Financial Planning Association October 2008 ABN 62 054

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Financial Planning Associationof Australia LimitedABN 62 054 174 453October 2008Level 4, 75 Castlereagh StreetSydney NSW 2000AFTS SecretariatThe TreasuryLangton CrescentPARKES ACT 2600GPO Box 4285Sydney NSW 2001Tel: 02 9220 4500Fax: 02 9220 4580Member Freecall: 1800 337 301Consumer Freecall: 1800 626 393Fax: 03 9627 w.fpa.asn.auDear Mr HenryAustralia’s future tax system1The Financial Planning Association of Australia (FPA) welcomes the opportunity to provide input to theGovernment’s comprehensive review of Australia’s taxation system.The attached submission highlights key issues for consideration in the development of Australia’s futuretax system. The FPA and its members believe that simplifications and improvements to the tax systemwould greatly enhance retirement savings for Australians and therefore reduce reliance on theGovernment’s social security system. We have focused on:;Government benefits and workforce participation;Encouraging a savings culture;Insurance; andFacilitating a strong and internationally competitive tax regime.The FPA believes the recommendations made in the following submission would assist in achieving theGovernment’s objectives of the Review to provide the certainty and security for pensioners, removesome of the challenging disincentives to workforce participation, enhance Australia’s productivity andprosperity in an increasingly competitive global environment, and simplify and harmonise thecomplexities within the tax system.The FPA would welcome the opportunity to discuss these issues with the Tax Review Panel.If you would like further information on the issues raised in this submission, please contact au).Yours faithfullyJo-Anne BlochChief Executive Officer1The FPA is the peak professional organisation for the financial planning sector in Australia. With approximately 12,000 membersorganised through a network of 31 Chapters across Australia, the FPA represents qualified financial planners who manage thefinancial affairs of over five million Australians with a collective investment value of more than 630 billion.New South Wales / ACTPO Box 4285Sydney NSW 2001Ph: 02 9220 4500Fax: 02 9220 4580nsw@fpa.asn.auQueensland433 Logan RdStones Corner Qld 4120Ph: 07 3394 8288Fax: 07 3394 8289qld@fpa.asn.auSouth Australia / NT / WA / TasSuite 20, Carrington House61-63 Carrington StAdelaide SA 5000Ph: 08 8237 0520Fax: 08 8237 0582sa@fpa.asn.auVictoriaPO Box 109, Collins St WestMelbourne Vic 8007Ph: 03 9627 5200Fax: 03 9627

Australia’s future tax systemSubmission to the Tax Review PanelFinancial Planning Associationof AustraliaOctober 2008

TABLE OF CONTENTSPageIntroduction3Summary of recommendations41.Superannuation61.1Superannuation Guarantee61.2Government superannuation co-contribution scheme71.3Access to superannuation for the self-employed71.4Deductible personal superannuation contributions71.5Superannuation concessional contributions cap81.6Superannuation Work Test81.7Capital Gains Tax (CGT) on death benefits in pension phase81.8Use of terminology92.3.4.5.Government benefits and workforce participation102.1Incentives to defer the age pension102.2Incentives to encourage workforce participation102.3Seniors Health Care Card112.4Calculating assessable income for Government benefits11Encouraging a savings culture113.1The individual and societal benefits of financial advice113.2Incentives to help consumers pay for financial advice123.3Consistency of tax treatment for financial advice123.4Encouraging lifetime savings123.5Medium-term savings options13Insurance134.1Addressing the protection gap134.2Simplification of the insurance tax system14Facilitating a strong and internationally competitive tax regime145.1Tax avoidance145.2Rationalise Federal, State and Local taxation155.3Imputation credit system155.4Discretionary trusts165.5Small business tax concessions165.6Australian expatriates with Self Managed Superannuation Funds16Australia’s future tax system submission, Financial Planning Association, October 20082/16

