: Deprivation by income source, 2006
Noting Professor Saunders' work among other 'financial stress' research
findings, the ACTU concluded that they 'confirm the conclusion suggested by
replacement rates, poverty lines and budget standards: the current Newstart
payment rate is inadequate'.
Submitters' and witnesses' concerns
with the level of payments
Several submitters and witnesses to this inquiry shared the ACTU's
criticism of the inadequate level of current payments. In particular, there was
concern that payment rates for the unemployed, single parents and students are
simply inadequate. The Australia Institute commented that for those at the
bottom of the income ladder:
...the issue is one of adequacy. I think Youth Allowance and
unemployment benefits are too low, and I note that the Business Council of
Australia and a wide range of conservative economists agree with that
ACOSS wrote in its submission:
The main weakness of our social security safety net is the
inadequacy of ‘allowance’ payments for unemployed people, single parents and
students. Recent increases in pensions for older people have sharply reduced
poverty but these were not extended to allowance recipients and the gap in
payments between pensions and allowances is now $166 per week for a single
adult. Policy makers should end the pretence that employment and activation
policies alone can prevent poverty among people of working age. This has not
happened in any OECD country. Clearly the social security system needs to carry
its share of the load, starting with implementation of the ‘Henry Report’
proposal to extend recent pension increases to those on the lower allowance
The committee was concerned to hear of some speculation in recent months
that the issue of payment levels had not been raised in roundtable discussions
held as part of the McClure Review process. However, several submitters to this
inquiry stated that this was not the case. The St Vincent de Paul Society and
UnitingCare Australia both noted that they had made verbal submissions to the
McClure Review where they—among many others—drew attention to the inadequacy of
income support payments, particularly the Newstart payment. Both organisations
suggested that the Review was not focussed on this issue of payment levels.
Conversely, Dr John Falzon of St Vincent de Paul Society National
Council told the committee that among those giving evidence to the Review, the
'essential starting position' was that people on social security benefits
should not be forced to live below the poverty line.
UnitingCare Australia argued there should be clearly established
criteria to determine the appropriate level of payment. It emphasised that:
...it is appropriate that the criteria for assessing the
adequacy of a single base payment and supplements [should] include that the
payment levels protect against poverty, deprivation and homelessness and enable
the transition to employment and access to affordable and appropriate housing.
The establishment of an adequate base payment will bolster
current payments that expose recipients to deprivation and homelessness, reduce
their ability to secure and retain employment and cause serious disadvantage
for their families.
We expect that a determination of adequacy would be the
subject of comprehensive research that considered the usefulness of various approaches
and measures, including:
a combination of movements in
wages and prices;
the budget standards approach
(currently under revision) originally produced by the Social Policy Research
Centre at UNSW and commissioned by the then Department of Family and Community
Services (see Saunders 2004).
Committee view on the adequacy of
The committee emphasises the importance of a social security system that
ensures that people are not living in poverty. Put simply, payment levels for
working age benefits must be adequate to ensure that people are not living in
poverty. The committee considers that there should be a review of the
level of working age payments (see recommendation 3).
The second principle: incentives to
The second principle emphasises the importance of setting payment rates
at levels that encourage people to work. The federal government has signalled
that it believes the current system of support payments for working age people
who are able to work needs to be reformed. Chapter 1 noted that a review has
been commissioned. In November 2014, the Minister for Social Services,
the Hon. Kevin Andrews MP (Minister), stated:
...the present system fails to provide clear incentives,
opportunities and rewards for working age Australians wanting to leave income
support, even among those who desperately wish to do so...
...perverse incentives have grown over time, encouraging people
to take actions that are detrimental to their own long term interests.
The $260 a fortnight gap in the rate of payment between the
Disability Support Pension and the Newstart Allowance, for example, has created
a perverse incentive for people on unemployment benefits to test their
eligibility for the DSP which has historically had no requirements to look for
The ACTU took issue with the argument that lower payment rates relative
to wages (ie. lower replacement rates) will promote workforce participation.
This is the view that the smaller the replacement rate, the greater the amount
by which an individual can increase his or her income by becoming employed, and
therefore the greater the immediate financial incentive to seek employment.
The ACTU put the following position:
At some point, it is likely to be true that increased payment
rates would reduce the incentive to participate in the workforce. However, the
relationship between the adequacy of the replacement rate and the effectiveness
of recipients’ job search activities is not monotonic. Increasing the
replacement rate to 100 would eliminate the immediate financial incentive to
seek work, but reducing the replacement rate to 0 (ie. abolishing
unemployment assistance) would leave unemployed people socially excluded,
unable to subsist, and unable to meet the costs of searching for work. Unemployed
people need a sufficient income to allow them to maintain a stable home, meet
all necessary costs of living, purchase appropriate clothing for interviews and
employment, and pay for transport to and from job interviews and potential
places of employment. Very low incomes can also lead to a decline in physical
and mental health that can reduce a person’s likelihood of finding employment.
Other submitters to the inquiry also cautioned that incentives to work
should not mean setting payments at levels that drive people into poverty. They
indicated that current payment levels were so low that they jeopardised the
ability of people to find work. Ms Therese Edwards of the National Council of
Single Mothers and their Children told the committee that a payments system
should serve as a 'springboard for parents' to give them 'a solid footing and
chance to gain a start in the labour market'.
In particular, she criticised the current threshold arrangements with when a
single parent's child turns eight and is shifted to Newstart:
...a mum with three children on parenting payment single can
earn and keep about $113 per week. Once her little one turns eight, she is
allowed to keep $50 per week. These losses are unrecoupable. National Welfare
Rights estimates that a mum working 15 hours per week on the minimum wage will
have to work 28 hours once she has moved across to Newstart just to retain that
same amount. We question whether there is the capacity and whether those hours
UnitingCare Australia's National Director, Ms Lin Hatfield Dodds, told
The establishment of an adequate base payment would bolster
current payments that expose recipients to deprivation and homelessness, reduce
their ability to secure and retain employment, and cause serious disadvantage
for their families.
Anglicare Australia emphasised that obligations regarding employment and
...need to be framed around the capacities of those people, and
need to recognise their strengths and their circumstances. They need to take on
board the reality of the job market in which people find themselves. And there
are also responsibilities that the wider society has, above and beyond ensuring
adequate income for people out of work. Leadership, employment creation
and respect for those who are doing it tough are the starting points.
The ACTU argued that income support recipients should receive 'a decent
increase' in their take-home pay if they move into work, or increase their
hours of work. It argued that to do this, effective tax rates should not be
prohibitively high and the rate at which payments are withdrawn as earnings
rise (the taper rate) should not be excessive.
In this context, the ACTU criticised the National Commission of Audit's
(NCOA) recommendation to apply a taper rates for various payments of 75 per
cent, arguing that this setting would discourage workforce participation. It
noted that at this rate, an income support recipient who chooses to earn
an extra $20 from work will lose $15 of income support and may also pay income
tax out of the remaining $5. The ACTU concluded:
Prohibitively high taper rates such as those recommended by
the NCOA would be at odds with the principle of promoting workforce
Committee comment on the incentive
to work principle
The committee notes that that ACOSS / COTA 'employment incentives'
principle emphasises that these incentives should emphasise a person's
financial need rather than rigid compliance with income and assets tests. This
is a point that is often overlooked in efforts to design a payment system to
encourage people into work. Many submitters and witnesses to this inquiry
emphasised the importance of providing working-age people with a payment that
is adequate for them to gain employment. It is of real concern to the committee
that this is currently not the case.
