Additional comments by Coalition senators
Schedule 1 – Exemption of income derived from foreign service
The proposal to remove the long standing general exemption
from paying Australian taxation provided under section 23AG Income Tax
Assessment Act 1936 has been introduced at very short notice, having been
announced in the Budget on 12 May.
Considering the evidence given to the Committee of the
confusion and inconvenience that will inevitably result from the introduction
of this measure which the Government proposes to make effective from 1 July,
Coalition Senators believe it would be more appropriate to allow for a longer
period of consultation and preparation for those who will be directly affected
by this measure. This would include the accounting profession, companies
providing workers with work overseas, as well as individuals affected by the
proposal.
Coalition Senators are concerned that this is a rushed and
poorly thought through measure on the part of the Rudd government with
apparently little or no regard having been given to the difficulties the
proposed short lead-in time to implementation will cause for those directly
affected.
In their submission, the Taxation Institute expressed
concerns regarding:
...the impact of the proposed amendment on:
- Individual taxpayers – it will add complexity to tax law
and administration which will impact unfairly on ordinary Australians working
overseas and limit opportunities for Australian workers to work overseas; and
- Australian businesses - it will impose additional costs on
Australian companies employing Australian residents overseas and therefore
reduces their competitiveness and opportunities to expand their businesses
internationally.[1]
According to the Treasury submission it is estimated that
between 15,000 and 20,000 individuals could lose their exemption from domestic
taxation under this measure. By contrast the Taxation Institute states that
there are more than one million Australians working overseas – suggesting a
much larger number of Australians who will at the very least need to consider
or take advice about whether they will be caught by the amended section 23AG.
Coalition Senators have received literally hundreds of
emails regarding this proposal from such Australians engaged in work in overseas
locations from south-east Asia to Europe, Kazakhstan, Africa and the Americas.
All write of the inconvenience the introduction of this measure will cause in
disrupting their financial affairs and many regard the failure to give them
time to prepare for the introduction of this measure as an indictment of the
Rudd government for the lack of consideration shown to them and their families.
Reduced competitiveness of
Australian contractors
One group which will be particularly affected by these
proposed changes are consulting engineers, who were represented at the
Committee Inquiry by their professional association, ACEA.
The ACEA believes the implementation of the proposed
amendments to section 23AG will not only adversely affect the financial
arrangements of their members working overseas (as mentioned in the previous
paragraph) but also will result in a significant reduction in the
competitiveness of Australian consulting engineering firms in winning
international tenders. ACEA points out that in 2007-08, exports of engineering
industries services were $1,334 million, representing 2.6 per cent of
Australia's total income in service exports, which is significant. The ACEA
also pointed out in their submission that "one international contract can
result in flow-on work in the overseas region," thus leading to further
business for Australian engineering companies.[2]
The implementation of this proposal may accordingly result in reduced business
opportunities for Australian contractors.
Coalition Senators are perplexed by the apparent failure of
the Rudd government to consider the impact of the proposed measure on the
competitiveness of Australian industry in bidding for international contracts.
Again this is seen as evidence of this measure having been insufficiently
thought through.
The accounting profession was particularly critical of the
short timeframe the government has allowed before the planned implementation
date of this legislation, 1 July 2009.
Witnesses representing accountants raised numerous concerns
regarding the difficulties imposed by the short timeframe (of less than one
month) in preparing advice to assist their clients in managing their financial
affairs:
Every single suburban accountant now will have to understand
how the offset rules work. They will need to be informed of how tax paid can be
estimated or determined in countries like the UK and New Zealand where you do
not lodge tax returns for an individual, let alone with treaty countries. The
issue is then whether the commissioner will enter into a whole series of
arrangements to allow these million Australians to have different lodgement
periods so that we do not get mismatches in payments. It is a mess.[3]
The Taxation Institute added further comments on the
compliance cost of the measure as follows:
With over one million Australians working overseas, the
compliance costs associated with this measure will be immense. Given this multi
million dollar compliance cost imposition, the Taxation Institute is concerned
that there has been no attempt by the Government to mitigate the impact of the
new compliance obligations which will arise as a result of this amendment nor
deal with the harsh financial effects arising from the interaction between the
proposed s 23AG, the Foreign Tax Offset (FTO), Pay‑as‑you‑go
(PAYG), Fringe Benefits Tax (FBT) provisions and Australia’s tax treaties.[4]
Both the Taxation Institute and KPMG have suggested
amendments with respect to PAYG taxation, Fringe Benefits Tax and Foreign Tax
Offsets. Coalition Senators are of the opinion that the issues raised in these
two submissions are of serious importance and recommend that the government
give full consideration to them.
Again, the fact that there are submissions by peak
organisations that raise such serious issues does lend weight to the opinion
that this legislation has been put together in haste and not adequately thought
through.
Relocation issues
The government presumption that this amendment to section
23AG will raise $675 million in additional taxation relies on Treasury
modelling which assumes that all taxpayers currently exercising this exemption
will remain Australian residents for taxation purposes.
However doubt was cast on this presumption during the
hearing when it was suggested that a significant proportion of Australians
working overseas might rearrange their affairs to avoid Australian residency
for tax purposes and relocate their "residence" to other countries
such as France, Spain or the UK and work as fly-in fly‑out workers from
these countries rather than Australia.