IntroductionThe Financial Planning Association of Australia (FPA) is the peak professional organisationfor the financial planning sector in Australia. With approximately 12,000 members organisedthrough a network of 31 Chapters across Australia, the FPA represents qualified financialplanners who manage the financial affairs of over five million Australians with a collectiveinvestment value of more than 630 billion.The purpose of Australia’s future tax system is to collect revenue from residents andbusinesses to build a pool of resources to help fund essential services for all Australians,particularly those in most need of assistance. Australia’s future tax system should be simple,efficient and equitable, which are fundamental principles the FPA believes must underpin ournation’s tax system.The FPA also believes it is vital that the tax system is integrated with, consistent with, andsupports other Government initiatives and policies. In particular, the Government’s approachto ensuring retirement adequacy for all Australians, including the welcomed initiative toimprove the pension system and further develop policies to help people save for a self-fundedretirement.As life expectancy rates continue to increase, along with the rising cost of living, retirementincome streams need to sustain people for much longer and the actual amounts need to behigher. The number of Australians over 65 years of age has increased by 67 per cent in the2last 20 years . The FPA understands there are significant issues with the age pension systemwhich are vital to ensure that more Australians live in retirement comfortably. However, webelieve there are also a number of wide ranging issues related more broadly to the adequacyof retirement income which warrant consideration.Retirement income primarily comes from three main sources:1. Superannuation – a positive Government initiative to incentivise Australians to save for aself-funded retirement.2. Other personal savings – Australia needs to move to a ‘savings culture’.3. Government age pension – a vital Government safety net for those Australians in need offinancial support in retirement.3Recent research shows the ‘retirement savings gap’ was as high as 823 billion in 2003-04 .Given that many people are failing to provide adequately for retirement income now, theimplication is that without changed behaviour, the retirement savings gap may grow. In fact,projections indicate that the average worker will receive close to a third of their retirement4income from the pension .However, Australians are less confident when it comes to complex issues like investing andensuring enough money for retirement: 86 per cent of Australians do not believe that the agepension will be sufficient for retirement, and 73 per cent say employer funded superannuation5will not meet their retirement needs .This research indicates that many Australians will rely on the age pension, in whole or in part,to fund their retirement. It highlights that investing for quality of life and health beyondretirement is a new essential in the 21st century.The FPA believes improving Government policy to encourage Australians to save throughretirement, and to smooth the transition between work, self-funded retirement and the agepension, would greatly enhance retirement adequacy and reduce reliance on social securitybenefits.Financial planners play a significant role in assisting Australians to prepare for retirement, andthe FPA continues to promote the value of professional advice in this regard. A key service ofour members is explaining the various complexities of the tax and pension systems to their2Rhonda Parker, Aged Care Commissioner, Successful Ageing, Retirement Village Association Annual Conference,November 20073Investment and Financial Services Association, Australia’s National Savings Revisited: Where do we stand now,20074AMP Superannuation Adequacy Index, 20085Financial literacy: Australians understanding money, September 2007Australia’s future tax system submission, Financial Planning Association, October 20083/16