The committee strongly agrees with the ACOSS / COTA principle on
employment incentives. Maximum payment levels must be based on an individual's
current financial need rather than their future employment prospects, and payments
should not be reduced the closer a person with a disability or caring
responsibility comes to securing paid employment.
Means-testing benefits: a third
The Australian system of social security establishes a number of
criteria that determine a person's eligibility for benefit payments. One of
these criteria is a means‑test which applies either an income or assets
test (or both) to determine eligibility. Under a set threshold, a person will
typically be eligible for the full benefit; for each dollar earned over the
threshold, there is a commensurate reduction in the rate of the benefit.
Australian governments have viewed means-testing as important not only
to assisting those most in need, but to keep the cost of welfare under control.
The Minister said in May 2014:
Australia needs a well-targeted means-tested income support
system, which provides financial assistance to those most in need, while
encouraging self-provision whenever possible.
The Australian social security system is tightly means-tested. A 2009 paper
published by the Parliamentary Library explained:
Australia is unique among Western countries for the extent to
which its social welfare programs are means tested. Income support is extended
across a range of categories, including the old, people with a disability,
the unemployed and people caring for children. This support is provided on
a flat rate basis and funded from general taxation, rather than from
contributions from workers. The Australian system of income support differs
from those in most other welfare states in that it is not based around social
insurance, whereby, for example, the old, unemployed and sick are protected by
earnings related income replacement schemes. Consequently, Australian welfare
benefits are generally lower than in other welfare states.
Even with low benefits, the means-tested Australian social security
system creates a significant redistributive shift from the top to the bottom 20
per cent of the population. As Treasury noted:
The Australian tax and transfer system overwhelmingly directs
assistance towards low income earners. According to the latest ABS Household
Expenditure Survey, the poorest 20 per cent of Australian households, on
average, receive cash transfers and social services benefits worth more than
eight times what they pay in taxes. By contrast, the richest 20 per cent of
households, on average, pay more than four times as much tax as they receive in
Figure 6.4 below shows that Australia transfers 12.1 times as much to
the poorest 20 per cent of the population, compared to the richest 20 per cent
of the population. The OECD average is a ratio of 1.1.
Figure 6.4: Top and Bottom Income Quintiles: Ratio of Transfers to each
Source: Department of Social
Services, answer to question on notice,
received 13 November 2014, p. 2.
Middle class welfare
As in other countries, there has been debate in Australia about whether
benefits should be distributed to those on middle incomes. The political
argument in favour of these benefits is that governments should provide
assistance to the cost of raising a family. The contrary position is that
payments to middle and upper income earners are not efficient and do not meet
the basic test of a system that provides for those most in need.
Research by Professor Whiteford, Professor Gerard Redmond and Elizabeth
Adamson found that while there was an increase in middle class welfare between
1982 and 2007–08, the increase was 'relatively modest and focussed on families
not far above the second decile'. They conclude:
Overall what appears to have happened over the period since
1982 is that benefit spending has become less targeted on the poorest 20 per
cent of the population but has been shared more widely with individuals and
families below the median. Persons in these income ranges may not be poor, but
it is difficult to characterise them as rich...
Committee comment on means-testing
The committee believes that the means-testing of benefits should principally
be viewed as a design feature of Australia's social security system, as opposed
to a principle underpinning social security payments. The committee notes that
a tightly means-tested system of income support payments can compromise the
system's ability to deliver on the principles of adequacy and providing
incentives to work. Applying stringent means-tests can result in poverty
traps high effective marginal tax rates, both of which discourage people from
participating in the workforce.
The committee agrees with ACOSS / COTA principle relating to employment
incentives that 'modest levels of private income and assets' should be ignored
in determining eligibility for base rate payments. It also agrees that supplements
should be less strictly income tested given that their purpose is to assist
with extra costs of an employed person.
The committee considers that in determining eligibility for social
security payments, the principle of 'fairness' is crucial. As noted above,
'fairness' relates to providing payments based on financial need. It
also stresses that people should not be moved from higher to lower payments
when their financial needs are the same (see paragraph 6.3).
A benchmarking process for setting payment levels
UnitingCare Australia, The Salvation Army, Anglicare Australia,
Catholic Social Services Australia and Baptcare Australia all support a
benchmarking process to set adequate minimum payment levels for social security
benefits in Australia.
The committee agrees that this approach is necessary. It is concerned with
the evidence presented in submissions that across a range of measurements,
the payment level for Newstart recipients has failed to keep pace with
The committee recommends that the Australian Government review the level
of working age payments to examine the rate of payment to the poverty line.
The committee recommends that the Australian Government establish a
consultation process to engage key stakeholders in discussions on how to set
minimum levels for social security payments in Australia, including
Commonwealth Rent Assistance payments and student assistance payments. In determining
the optimal basis for benchmarking payment levels, these discussions should
consider the merit and weight to be placed on each of the following
budget standards; and
financial stress indicators.
Chapter 2 of this report noted that emergency relief funding had been
reduced in 2014–2015 by $7 million. The Department of Social Services explained
this reduction in funding in terms of reduced need for emergency funding. The
Deputy Secretary told an Estimates hearing in June 2014:
In 2011-12 there were just over a million requests for
assistance. In 2012‑13 there were 864,000 requests for assistance.
Last year there were, to date for a half year, 374,000.
The committee questions this data and the government's proposed cut to
emergency funding assistance. The evidence that the committee has received from
various welfare agencies on the level and severity of hardship in recent years
indicates that there is a need for more, not less, emergency relief funding
(see chapter 2).
The committee recommends that the Australian Government urgently review
the amount of funding allocated to Financial Crisis and Material Aid including
for the provision of Emergency Relief and Food Relief (including over the
forward estimates), to ensure that vulnerable Australians in need are able to
Should an independent body set
The preceding discussion raises the question of who should set the base
level for payment. Should it be the government or should an independent body be
charged with setting payment levels based on a transparent benchmarking
process. Anglicare Australia noted in its submission that it has twice
conducted a national survey to test public support for an independent body to
set payment levels. It said:
On both occasions, around 60% of respondents, across all
population groups, were in favour of an independent body setting payment
levels, and about 20% favoured the government. Governments of all
persuasions, however, have not responded well to this idea. That is why
Anglicare Australia is calling for, at the very minimum, an independent and transparent
benchmarking process that informs – and be seen to inform – government decision
UnitingCare Australia put a different argument. Ms Hatfield Dodds told
We are not proposing that an independent process is set up
that binds government. We are proposing a transparent benchmarking process
under which government can then make its own decision about how it wants to
deal with that in a budget context.
The committee notes that under the ACOSS / COTA principle of
'administration', 'entitlements and compliance with any participation
requirements should be assessed by a single statutory agency'. However, the
committee is not convinced that an independent statutory body should be setting
payment levels. It believes that this is the role of government. However,
it is important that governments follow a clear and transparent process for
measuring, setting and indexing working-age payment levels. The committee
reiterates the need for proper consultation with stakeholders to establish this
A tiered system of payments
One option aimed at simplifying the current payments structure and
prioritising work incentives in social security payments is to categorise
payments and alter payment levels according to a recipient's prospects of
returning to work. The Interim Report of the McClure Review Reference
Group (see chapter 1) proposed:
...a simpler architecture for the income support system consisting
of the following payment types: a tiered working age payment; a Disability
Support Pension; an Age Pension and a child payment.