The reason for their doing this would be to preserve their
income status and family standard of living, which will be compromised by the
introduction of this measure. Were this scenario to occur, it may be that the
government may find that the estimated gains in taxation revenue derived from
this proposal will prove to be illusionary.
Transition period
Coalition Senators are concerned that in their rush to
introduce this measure the Government has not provided sufficient time for
individuals who will be affected by these changes to consider the impact of the
proposals on their financial affairs or for their financial advisors to prepare
advice for them.
Coalition Senators are of the opinion that, in the interests
of fairness and equity in dealing with citizens who in good faith have availed
themselves of the exemptions provided by section 23AG, the government should
consider delaying the commencement of this measure.
Coalition Senators believe a transitional period would be
appropriate, as this would give the Government sufficient time to consider
implementing the amendments proposed by the accounting profession to this
Inquiry.
Alternatively the Government could take the approach of
'grandfathering' the exemptions currently in place and apply the new
arrangements to taxpayers seeking exemption under section 23AG from a later
date by which time the legislation could have been reviewed and amended in
keeping with the recommendations of the accounting profession.
Schedule 2 – Government Co-contribution for Low Income Earners
Through this measure the co-contribution scheme for low and
middle income earners has been wound back; government contributions have been
lowered by a third.
It is regrettable that the matching rate for the super co-contribution
has been temporarily reduced from $1.50 to $1, as this compelling incentive has
made the scheme enormously successful. Approximately 1.4 million Australians
received a co‑contribution in 2007-08.
Evidence indicates that the super co‑contribution scheme
and related matters are issues being considered by the Australia’s Future Tax
System (Henry) review. As such, Coalition Senators query why the government is
acting before that review has been completed. Depending on the findings of the
Henry review, these co-contribution changes may prove to be entirely the wrong
thing to do and may work contrary to recommendations that may flow.
This measure, which takes effect from 1 July 2009, is called
a temporary measure by the government as it has said it will gradually phase
the co-contribution rate back up to 150 per cent from 2014-15. From 1 July 2009
the scheme will provide only a 100 per cent co-contribution for each of the
financial years 2009-10, 2010-11 and 2011-12. In 2012-13 and 2013-14, 125 per
cent of contributions will be provided and 150 per cent of contributions from
2014-15 onwards.
The maximum government contribution will be lowered from
$1,500 to $1,000 in the income years 2009-12.
The co-contribution scheme has assisted pending retirees and
other eligible workers to boost their account balances. Its removal will
notably lower the incentive for individuals to make their own provision for
retirement, thereby placing a greater burden on the taxpayers once they retire.
This is particularly concerning as it was noted in the submission of The
Association of Superannuation Funds of Australia (AFSA) that the level of voluntary
contributions to superannuation is already down around 50 per cent on the level
achieved a year ago.[5]
Coalition Senators consider the decision to be a retrograde
one that may prove to cost more than it saves in the medium to long term.
Schedule 3 – Excess contributions tax
Concessional contributions which cover the compulsory
Superannuation Guarantee and salary sacrificed amounts to super will be halved
as at 1 July 2009.
The provision of adequate and sustainable retirement incomes
for all Australians will be undermined by this proposal. According to the
ASFA's survey statistics, a 55 year old with a balance of $250,000 in their superannuation
account, on an actuarial return over 10 years of 5 per cent or less, will not
be able to adequately provide for their retirement.
The existing level of concessional contributions was
designed to provide a significant incentive for individuals to make their own
provision for retirement. Changes to the level have the potential to severely
undermine that incentive and, in particular, to remove the actual ability for
people close to retirement to be able to afford to make provision for their retirement
through large contributions.
The proposed measure sends a clear message to persons who
may have had the ability to contribute significantly towards their retirement
that the government is not supportive of them doing so.
This message is particularly poignant for those approaching
retirement. From evidence at the hearing, not all individuals who take
advantage of the existing provisions are particularly high wealth individuals.
Indeed ASFA quoted a number of surveys and other data to support their claim
that many are average income earners and people who do not have high value
superannuation accounts. People who are approaching retirement have a lower
need for disposable income (mortgage fully paid, children grown up) and are
arguably in a position for the first time in their lives to make large
contributions to their super.
In essence, many Australians earning around average incomes
are unable to contribute additional amounts to superannuation in their 30s and
40s due to more pressing commitments such as raising children and repaying
their mortgage. It is only when many such individuals approach retirement age
that contributing extra to super becomes more feasible; and if they are to
contribute enough to become self funding at that point, they need to be able to
contribute large amounts and this is only a likelihood for most with the
favourable tax treatment currently available.
As a partial way of addressing the consequences of the
proposed measure, Coalition Senators also saw sense in the suggestion made by
ASFA that the government put in place a higher cap for those with relatively
low superannuation account balances to enable such individuals to catch up in
their retirement savings through salary sacrifice.
Given the dramatic fall in voluntary contributions to
superannuation funds over the past 12 months, if the government were serious
about ensuring that as many as possible of the increasing proportion of
Australia’s population approaching retirement made their own provision for that
retirement, it would not be seeking to implement a measure such as this at this
time.
A responsible government would see its role as encouraging
self-funded retirement for as many Australians as possible. These amendments
will likely cost the Commonwealth significantly more in the long term as there
will be more Australians calling on the public purse in the future.
Senator
Alan Eggleston
Deputy Chair
Senator
David Bushby
Member
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