clients from an education perspective. We believe that the absence of affordable advice, andthe fact that many Australians do not understand the net benefits of advice, means that fewerpeople are prepared to fund their own retirement.However, retirement adequacy is not just about the ‘pot of money’. Access to services andassistance which encourage and support self-funded retirees, as well as those most in need,are vital. Similarly, encouraging a ‘savings culture’ must look beyond savings initiatives.Consideration should also be given to financial literacy, access to affordable financial advice,debt management, budgeting and addressing the underinsurance ‘protection gap’.The FPA also believes the Government’s push to develop Australia as a financial serviceshub must be underpinned by an internationally competitive tax system that serves the needsof both individuals and businesses.In responding to the Tax Review Panel’s Architecture of Australia’s tax and transfer systempaper, the FPA has focused on measures which we believe will assist families, now and in thefuture, to become more financially independent, backed by a strong, stable and internationallycompetitive economy.In our submission we address retirement adequacy, the value of advice, and the barriers topreparing for retirement. These are issues that we believe are critical to ensuring that morepeople are able to fund their own retirement so that the pension becomes a more effectivesafety net for those in our community who really need it.The FPA believes adopting the following recommendations would effectively deliver goodsocial outcomes by simplifying Australia’s future tax system and improving the long-termfinancial security of Australians.Summary of recommendationsSuperannuation1.The FPA recommends further consultation and discussion to determine the optimallevel and mechanism for achieving an increase in the Superannuation Guaranteeabove the current 9 per cent.2.The FPA recommends Government superannuation co-contribution scheme:a) increase the Government contribution above 1,500;b) increase the income threshold for access to the Government co-contribution; andc) extend the co-contribution scheme to people who are not working by removingwork requirement or introducing a family income threshold.3.The FPA recommends the Government simplify the small business Capital Gains Tax(CGT) concession rules by removing the cap to allow small business owners tocontribute to superannuation following the sale of their business assets withoutpenalty.4.The FPA recommends the superannuation 10 per cent employment income cut-offthreshold be removed so that all personal contributions can be tax deductible up tothe relevant cap, irrespective of the individual’s employment status.5.The FPA recommends the Government set the concessional contribution cap forthose over 50 years at two times that of the concessional cap for those under 50years.6.The FPA recommends the superannuation work test should be removed.7.The FPA recommends that any income (including capital gains) derived prior topayment of a lump sum benefit on assets which has been held to provide a pensionto the deceased, should continue to be exempt from tax on the basis that the finalpayment relating to the pension has not been paid.Government benefits and workforce participation8.The FPA recommends the monetary amounts for the Pension Bonus Scheme arereviewed to reflect current inflation levels. The FPA also recommends the five yearcap on the Pension Bonus Scheme be extended and the work test requirements beremoved.Australia’s future tax system submission, Financial Planning Association, October 20084/16

9.The FPA recommends individuals who continue to work past retirement age shouldbe eligible to receive a discount on their PAYG income tax; and a payroll tax discountshould apply to employers with employees over age 65.10.The FPA recommends the income test for the Seniors Health Care Card be based onthe pension payments less the annual deductible amount.11.The FPA recommends the assessable income for Government benefits should becalculated only on the superannuation payment received above the tax-free thresholdlimit for people aged 55 to 59 years.Encouraging a savings culture12.The FPA recommends Government incentives to help consumers pay for advice,such as tax rebates and tax deductibility of advice fees. There should be a levelplaying field for advice fees.13.The FPA recommends the establishment of a Government incentivised lifetimesavings account and the amendment of section 102 of the Income Tax AssessmentAct to remove the tax penalty upon parent established child bank accounts.14.The FPA recommends the establishment of Government incentivised medium-termsavings options to help Australians save for children’s education and unforeseenmedical expenses, for example.Insurance15.The FPA suggests extending the requirement to have minimum compulsory lifeinsurance cover beyond the default superannuation fund to all superannuationaccounts.16.The FPA recommends the minimum insurance cover required under theSuperannuation Industry Supervision Act be based on a consistent formula - oneformula for death cover and one formula for Total and Permanent Disability cover.17.If the Superannuation Guarantee is increased above 9 per cent, the FPArecommends part of this increase should be used to increase the level of insurance.18.The FPA recommends the Government provide a tax rebate on insurance premiumsfor low income earners.19.The FPA recommends addressing the anomalies and complexities of the taxtreatment of insurance.Facilitating a strong and internationally competitive tax regime20.The FPA recommends Australia’s future tax system should remove many of theunnecessary anti-avoidance tax laws and create a simple, efficient and equitablesystem for all Australians.21.The FPA recommends a rationalisation and harmonisation between the Federal,State and Local tax systems and tax rates.22.The FPA recommends consideration be given to the arrangement for collecting taxesand whether one collecting authority would be appropriate.23.The FPA recommends Australia improve its imputation system by ensuring thatforeign tax credits can flow through to shareholders by being recognised as paymentsof company tax liabilities, which should be counted in the company’s franking creditaccount.24.The FPA recommends the tax laws should be amended to allow franking credits toflow through discretionary trusts, without the family trust election principles, providedthe trustee has held the shares for the required period.25.The FPA suggests that further improvements are required to the CGT small businessconcessions, and recommends disregarding goodwill as an asset for Capital GainsTax purposes.26.The FPA recommends the two year cut-off for Self Managed Superannuation Fundsabsence from Australian residency should be removed.Australia’s future tax system submission, Financial Planning Association, October 20085/16