The Interim Report proposed that the working age payment be tiered to 'take
account of individual circumstances, such as partial capacity to work, parental
responsibilities or limitations on availability for work because of caring'.
The Disability Support Pension (DSP) would only be available for people
with a permanent impairment. The Interim Report also proposed a tiered working
age payment for those currently on the DSP with a capacity to work.
In terms of child payments, the Interim Report proposed 'a simpler child
payment structure' which could bring together Family Tax Benefit Part A, Youth
Allowance, ABSTUDY and other payments for dependent children and young people.
Interestingly, the Interim Report suggested that single parents and
others with a significant barrier to full-time employment could be given a
higher rate. It stated:
In moving towards a new working age payment, consideration
should be given to reducing the current gap between pensions and allowances,
particularly for people with limited work capacity, or with significant labour
Within a tiered working age payment structure, consideration
should be given to when a higher rate should be paid. Recipients of higher
rates could include single parents, people with disability and a partial
capacity to work, and others with a significant barrier to full-time
employment. Recipients of the lower payment rates could include students and
single unemployed, particularly those of younger age.
The 2009 Henry Review proposed a broadly similar structure. It suggested
that payments should fall into one of three tiers, dependent on the recipient
and the purpose of the payment. The first category should be pensions for those
people not expected to work (the elderly, those with disability). These
payments should be 'sufficient to provide an adequate standard of living, based
on an accepted community standard'. The second category he termed
'participation payments'. These are provided to people 'who are able to work
and expected to work' (the unemployed, single parents). The rates of payment
here 'should provide a basic level of adequacy'. The third category is
student assistance which should be a lower payment rate than the participation
Reform and simplicity
In the context of the preceding discussion, the committee draws
attention to the ACOSS / COTA principle of 'simplicity'. The committee understands
that a key theme of stakeholders' discussions as part of the McClure Review is
to simply the payment system. Consistent with the ACOSS / COTA principle, the
committee emphasises that reform to simplify the current system must:
ensure that people in similar circumstances receive the same
level of payments with the same or similar eligibility requirements; and
remove the hurdles for people undergoing common life transitions
such as employment, unemployment, different stages in the care of children or other
In the context of the current reform process, the committee also
reiterates its concern that any changes to the current system are consistent
with the principle of fairness. Payments must be based on financial need and no
recipient should be financially worse off as a result of the reforms.
The committee recommends that in its response to the findings of the
Review of Australia's Welfare System, the Australian Government ensure that
those facing the greatest hardship are better off.
Other practical measures to address income inequality
The previous section identified the need to increase the level of social
security payments, and index these payments on a consistent basis to ensure
that payment levels reflect current community standards. This section
identifies some other specific measures that Australian Governments could
pursue to alleviate income inequality. These could include:
improving housing affordability for people on low incomes, and in
increasing the level of Commonwealth Rent Assistance;
indexing this assistance to market rents rather than the CPI; and
setting aside a percentage of all new housing developments for
mentoring young people who are disengaged (or at risk of dropping
out) from school, including 'hands-on' training programs and initiatives to
connect young people with employers;
retraining programs for older workers and case management to help
the long‑term unemployed find work;
targeted assistance for low income groups to assist with the cost
strengthening taxation compliance;
taxation reform including proposals to:
further increase the tax-free threshold;
limit the use of negative gearing as an investment strategy; and
progressively increase the rate of taxation on superannuation
contributions, fund earnings and payouts.
Housing affordability and
Commonwealth Rent Assistance
The ACOSS / COTA principles outlined above contain a principle on
'housing affordability' which says:
...comprehensive action should be taken to make housing
affordable for people on low incomes...
Rent Assistance should be adequate and indexed to movements
Improvements in Rent Assistance should complement, not
replace, adequate public investment in social housing and reform of incentives
for private investment in affordable housing.
In its submission, COTA noted that Commonwealth Rent Assistance (CRA)
payments are often 'the difference between having and not having a home'. However, CRA
payments have not kept pace with increases in private rents, particularly in
metropolitan areas. COTA argued that while long term solutions for increasing
the supply of affordable housing are critical:
...an increase in the CRA for the lowest income groups is an
important measure as it would start to reduce the gap between the level of
subsidy received by people in public housing and people in private rental who
may have similar incomes and needs.
COTA also argued the
need to index payments to the private rental market to ensure the value
of assistance does not erode over time.
This inquiry has received some evidence that CRA should be increased
(see paragraph 3.85–3.86). Ms Mary D'Elia, the State Operations Manager of
Baptcare in Tasmania, told the committee:
In a situation of increasing income inequality, it is
low-income households living in private rental that face the greatest financial
stress. Baptcare calls for the Commonwealth rent assistance to be increased and
for it to be indexed to the rental component of the CPI. It is also disappointing
that the Commonwealth has suspended NRAS initiatives for the construction of
new housing developments for low-income renters. Baptcare encourages the
Commonwealth to work with the social housing sector to establish viable,
long-term strategies in this field so that housing does not increasingly
exacerbate the impact of income inequality.
The Queensland Department of Housing and Public Works told the
committee that there are approximately 200 000 low-income Queensland
households that currently receive CRA. Of this number, around 18 000 are
in community sector housing with the remaining 182 000 in the private
rental market. The Director-General of the
Department, Mr Neil Castles, told the committee:
The issue with CRA is that it is not particularly responsive
to variations in household income, movements in market rentals and regional
differences. In some parts of Queensland there is probably a lesser need for
CRA but if you are in the CBD or close to the CBD of Brisbane—and that may be a
requirement, depending on need—CRA may not be adequate. It is a one‑size-fits-all
approach and that does not necessarily work.
The Henry Review recommended that the maximum rates of rent assistance
for income support recipients should be 'substantially increased' and linked to
movements in market rents. Further, public housing rent concessions should be
replaced by rent assistance and 'a new form of assistance for high-need tenants
to improve equity and work incentives'.
The Interim Report
of the Reference Group on Welfare Reform has recognised that current
arrangements that index rent assistance to the CPI are not effective. As it
Rent Assistance is indexed to the Consumer Price Index (CPI),
but private rents have been rising at a higher rate than the CPI for some time.
This means that Rent Assistance has been gradually becoming less effective in
reducing rental stress for people in the private market. It has also widened
the gap between the relative generosity of Rent Assistance and public housing.
The committee has not had the opportunity or the evidence to
examine the issue of the maximum rate of rent assistance in any detail.
However, the committee recognises that this is an important issue. It proposes
that the level and the method for setting CRA payments should be considered as
part of the consultation process on social security payments (see
recommendation 4). It also makes the following recommendation.
The committee recommends that the Commonwealth Government establish a
series of national and regional rental indexes to track the increase of rents.
The committee recommends that consideration, including of cost implications, be
given to indexing Commonwealth Rent Assistance according to the geographically
most suitable index.
A percentage of social housing in
national planning guidelines
In addition to increasing the funding for CRA to reflect rent increases,
the committee also highlights the need to increase the stock of public housing
for people on lower incomes. The committee considers that government should aim
to set a requirement that new housing developments contain a certain proportion
of social housing. Specifically, the committee encourages the federal
government, in partnership with state governments, to:
planning guidelines for new housing developments that require a social
mix of public and private housing with a minimum target of affordable and
public housing, and housing that caters for diverse social and cultural needs;
increase the provision of emergency accommodation and
transitional housing for people in need. This includes women and children
affected by family violence, people experiencing homelessness, refugees and
asylum seekers, migrants and people released from detention;
develop national urban planning guidelines that provide for the
location of high density housing and commercial buildings close to high
capacity public transport; and
the clustering of medium-density housing, community facilities
and small‑scale businesses around neighbourhood shopping centres and
other social facilities linked with public transport.
The committee recommends that the Commonwealth Government develop
National Urban Planning Guidelines ensuring that new and existing developments
have access to public transport, health, education and other services.
The committee also recommends that the Commonwealth Government develop
National Planning Guidelines that all new housing developments have a minimum
target of affordable and public and social housing for low income and other
Education and training: the
importance of youth mentoring
This inquiry has received valuable evidence from a range of
submitters and witnesses on the type of education and training programmes that
successfully support young people from disadvantaged backgrounds to remain in
school until Year 12, and further training or the workforce after school. These
programmes instil the importance of school and enabling young people to see that
they have an employment future and where this future lies. The programmes have
achieved some excellent outcomes.
Youth Connections is a federal government programme that assists young
people at risk of not completing Year 12 to engage with employment
opportunities to ensure they finished year 12 and then transition into
employment or further study. The programme's providers offer outreach
activities for young people who are disengaged from education, training or
employment to support them in their local communities. The programme also aims
to build the capacity of schools and communities to improve the support
available to young people at risk of disengaging.
The Youth Connections programme will cease at the end of 2014. Several submitters
have noted the success and popularity of the programme in improving Year 12
completion rates in disadvantaged areas and recommended that it be continued.
Mr Womersley of the South Australian Council of Social Service, for
example, expressed his disappointment that the programme would not be funded
beyond 2014. He drew the committee's attention to the programme's role in
building long term connections with disaffected young people.
Similarly, the Youth Affairs Council of Western Australia highlighted 'the
importance that the nationally funded Youth Connections Program plays in
reducing income inequality in our communities'. It urged that the government 'continue
funding of the highly successful and critically important, Youth Connections
Mr Craig Comrie told the committee:
Across the country it [the Youth Connections programme] has a
success rate of 80 per cent in engaging young people to stay in education or
employment. In some parts of the country the success rate is 94 per cent.
... It is a $7.5 million investment in Western Australia. In
terms of cost, it is really not expensive for the outcomes that are achieved by
the program. There are 1,500 young people supported every year, and there are
also 77 youth workers, who, on 31 December, will lose their jobs. We
really need to stop the back and forth between the state and federal
governments, and someone needs to make a commitment in this area.
... One of the potential safeguards in place around the Youth
Connections programs is [Job Services Australia (JSA)]. I would suggest that
JSA is probably not equipped at the moment to best support young people. There is
a different conversation that needs to be had with young people, going back to
what I mentioned about meeting young people where they are and hearing their
story rather than simply being, 'Okay, you've come to JSA. The aim here is to
get you into employment.' For youth services the aim is: 'We want to know where
you're coming from, we want to know your story and we want to know what you
want in life so that we can help you get there.'
The Youth Affairs Council of South Australia (YACSA) conducted a survey
of young people, the results of which were reported in its submission. One of
the survey questions asked what governments can do to make things better for young
people experiencing poverty. YACSA noted:
80 per cent of respondents called for the provision of more education
and employment pathways programs (the highest response);
76 per cent called for more affordable housing options including
more government housing; and
65.1 per cent called for higher rates of government allowances.
YACSA added that specific comments from the survey:
...centred on governments providing employment and training
transitions programs (like the recently defunded Youth Connections), meaningful
mentoring programs, more programs to teach young people about starting their
own business, and providing a fair and consistent Centrelink Allowance system
that covers the basics of life.
The committee is concerned that the decision to terminate the Youth
Connections programme and other youth transition programmes will leave a
significant gap in services for those young people who no longer attend school.
The committee urges the Commonwealth Government to either recommit funding
for the Youth Connections programme or introduce a rebadged program with the
same objectives and design as Youth Connections. In addition, the
committee recommends that the Australian Government considers incorporating the
key mentoring aspects of the Youth Connections programme into TAFE courses.
The committee recommends that the Commonwealth Government reconsider its
decision to terminate the Youth Connections programme and other youth
transition programmes. These programmes should be continued or at least rebadged.
The focus of the programme must remain on one-on-one mentoring to help young
people to overcome the barriers that make it difficult for them to stay in, or
return to, school or training.
The committee recommends that the Commonwealth Government establish TAFE
programmes that build on the mentoring approach of the Youth Connections
programme. The objective of this approach at TAFE level is to ensure that young
people remain engaged in vocational training and are able to identify and
pursue their employment options.
'Pasifika Families with Pride and
Ms Ranandy Stanley from the Hope Centre in Logan noted the
achievements of the Pasifika Families with Pride and Purpose Program, which engages
migrant families from Pacific Islander backgrounds.
Despite being a new initiative, it has improved Year 12 retention rates at
several local schools. The programme aims to:
[G]et elders from the community to talk about how to fit into
the Australian customs. We have Griffith University come in and talk about how
important education is and finding pathways for them to get into university.
Then we have someone talking about healthy relationships at home and how to
interact with your parents and that sort of thing. We touch on different
Learning for Life
Ms Anne Hampshire of The Smith Family noted that 'low-income
families have very high aspirations for their children and their family
generally, but they struggle to provide the resources and the stepping
stones to realise those aspirations'.
The Smith Family runs a programme called Learning for Life that seeks to
provide those resources to 'attain Year 12 and beyond'. The programme engages
with the young person and their family, tailoring access to resources in
addition to small financial contributions contingent on the young person
meeting specific goals such as attendance and utilisation of the opportunities
provided. That is, the scholarship's strength is this idea of mutual obligation
and trust between the individual and The Smith Family. This programme supports
over 34 000 young people.
The South Metropolitan Youth Link
in Western Australia
The South Metropolitan Youth Link (SMYL) in Western Australia places
school age children at risk of disengaging from the education and training
system into a workplace. SMYL pays the wages of these children whilst they
attend a workplace and learn the requisite skills to function as an employee.
There is a role for government to assist with paying these young people's wages
to ensure they remain engaged with study or in some cases moving directly into
We have the constant assertion from industry that it cannot
afford to pay the $100 a day to put a kid at the workplace. There is a point
where [the government and not-for-profit sectors] have to wear that
because we work with kids who are really difficult. They are not good year 12
kids. Within six to 12 months, most of our kids are functioning, but we still
have to carry their wages until year 12. After year 12, about 85 or 90 per cent
of the non-Aboriginal kids get employment straightaway with their host
employers. We have that kind of compact with employers. Our fear about this is:
if you wait until the kids have left school, it becomes almost impossible. It
is too expensive. If we get these kids while they are not attending school but
at school age, we can get them re-engaged.