1.SuperannuationAs life expectancy rates continue to increase, retirement income streams need to sustainpeople for much longer. In Victoria for example, the life expectancy for women is around 83years and for men 77 years, creating a retirement period of between 12 and 18 years for6those retiring at age 65 . It is important that the tax system provides support to ensureretirement savings can continue to grow for some time after actual retirement.The FPA believes improving Government policy to encourage Australians to save throughretirement, and to smooth the transition between work, self-funded retirement and the agepension, would greatly enhance retirement income adequacy and reduce reliance on socialsecurity benefits.Government policy should reflect the increasing life expectancy rates and the resulting longerretirement stage of life for Australians. This issue should not just be addressed by a largeramount of funding, but by improving the efficiency of the policies and systems that supportretirement income.The FPA believes the following principles should underpin Australia’s future tax system inrelation to superannuation: Australia’s tax system should encourage long-term and medium-term saving. Australia’s tax system should support longevity in retirement and adequate retirementincomes for all Australians. Australia’s tax system should provide equity and simplicity in retirement.1.1Superannuation Guarantee7A couple retiring today require 49,502 per annum to live a ‘comfortable’ lifestyle . In order togenerate this level of annual income, a lump sum at retirement of approximately 600,000 ormore is required. It is a significant concern that the average superannuation balance for those8in the 60-64 age bracket is only 202,600 .Given that nearly 11,650,000 Australians currently earn the average wage of approximately9 51,000 per year or lower , projections would show that these people would be unable toaccrue adequate levels of superannuation based on the 9 per cent SuperannuationGuarantee, even given a lifetime of saving. Therefore, the ability for people to self-fund theirretirement would be limited and many Australians would need to rely on the age pension inthe future.The FPA believes the Superannuation Guarantee is insufficient and recommends thecontribution level be increased above the current 9 per cent. FPA members suggest anincrease to between 12 and 15 per cent. Contributions for a higher level of SuperannuationGuarantee could be delivered through one of the following options:a) increase the Superannuation Guarantee in total; orb) a soft compulsion mechanism to encourage contributions from employees, employersand Government. The distribution of contributions could reflect need and affordabilityas well as consider practical implementation issues.The FPA recognises that this is a significant change and potential cost burden particularly foremployers. We would suggest that any changes would need to be brought in over a period oftime and staged so as to minimise the impact on the economy.The FPA would encourage and welcome further consultation and discussion to determine theoptimal level and soft compulsion mechanism for achieving an increase in theSuperannuation ASFA Retirement Standard, February 20088Rice Warner’s Superannuation Market Projections9Australian Bureau of Statistics, 2006 Census7Australia’s future tax system submission, Financial Planning Association, October 20086/16

1.2Government superannuation co-contribution schemeThe FPA recommends consumers should be encouraged to contribute to superannuationvoluntarily wherever possible. To incentivise Australians to save for retirement, the FPArecommends the following changes to the Government co-contribution scheme:a) increase the Government contribution above 1,500; andb) increase the income threshold for access to the Government co-contribution.The FPA recognises that this benefit focuses on those currently working. We recommend theremoval of the requirement to work to extend the co-contribution scheme to people who arenot working such as stay at home mothers (possibly limited to those receiving family taxbenefit A), carers, and workers compensation injured workers. An alternative approach wouldbe to introduce a family income threshold. This would take into account a non-working spouseand promote greater equity and participation in the superannuation system.The FPA suggests the fiscal impact of this broadening of the co-contribution scheme wouldbe adequately covered by the resulting future savings on age pension expenditure and shouldnot be funded by an increase in other superannuation taxes.1.3Access to superannuation for the self-employedWith more than 1.88 million small businesses in Australia employing 3.6 million people andwith a total capitalised worth of 4.3 trillion, four times that of the Australian stock exchange,small business is a very important sector of the Australian economy.However, self-employed Australians still have difficulty in getting the full benefit of thesuperannuation system because they often cannot make regular contributions over a lifetimeand can be faced with a need to make large lumpy contributions late in life. This is becauseso much of their savings is tied up in their businesses.It is quite common for small business owners to reinvest their income back into their businessas the major family asset. Many self-employed and small business owners assume they’llsimply sell their business when it’s time to retire and contribute the proceeds tosuperannuation.However, the rules for small businesses to claim the small business Capital Gains Tax (CGT)concessions, which qualify them to rollover lump sum amounts into superannuation, are verycomplex especially where the business is owned via one or more companies and/or trusts.Such rollovers are now considered by the regulator as contributions, making amounts up to 1,045,000 subject to the superannuation contribution restrictions and work testrequirements. This discriminates against older Australians who have worked hard to build anest egg via their business. This is a relatively small amount and as such treating thepayment as a rollover as previously allowed should not result in a hugely significant budgetaryimpact.Small business owners are also faced with stringent notification requirements in order to claimthe CGT cap. Failure to meet these requirements makes them ineligible to use the CGT capand therefore likely to breach the superannuation non-concessional contributions cap.The FPA recommends the Government simplify these rules by removing the cap to allowsmall business owners to contribute to superannuation following the sale of their businessassets without penalty.1.4Deductible personal superannuation contributionsThe current 10 per cent employment income cut-off threshold, which determines anindividual’s eligibility to claim a personal tax deduction in relation to superannuationcontributions made in any given year is complex, arbitrary and difficult to calculate. Often, the10 per cent cap cannot be accurately worked out for weeks after the end of a financial year.Many may simply not work or claim a deduction for fear that an extra PAYG payment willresult in a failure of the 10 per cent cap.Australia’s future tax system submission, Financial Planning Association, October 20087/16

In addition, for some employees the ability to salary sacrifice is not available. It is inequitablethat one employee can take advantage of the tax efficiency of a salary sacrifice but anothercannot simply because their employer will not allow it. The ability to claim personalsuperannuation contributions as a tax deduction is an alternative means of contributing toretirement savings.The FPA recommends the 10 per cent test be removed so that all personal contributions canbe tax deductible, up to the concessional contributions cap, irrespective of the individual’semployment status. This would result in a simplification of the system, would remove currentanomalies, and encourage more Australians to voluntarily increase their superannuationsavings. This would reduce reliance on the social security system.1.5Superannuation concessional contributions capGovernment policy should encourage Australians to contribute to their superannuation and,where possible, fund their own retirement. The pending reduction of the superannuationconcessional contribution cap from 100,000 to 50,000 for people over 50 years of age in2012 creates additional unnecessary barriers for Australians to save for their retirement. Inaddition, the five year transition does not allow sufficient time for those aged 45 plus to adapttheir transition to retirement plans to cater for these changes and ensure their financialsecurity in retirement.The FPA recommends the Government set the concessional contribution cap for those over50 years at two times that of the concessional cap for those under 50 years. The lead up toretirement (such as the last 10 years of full-time work) is a critical period for retirementpreparedness, employing sound transition to retirement strategies and growing one’sretirement savings. These measures would encourage individuals to contribute to theirsuperannuation and would, in the long-term, reduce the reliance on the age pension and thesocial welfare system.1.6Superannuation Work TestThe superannuation work test requires individuals between the ages of 65 and 74 to work 40hours in 30 consecutive days during the financial year, to be eligible to contribute tosuperannuation. Those over 75 years are not permitted to make superannuationcontributions. The FPA recommends the superannuation work test should be removed.Those who are over 65 and have not yet managed to save enough for their retirement, as wellas those who are in the process of organising their retirement income streams intosuperannuation, have been particularly disadvantaged by the work test. Removing the worktest would greatly assist in remedying the situation for each of these categories of people.In the majority of situations where a large contribution is required as part of a retirementstrategy, the person involved will not be in a position to meet the work test. This will generallyhold true for people selling small businesses, rural families selling their farms, peoplereceiving disability payouts, people receiving inheritances (especially women), and workingpeople over 65 who suddenly become ill. If significant additional workforce productivity isunlikely to be encouraged through the existence of a work test, and it increasinglydiscriminates against certain classes of people, then its value must be called into question.The removal of the work test would provide an opportunity for more Australians to achieveself-funding of their retirement goals whilst minimising their reliance on Government socialsecurity. Having regard to the age of the people affected and the limited amounts involved, itis suggested that there is little potential for this relaxation to be used as a post-retirement taxavoidance strategy.1.7Capital Gains Tax (CGT) on death benefits in pension phaseThe FPA believes that with respect to superannuation in the pension phase, death should nottrigger CGT, regardless of the dependency status of the beneficiary.Currently, where a superannuation fund trust deed does not provide for a reversionarypension and the sole pensioner member of the fund dies, the Australian Tax Office (ATO)Australia’s future tax system submission, Financial Planning Association, October 20088/16