As chapter 1 of this report noted, the committee had an opportunity to
visit SMYL's College and training facility in Rockingham and was impressed.
Clearly, the College has had significant success in keeping its students on its
roll and engaged in practical and hands-on activities. It is also clear that
the mainstream schooling system could not have achieved these results.
The Northern Adelaide State
Secondary Schools Alliance
The committee also heard of the success of programmes that connected
school students with vocational education providers and employers. The Chief
Executive Officer of AnglicareSA, Reverend Peter Sandeman, told the committee of
a successful collaborative programme in north Adelaide that connected schools
with TAFE, providing later-year school children with TAFE training
The first organisation I draw your attention to is the
Northern Adelaide State Secondary Schools Alliance, affectionately known as
NASSSA. The purpose of the alliance is to maximise the learning
opportunities, career pathways, retention and educational outcomes for students
in state secondary schools in the northern Adelaide region. The alliance is a
key link between 11 secondary schools and community, university, training
organisations and industry partners across the northern Adelaide region.
It has enabled those schools to stop talking about 'my students' and start
talking about 'our young people' and that is a big jump. It is one of the
things I was associated with in the north and it has endured to this day.
NASSSA then allows schools to work with employers and employer groups as a
We had the schools working together to provide TAFE
opportunities during year 10, 11 and 12. Let me give you an example. By
themselves, individual high schools could only muster maybe three or four kids
who wanted a particular program, and TAFE would say, 'Sorry; not interested.'
So what we did was to get the schools to develop an alliance, and I think we
went from 56 kids doing TAFE training in one year to 560 the next year, simply
through the schools buying from and negotiating with TAFE in bulk.
Work Inspiration is an employer-led programme aimed at making a young
person's first experience of work both meaningful and inspiring. It is operated
in partnership between The Smith Family, the Foundation for Young Australians
and the National Australia Bank. Employers are encouraged to create their own
format for a work experience programme. This programme should encourage a
dialogue between the young person and employer: the young person explaining
themselves and their interests and the employer explaining the opportunities
that might suit these interests and how a career might pan out.
Mrs Hampshire from The Smith Family told the committee:
Work Inspiration is an employer-led initiative but involves
very close partnerships with schools and community organisations. It came from
the UK originally; it provides young people with a very different type of work
experience, a very hands-on, personal opportunity. For the employer it allows
them to understand what a potential youth labour force might look like. It
allows them also to get—what generation are we up to now?—Generation Z's view
of how they might sell their products, et cetera. We need far more
innovative and creative ways.
At the hearing in Elizabeth, the committee heard of the importance of
school students—particularly those from disadvantaged backgrounds—being able to
connect with employers. Dr Ian Goodwin-Smith of Flinders University drew the
committee's attention to the work of Dr Anthony Mann, the Director of
Policy and Research at the Education and Employers Taskforce in the United
Kingdom. Dr Mann's research shows that there is a positive connection
between employer engagement with students at school and the employability and
earning power of a young adult who could recall that interaction.
In referencing Dr Mann's work, Dr Goodwin-Smith told the committee that,
by interacting with employers, young people:
...get a more complex
array of social and cultural capital—they get that life experience which you do
not get, necessarily, in an inter-generationally unemployed family...
There needs to be a
lot of work done, with people who have been unemployed throughout the
generations, to overcome that kind of cultural and social exclusion. There also
needs to be a commitment to carrying that work through to post-employment
support. That is what a lot of our research showed us as well. Worker
acculturation and post-employment support using a case-management approach are
Similarly, Ms Catherine Bartolo of YFS Limited suggested the need for
'champions' for disengaged youth, adding that service providers can fulfil that
They need people in their lives to champion-whether it is a
football coach, a teacher or an agency like us that says, 'We're going to do
what it takes to make it work.' We have to break some of those cycles.
The committee recommends that Australian schools—particularly those in
regions of socio-economic disadvantage—establish alliances with employers and
vocational education providers to deliver programmes that encourage young
people to remain at school, develop contact with employers and support young
people to transition to the workforce or further education or training.
These programs should encourage employers and vocational education
institutions to take a lead role in designing courses that identify future job
opportunities for these young people.
Training and employment for older
workers and the long-term unemployed
The committee also received important evidence on the need for targeted
training programs to assist older workers (particularly those facing
retrenchment) and long-term unemployed people looking to re-enter the
Retraining opportunities for older
The TAFE system also has an important role to play in providing
retraining opportunities for older workers. Chapter 4 noted the comments of the
Age Discrimination Commissioner and her call for a National Jobs Checkpoint
Plan (see paragraph 4.79). Ms Ryan envisaged that this Plan would be:
...high profile, widely supported, and nationally coordinated
approach to helping all people at midlife to check where they are and change
direction if they need to. This national approach can be developed by
governments, industry and vocational education providers working together. I
see TAFE right at the centre of this Plan. TAFE colleges have the required
training skills and links with local employers and government programs, but
these links need to be strengthened and supported for vocational education
everywhere throughout Australia.
As chapter 4 noted, the committee believes that this proposal has
merit. It encourages the Office of the Age Discrimination Commissioner to
articulate a plan, with costings, that can be put to the Commonwealth and State
governments for their consideration.
The costings should emphasise the savings that will arise from a preventative
approach where people move smoothly to training and further work, as distinct
from older workers being made redundant and reliant on income support payments.
The committee recommends that the Office of the Age Discrimination
Commissioner articulates a National Jobs Checkpoint Plan, with costings,
that can be put to the Commonwealth and State governments for their
consideration. These costings should emphasise the savings that will arise from
a preventative approach where older workers can move smoothly to training opportunities
and further work, as distinct from these workers being made redundant and
reliant on income support payments.
Connecting the long-term unemployed
to the workforce
The task of encouraging low-income people from disadvantaged
groups into the labour market requires a sustained and coordinated effort. For many
years in Australia, a targeted approach has been applied through various labour
market programmes. On the basis of the evidence received during this inquiry,
the committee suggests that there are significant benefits from the case
management approach of programs operating in areas of acute socio-economic
As chapter 1 noted, in Elizabeth, the committee had the
opportunity to meet representatives of the Building Family Opportunities (BFO)
Program, run by Wesley UnitingCare Port Adelaide. The program seeks to bring
together long-term jobless families, local community organisations, government,
and employers to find solutions to complex issues that prevent families from
participating in employment. BFO case managers work with families to address all
barriers until a sustainable job is achieved. The approach of JSA tends to
be more focused on job skills, experience and local job opportunities (see
The committee commends programs such as the BFO Program. These initiatives
are carefully targeted to meet the specific needs of families facing severe
The committee recommends that the Australian Government assess the success
and the financial and social benefits of programmes that provide individualised
support for the long-term unemployed and those at risk of long-term
unemployment. Pending this analysis, the committee recommends that the
Australian Government consider the case for funding these programmes on a more
secure, longer-term basis.
Currently, the Australian Government assists with the cost of
childcare through a means-tested childcare benefit and a capped childcare
rebate. The maximum rate of childcare benefit is payable for a family income
under $42 997 or for families receiving income support. A family with one
child is not eligible for the benefit if its income exceeds $149 597; for
two children, the benefit cuts out at an income of $155 013 and a family
with three children is only eligible for the benefit if its income is less than
The child care rebate covers 50 per cent of out of pocket child care expenses
up to a maximum of $7500 per child per year.
The Henry Review recommended combining the Child Care Benefit and
the Child Care Rebate into a single payment based on a percentage of childcare
costs. The Review proposed that the payment should have a high rate of subsidy for low‑income
families that covers up to 90 per cent of the costs of childcare. It also
proposed a base rate of assistance for all families that use child care to
facilitate parental engagement in the workforce. The base rate of assistance
should be set as a proportion of child care costs, with reference to the
marginal tax rate faced by the majority of taxpayers.
The committee notes that the Productivity Commission (PC) is currently
undertaking a review of Childcare and Early Childhood Learning. In its July
2014 draft report, the PC recommended that the all childcare subsidies should
be consolidated into one payment called the Early Care and Learning Subsidy
(ECLS). This subsidy would also contain a top-up provision to provide
additional services to specific groups of children based on need, 'notably
children assessed at risk, [indigenous children], and children with a diagnosed
disability'. The PC also proposed establishing two block-funded programs to
cater to specific areas of need:
The Special Early Care and Learning Subsidy would fund the
deemed cost of meeting additional needs for those children who are assessed as
eligible for the subsidy. This includes funding a means tested proportion of
the deemed cost of mainstream services and the ‘top-up’ deemed cost of
delivering services to specific groups of children based on their needs,
notably children assessed as at risk, and children with a diagnosed disability.
The Disadvantaged Communities Program
would block fund providers, in full or in part, to deliver services to
specific highly disadvantaged community groups, most notably Indigenous
children. This program is to be designed to transition recipients to
child-based funding arrangements wherever possible. This program would also
fund coordination activities in integrated services where [Early Childhood
Education and Care (ECEC)] is the major element.
The Inclusion Support Program would provide once-off grants
to ECEC providers to build the capacity to provide services to additional needs
children. This can include modifications to facilities and equipment and
training for staff to meet the needs of children with a disability, Indigenous
children, and other children from culturally and linguistically diverse
The report also suggested a shift in funding priorities from the
proposed Paid Parental Leave scheme to ECEC:
A considerable number of submitters, the 2014 National
Commission of Audit and various commentators, suggested that the Government
direct at least some of the funding for its proposed Paid Parental Leave (PPL)
scheme to ECEC assistance for families, to ensure continuity of support for
working parents with young children. The Commission considers that it is unclear
that the proposed changes to the Paid Parental Leave scheme—which is more
generous than the existing scheme and that recommended in the Commission’s 2009
report on paid parental leave—would bring significant additional benefits to
the broader community beyond those occurring under the existing scheme. There
may be a case, therefore, for diverting some funding from the proposed new
scheme to another area of government funding, such as ECEC, where more
significant family benefits are likely. Such a move could add up to a further
$1.5 billion per year to Australian Government assistance for ECEC.
The committee notes media speculation that the PC's final report as part
of the federal government's review into childcare and early childhood learning
will recommend a single means-tested payment for childcare, with government
assistance based on a percentage of the 'deemed cost' of childcare.
This inquiry has not examined the issue of childcare costs in any
detail. Few submitters raised the issue. The Salvation Army proposed
temporary tax cuts to offset the cost of childcare.
The committee does recognise that childcare costs can be
significant impost not only for low income families and single parents, but
even for people and households on average incomes. It also acknowledges that
there is a significant opportunity cost to the economy where women either
choose, or are financially forced, to remain at home to care for a child. The
committee awaits the PC's final report.
It hopes that the report will make recommendations that adequately address the key
issue of increasing investment in childcare places, particularly in areas of
Taxation options: raising the tax-free
Apart from increasing benefits, another obvious way to assist low income
people is to remove their tax obligations. The Australian taxation system has a
tax-free threshold: a person earning below this threshold is exempt from paying
income tax. Tax is only paid on taxable income exceeding the threshold.
As of July 2012, the tax-free threshold increased from $6000 to
$18 200. Dr Paul Blacklow of the University of Tasmania told the
...I think that most public policy for the last 20 years has
only contributed to inequality. Really, the raising of the tax-free threshold
is the only thing I can think of that has been a positive step...
The final Report of the Henry Review noted the merit of a tax system
that reduced the number of income support recipients need to pay tax. It argued
that the transparency of the system could be improved by 'a more complete
separation of the tax system from the transfer system' which could be achieved
by setting the tax‑free threshold at a 'much higher level'. One of the
recommendations of the Henry Review was that 'a much higher personal tax-free
threshold, around $25,000, should replace the current complex array of
thresholds and offsets'.
The Review estimated that a threshold set at this level:
...would mean that more than 1.2 million additional people
would no longer pay tax—over 10 per cent of current taxpayers. Many of these
would not have to file a tax return (although some would continue to do so to
claim withheld amounts or imputation credits). Setting the tax-free threshold
at this level would remove the need for the low income tax offset and limit the
need for the senior Australians tax offset.
Strengthening tax compliance
Compliance with taxation laws is important not only to the integrity of
the tax system but also to ensure that revenue for public services is collected
and the intended distributional effects actually occur. In evidence to the
committee, the Australian Taxation Office (ATO) stated:
The overwhelming majority of Australians actually do the
right thing in terms of complying with their tax obligations. That is the
evidence we experience, in terms of our view, at the ATO. We devote an enormous
amount of effort to trying to make it as easy as possible for people to comply.
By the same token, we also devote resources to those who are not complying,
initially from a help and educational perspective, to try and help them to
understand their obligations and meet them—because many who do not do so
inadvertently. For those who do so deliberately, we have a particular focus
around those as well to ensure that they do meet their obligations and continue
to do so going forward.
Several contributors to this inquiry stressed the importance of
strengthening compliance with the tax system and closing tax shelters and
loopholes. The committee also draws attention to what appears to be a double
standard in the government agencies' approach to compliance issues at different
ends of the income spectrum. As Dr Richard Denniss of the Australia
Institute told the committee:
The ATO is proud of the fact that it focuses on the 95 per
cent of people who pay their tax and pay their tax willingly. They are proud of
the fact that they adopt a commercial approach to negotiation with those who
are in default whereby they do not throw money at cases they are unlikely to
win. They are proud of the fact that they take a 'light touch' approach; they
are happy to settle rather than bankrupt people. This is not the approach taken
by our welfare agencies, where people are bankrupted for very small debts.
There are legal ways to minimise personal tax liabilities. These strategies
tend to adopted by those on higher incomes and with more wealth. These vehicles
include negative gearing on investment properties, superannuation tax
concessions, capital gains tax arrangements and the use of private trusts. In
its submission, ACOSS argued:
While the progressive personal income tax rate scale is
clearly progressive, people on higher incomes can easily avoid paying tax at
their marginal rate through tax shelters and loopholes such as superannuation,
negatively geared investment in assets, the preferential tax treatment of
capital gains, and the use of private trusts. For example, the top 20% of wage
earners receive the majority of the benefits from tax breaks for
superannuation, even though they are unlikely to have to rely on age pensions
when they retire. The top 10% of male wage earners receive more in
superannuation tax concessions over their lives than they would if they
received the full rate of the age pension.