asserts that the tax exemption on earnings is not available after the member’s death on the10basis that there were then no current pension liabilities .The tax exemption on earnings will continue if a member who was in receipt of a pension diesand the trustee applies the death benefit by way of a reversionary pension or applies thebalance of the deceased’s super to commence a new pension in favour of a tax dependant11(which may have a different income level) .However, where the death benefit is applied by way of a lump sum benefit that is ultimatelypaid after the death of a member, the ATO says that the tax exemption on earnings willcease. If this is the case it means that upon sale of the assets to facilitate the lump sumpayment, any realised capital gains are taxed. The realised gains are calculated using theoriginal cost base of the asset when the fund first acquired it which could extend back to theaccumulation phase.In a typical arrangement, the fund trustee will have the capacity to choose (sometimes afterhaving consulted the beneficiary to gauge his or her preference) between payment of a lumpsum benefit or to continue to apply the account proceeds towards the payment of a pension. Ifthe decision is that the benefit will be paid (in part or wholly) in the form of a lump sum, theFPA believes the tax treatment of the fund should be the same as if the decision were tomake the payment wholly as a pension.Often such a decision will be driven by the financial security of those who may receive thelump sum benefit. It is quite anomalous that those who may ‘need’ a lump sum to pay offdebt will bear taxation whilst those who do not will avoid it by continuity of the pension.From 1 July 2007, trustees were also prevented from continuing a pension in favour of adultchildren or applying the balance of the deceased’s account to commence a new pension foradult children. In addition if a member dies in pension phase and the beneficiary is adependant child at the date of death, any pension paid to them must cease at age 25, unlessthe child is permanently disabled. Any remaining balance must be paid to the child as a taxfree lump sum.The FPA recommends that any income (including capital gains) derived prior to payment of alump sum benefit on assets which have been held to provide a pension to the deceased,should continue to be exempt from tax on the basis that the final payment relating to thepension has not been paid.If there are concerns about the delays in finalising some lump sum death benefits and thebeneficiaries having the benefit of the tax exemption during this period, the FPA wouldsupport a two year grace period after which the tax exemption on earnings would cease.1.8Use of terminologyThe FPA is concerned by the statement in the Architecture of Australia’s tax and transfersystem paper ‘For concessional superannuation, the ability to invest out of pre-tax incomeproduces a negative EMTR' (page 251). This section of the paper also refers to the 15 percent tax rate on superannuation contributions as a ‘negative tax’. This im

The Financial Planning Association of Australia (FPA) 1 . . retirement is a new essential in the 21st century. The FPA believes improving Government policy to encourage Australians to save through . The FPA recommends the income

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