To ensure that tax policies reduce income inequality rather
than increase it, access to these and other tax shelters which make no positive
contribution to economic growth and productivity should be restricted. It is
also vital that policy makers avoid any major shift in the incidence of
taxation from income to consumption as this would greatly increase inequality
of spending power by raising taxes on people on the lowest incomes and reducing
them on high income households.
Superannuation taxation concessions
The taxation of superannuation contributions, earnings and withdrawals
in Australia is at a discounted rate (relative to the income tax schedules).
Employer contributions are taxed at 15 per cent on amounts up to
$30 000 a year.
Salary sacrificed contributions are also taxed at 15 per cent on amounts
up to $35 000 a year.
Income earned in a superannuation fund is taxed at 15 per cent. If a person is
aged 60 or over, any withdrawals from a taxed superannuation fund are
tax-free. Dr Denniss noted the generosity of these taxation
If you are over 60, any income you withdraw from a super fund
is tax-free. A million dollars a year, $10 million a year—pull out as much as
you want—it is tax-free. That is why people are so desperate to get their money
into super. It is not to take pressure off the age pension. This is the best
money laundering ever invented. If you can get it into super, you wash it of
its tax on the way out. No-one is breaking the law. This is the law. This is
the system. But you have been told it is to 'take pressure off the aged
pension'. It is obscene. No-one with ten million bucks was ever going to get
the age pension.
Dr Denniss highlighted the regressive impact of way that
superannuation is currently taxed in Australia with the following analogy:
...imagine we had $40 billion in front of us now and parliament
wanted to decide who to give it to in retirement. We have decided not to give
it to young people. We have decided not to give it to disabled people. We have
decided not to give it to minimum wage workers. The $40 billion is most needed
The current system effectively lines people up from the
poorest at one end to the richest at the other end and gives the vast majority
of the money to those with the most. And not only does it give nothing to those
with the least, but when the low-income super contribution leaves us in 2017,
low‑income earners will pay more tax—more tax—on their compulsory
superannuation than they do on their meagre incomes.
If the parliament, rather than use tax concessions to achieve
this incredible disparity, were to post cheques, it would be posting cheques
for tens of thousands of dollars to the wealthiest Australians and it would be
sending a bill to the poorest Australians. The superannuation tax concession
system is obscene. Nine per cent of our incomes—9½ per cent of our
incomes—is compulsorily provided to superannuation. You do not need a tax
incentive to make someone do something that is compulsory. It is compulsory.
Similarly, COTA wrote in its submission:
Tax concessions for superannuation are broadly equivalent to
expenditure on the age pension. The need to rebalance this equation could be
established through a systematic review of retirement income policy which is
what COTA is recommending. COTA is particularly uneasy about the way in which
government support through superannuation tax concessions has been apportioned.
COTA joins ACOSS in their concern that:
Current superannuation tax expenditure settings are poorly
targeted, with some 30% of the value of superannuation tax breaks going to
the top 10% of income earners and only 20% of tax concessions received by
people in the bottom 50% of income distribution.
The committee encourages the government to assess whether the current
tax incentives to invest in superannuation and take pressure off the aged
pension outweigh the significant cost to the public purse in offering these tax
concessions. More particularly, the committee encourages the government to
assess the equity implications of the current arrangements for the taxation of
Is it fair that the concessions are directed to the very rich and
do little to increase the retirement savings of the poor?
Would those who benefit the most from current concessional
arrangements be adversely impacted if these concessions were tightened, or
would their savings be redirected into another investment vehicle?
The other area with significant concessions in Australia's tax system
relates to negative gearing. As with the superannuation tax concessions, the
effect of negative gearing is to disproportionately deliver benefits to the
The ATO has found that negatively geared property investors claimed
$13.2 billion in losses in 2010–11. The average loss per negatively geared
investor was $10 950. For investors earning over $180 000, the
average loss was $23 800.
As chapter 3 discussed, negative gearing allows a property investor in
Australia to offset rental losses against income. In addition to the reduced
personal income tax liability, negative gearing allows an investor to hold a
property which is rising in value. As an investment strategy, negative gearing
has become increasingly popular:
In 1993-94 there were 980,471 investors, with 480,736 (49%)
positively geared and 499,735 (51%) negatively geared. The number of investors
increased to 1,751,679 in 2009-10, a significant rise of 79%, with 640,757
positively geared and 1,110,922 negatively geared. This is a remarkable
increase of negatively geared investors compared to those who are positively
geared. The number of negatively geared investors increased by 122% over this
period, while those positively geared increased only 33%. The trend shows that
negative gearing is becoming central to residential property investment.
Individuals with net rental income less than $0, by taxable income, 2012–13
------------------------------Net rental income less
$18 2000 or less
$18 201–$37 000
$37 000–$80 000
$80 001–$180 000
1 262 044
Australian Taxation Office, Answer to Question on Notice, pp 5–6 of
Committee Hansard, 16 October 2014.
Table 6.1 shows that the majority of negatively geared properties are
owned by individuals with a taxable income less than $80 000. This
statistic is misleading for a number of reasons. Firstly and most importantly,
many of these investors have a taxable income below this value through the use
of negative gearing deductions. Second, the Reserve Bank of Australia has noted
that as of September 2014, 60 per cent of investor housing debt is
held by the top quintile and that investment housing loans are twice as common
in the top quintile (see Table 6.2 below).
This may be because higher income individuals buy more expensive properties as
investments, which ultimately results in those with a higher income accruing
the majority of the financial benefits of negative gearing. Finally, there are
74 000 individuals declaring rental income who have a total taxable income
of $0 or less. These people are likely to be individuals with other income
streams (partners), non‑taxable income streams (superannuants), or those
who live overseas and earn an income in another tax jurisdiction (foreign
Table 6.2: Investor Housing Leverage and Debt Serviceability, (Households
with investor housing debt, by disposable income quintile, 2010
Source: Reserve Bank of Australia, Financial Stability Review, September
2014, p. 51.
The committee is concerned not only with the regressive distributional
nature of negative gearing tax concessions, but the impact of the policy on
housing affordability. This inquiry has heard from several submitters and
witnesses that low income, and even middle income, people and households are
not only missing out on the Australian dream of home ownership but are also
priced out of the private rental market. Policy settings, including taxation
settings, should be directed at increasing the stock of owner-occupier housing
in Australia. Rather, its effect is to limit this stock and 'create a renting
society among the poorer segments of society'.
The committee considers that the government, as part of its upcoming
White Paper on taxation, should look at the options to curtail the generosity
of the current negative gearing concessions. It is aware of media reports in
the lead-up to this year's federal budget that the Treasury had conducted work
on limiting negative gearing to new homes. Just as the First Home Owners' Grant
is being limited to the purchase of new houses, if negative gearing is to
remain, the policy settings should be directed at creating incentives to increase
the affordability and supply of housing.
The committee recommends that as part of the planned discussions leading
to a White Paper on taxation reform in 2015, the federal government have regard
to how the existing tax system is affecting inequality in Australia. This
should include an analysis of existing tax concessions.
The liability investment approach
2011–12, the New Zealand Government commenced a programme of welfare
reform, which aims to reduce long-term welfare dependency. Central to this
reform is the conceptualisation of the dependency as a future liability
(social, economic and fiscal), the costs of which can be decreased
with early investment in employment outcomes (liability investment).
part of this new approach, the Welfare Working Group,
whose recommendations underpinned the reform, noted the importance of
actuarial measurement of the future (or forward) liability.1 In
October 2011, Australian firm Taylor Fry Consulting Actuaries (Taylor Fry)
developed a model for measuring the fiscal liability
and was subsequently commissioned to undertake the 'first actuarial
valuation of the NZ benefit system as a baseline prior to welfare reform'.2
January 2014, a 2013 valuation conducted by Taylor Fry was publicly
released, showing that the inflated and discounted estimate of the client
liability as at 30 June 2013 was $76.5 billion (a decrease of $7.4 billion,
from 2011-2012).3 The Taylor Fry valuation notes that the
Ministry of Social Development is able to influence 'the number of leaves
and joins and changes to future behaviour' (through the Work and Income
programme), which combined achieved a $4.4 billion reduction in the
liability. Of this amount, $1.8 billion was due to higher than expected
leaves and lower joins.
6.6 shows that nearly all the reduction arose from Sole parents (including
those with children 14 years and older who are included in the Jobseekers
segment), who accounted for $1.1 billion of the reduction and other
Jobseekers who accounted for $0.7 billion.
Hatfield Dodds referred to New Zealand's investment approach in her
evidence to the committee:
are just embarking on an endeavour to have a look at an investment
approach, which is really an actuarial approach to public policy. It is
about how government behaves and how government thinks about disadvantaged
people. They have a liability approach...
one of the issues I was told about were single parents, mostly women
there as it is here, who are 20 and under with children on benefit payments
are something like four or five times more likely to be on benefits
continuously through to their thirties if investment in supports and
services are not made when they are 20 or below. The earlier you can get
to single parents, the better a social gain it is. The liability
investment approach does not talk about the social gain; it talks about the
fiscal cost to government of not acting...The liability is a proxy for
wellbeing, but it seems to me that any proxy that has national government
departments of treasury and finance excited about it and coming to the
cabinet process wanting to invest heavily and early in the life of these
social issues that people have is something that is worth having a good
- Welfare Working
Group, Reducing Long-Term Benefit Dependency, Recommendations, February
2011, p. 2, available at:
http://igps.victoria.ac.nz/WelfareWorkingGroup/Index.html (accessed 25 November
- Taylor Fry,
Actuarial advice of feasibility: A long-term investment approach to
improving employment, social and financial outcomes from welfare benefits
and service, report for Ministry of Social Development and The Treasury,
New Zealand, 27 October 2011.
- Taylor Fry,
Actuarial valuation of the Benefit System for Working-age Adults as at 30
June 2011, report for Ministry of Social Development and The Treasury, New
Zealand, p. 2.
Fry, Actuarial valuation of the Benefit System for Working-age Adults
as at 30 June 2013, report for Ministry of Social Development and The
Treasury, New Zealand, p. 3.
Figure 6.5–Movement from the 2012 current client liability to the 2013
current client liability
Source: Taylor Fry, Actuarial valuation of the Benefit System
for Working-age Adults as at 30 June 2013, report for Ministry of
Social Development and The Treasury, New Zealand, p. 3. Reproduced
Figure 6.6–Change in liability due to joins and leaves being different
to expected, by segment
Taylor Fry, Actuarial valuation of the Benefit System for Working-age
Adults as at 30 June 2013, report for Ministry of Social Development
and The Treasury, New Zealand, p. 5. Reproduced with permission.
This inquiry has occurred at a time of considerable international interest
in the issues of income and wealth inequality. Internationally, several high-profile
figures have identified the harm that significant inequality causes and need for
concerted action to address the problem. Important empirical and qualitative research
from prominent academic economists has added weight to this agenda. It is
widely acknowledged that the remedy is not only to provide quality jobs, health
services and education opportunities to increase the income of the poorest in
society. It also involves curtailing the rent-seeking and tax avoidance activities
that have inflated the wealth of the richest in society. The gap between the
richest and the poorest does matter: it impacts on the type of society that is
To date, the debate in Australia on the issue of inequality has been
confined to welfare groups, academic economists, political scientists and
sociologists and a handful of parliamentarians. However, there has been
significant discussion in the media and in the community generally about issues
related to income inequality. For example, cost of living pressures on
households have dominated the political debate in Australia for a decade. The
inter-generational impact of record low levels of housing affordability has
been of acute concern for some years. The quality of Australian schools has also
been widely discussed, particularly since the introduction of NAPLAN in 2008.
Several submitters and witnesses to this inquiry have argued that there
is a need for a national conversation on issues of income inequality. Notably, the Australia21
report published in March this year stated:
Australians need to engage in a national conversation about
how inequality is impacting on our lives, our culture, our economy and our
society. We need to make clear to our political representatives what kind of
society we want for our children and grandchildren. Politicians will not act
while the community accepts growing inequality passively.
The committee considers there is urgent need for action on the issue of
benefit levels. As this chapter has noted, and as the ACTU's submission clearly
sets out, the level of Newstart benefit is simply inadequate. On four measures,
it is too low.
The aim of the committee's proposal to address this is to establish a
clear and transparent process through which to set benefit levels and index
these payments to keep pace with community standards (see recommendation 4). It
is disappointing that a major review into welfare reform options that is currently
in train is not properly considering the inadequacy of benefit levels. However,
the committee's proposal for reform should not—and will not—interfere with the
broader welfare reform process. It is critical that the harsh measures to
cut and withhold benefits proposed in the 2014 federal budget not be passed
(recommendation 2). It is also crucial than reform of Australia's social
security payment system not only leaves no group financially worse off, but
increases the financial position of those facing greatest hardship
(recommendations 3 and 6).
Payments aside, there is a diverse range of broader issues that impact
on income inequality. Taxation reform, including tighter compliance measures
for earners in upper income brackets, offers significant opportunities to
create a fairer, more equal society. The forthcoming White Paper on taxation
should have regard to how existing tax concessions affect income inequality
The committee recommends a multi-pronged approach to improving the
housing options for people on low incomes. This includes:
- increasing Commonwealth Rental Assistance payments and indexing
these payments to a national and a regional rental index (recommendation 7);
developing National Urban Planning Guidelines to ensure that new
and existing developments have access to public transport, health, education
and other services (recommendation 8); and
develop National Planning Guidelines that all new housing
developments have a minimum target of affordable and public housing for low
income and other disadvantaged groups (recommendation 8).
This inquiry has also considered options for governments, working with
welfare agencies and not-for-profit organisations, to promote the education,
training and employment prospects of young people at risk of dropping out of
school, as well as older workers facing retrenchment and the long-term
unemployed. The options that the committee favours include:
developing alliances between schools, employers and vocational
education providers to encourage young people to remain at school until Year 12
and provide them with a positive first experience in the workforce
developing a plan that will coordinate efforts between
governments, employers and vocational education providers to retrain older
workers through the vocational training system (recommendation 11); and
properly fund programs that offer a targeted case management
approach to assist the long-term unemployment (back) into the workforce
The committee urges federal and state governments to recognise the
long-term economic and social benefits of investing properly in these
initiatives, and learning from and improving the outcomes.
Senator Rachel Siewert
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