Session 5: Personal tax

PAUL CLITHEROE:

Okay, ladies and gentlemen, personal tax. Firstly, I would like to welcome the Prime Minister back. Welcome.

This is a session where I hope we can make some strong progress. Why? Because I think, as you noticed, what I was clearly finding difficult in the last session yesterday, which Greg Smith helped me with, was possible data to help me draw conclusions. Here we have got the data. You are probably going to feel like you have had entree, not a main meal. I am keen for everyone to get a chance to say something. I would like to alert you: you are very welcome, if you have a position statement from your organisation or whatever it may be - can I warn you, if I come to you and we get a sort of three-minute statement of your organisation's intent, that probably is your go for the session. Whereas if you prefer to give me something short and snappy, I will make every effort to get back to you more than once. So it is your choice.

What we have to do in this session is five topics, hopefully. Seven issues. Is the current structure of personal income tax appropriate? How can it be made simpler and fairer? Are the problems the way we tax different forms of savings for individuals? Count savings. Things like is the cost of superannuation eroding Australia's revenue base? I reckon we could spend two and a half hours on any one of those. However, we are going to start with three presentations. They will be around about four minutes long. Tim Lyons from the Australian Council of Trade Unions.

TIM LYONS:

Our starting position in respect of personal tax is very strong support for a progressive equitable system of personal tax to give effect to what we say will be the guiding principle in relation to these matters; that is, that taxes should rise as people's income rise, not just in dollar terms but in proportional terms. We say we are on very solid ground in the Australian community in respect of that position. That is what all of the research shows the Australian community expect of the personal taxation system. So we say our starting point as a point of principle is one that lies with not only the interests of the Australian people but, in fact, their views.

We wanted to make a couple of points to kick the debate off. The first is, in taking our tax system as a whole we need to accept that it is a total assessment of the tax that individual households pay. The difference in the total tax taken from the bottom Quintile and the top Quintile of the world distribution is only about 6%. In other words, the current arrangements we have, have a very flat and quite regressive tax taken as a whole across taxpayers.

The second thing, we need to acknowledge what happened in the 2000s in terms of what was the effect of the changes to personal tax arrangements particularly at the top end. In the course of the 2000s, the highest income earners in Australia received very, very significant tax cuts. They were in excess of what was received by equivalent earners in virtually any OECD country. To put it in perspective, a full-time worker on average wagers, bearing in mind that is the 50% mark of full-time earners, received a tax cut in real terms over that decade of about $25 a week. People at the top end, people on three times average full-time earnings, received a real tax cut of around about $234 a week; in other words, they received very much more both in real and proportional terms. That is a great deal of money. It is actually enough to buy a new Hatchback for themselves once a year. It wouldn't quite get them one of those luxury cars we heard so much about yesterday, but it was a significant tax break given to top earners.

In line with Dr Henry's injunction this morning that we deal with the common set of facts, we wanted to specifically deal with an observation that was made yesterday; that the top marginal personal tax rate cuts are only three times average full-time earnings, as if that is a low number. That is the highest it has been for many decades. For most of the last four years it has been somewhere around one and a half to two times average full-time earnings and accelerated to three times only in the last few years. The top rate applies to only the top roughly 3% of taxpayers. If we are going to argue that even the top 3% of taxpayers are on struggle street, it is certainly getting particularly crowded on that particular patch.

Fourthly, any suggestion that the locus of our attention should be cutting the top rate needs to bear in mind that that is exactly the wrong place to drive workplace participation and exactly the wrong place to drive equity. All of the evidence shows, if we are going to drive greater workforce participation and equity we need to target our tax cuts at lower and middle income earners, technically for people where the tax system makes a barrier for returning to work; women returning to work and lower income work.

I think everyone in this room in the end acknowledges that the current concessional taxation arrangements on superannuation, aside from being regressive, are unsustainable. Speaking as a person who is just on the low side of 40, to me it is one more baby boomer party that will be over by the time my generation gets to retirement and eventually the matter will need to be dealt with. The situation is actually worse, I think, than what Cassandra indicated in the previous session. Around 40% of the tax breaks on superannuation go to the top 5% of earners, which is deeply inequitable.

We want to start by acknowledging the work this government has done to restore some progressive measures to the taxation system, including in respect of the Carbon Compensation Package and including through, we acknowledge, the way the Flood Levy was designed. It was deliberately progressive in a way that was fair but also boosted workforce participation.

Finally, in response to what Dr Henry said to us this morning, the Henry Review report suggested that the personal income tax regime was to be the only side of progressive taxation in this country. What that does is up the stakes very significantly for how much progressive nature we can build into those arrangements. Because if it is saying that the balance of our tax system can be regressive or proportional, then this is the only lever that we have to ensure we have a tax system which is fair.

So as I said, our research does indicate - and I think everybody else's published research indicates - that Australians do support a progressive tax system. They do support people paying their way on the basis of their ability to pay and that, in our view, is the overriding principle that should be considered in this session.

PAUL CLITHEROE:

Thank you very much. If we could move to Greg Evans from the Australian Chambers of Commerce and Industry, please.

GREG EVANS:

Thank you. As we know, income tax is the largest source of Australian tax revenue. As a core element of the tax architecture, it is crucial for wage and salary earners that the personal tax system is efficient, transparent and encourages workforce participation. A well-conceived personal tax regime can provide the platform for stronger growth and phased reductions in the level of taxation can bolster the overall economy.

The majority of Australia's small and high-ranking businesses, some 1.7 million enterprises, are entities also subject to personal income tax. Policy-makers do not necessarily appreciate the strong effect that lower tax rates can have on the decision-making of these small business operators. Preserving incentives for entrepreneurship hard work and capital interest gains need to be core objectives of the Australian tax policy. There are, however, inevitable trade-offs between efficiency and equity objectives.

Any debate about the tax reform should not shy away from discussing what we lose as a result of attempting to make our personal income tax system more pr
ogressive. While ACCI welcomes the proposed reduction in the company tax rate, it is a significant area of unfinished business that we need to more closely align the top marginal rate with the company tax rate. Modelling for the Henry Review has quantified the economic damage caused by personal income taxes. For each additional dollar of revenue raised from personal income tax, there is a net loss to a social welfare of 24 cents arising from the destruction of work incentives. Conversely, for every $1 of tax relief there is a net social gain of 24 cents stemming from enhancement activities to engage in paid work.

Increasing economically damaging taxes makes the economic high smaller, while reducing them in makes it bigger. These findings are uncontentious and should be the starting point for any debate about tax reform. Tax cuts provide an instant social dividend in excess of their cost. More difficult to quantify but arguably of far greater importance is the income of the tax system on incentive for entrepreneurship and innovation. Because it is difficult to model the role of dynamic business culture, it is often neglected or taken for granted in tax policy debates. Entrepreneurial activity is fundamental to Australia's economic success and policy-makers should be wary whenever they propose to diminish productive risk-taking and innovation in the economy.

In general, business welcomes the flattening and simplification of the Income Tax Schedule as this will promote participation, enhance productivity and living standards. Income tax burdens increase steadily over time without the need for explicit changes to income tax changes or marginal rates. Growth in wages reflecting both inflation and productivity gains automatically pushes taxpayers into higher income tax brackets thereby exposing them to a heavy tax burden.

Too often income tax cuts amount to little more than handing back of what has been appropriated by governments over time. The indexation of tax thresholds to wages growth will cause the tendency of the income tax burden to increase over time and ensure future income tax cuts deliver lasting results.

Tax reform which lowers personal tax needs to be funded and ACCI has a strong view that meaningful tax reform can only happen if it coincides with a review of the overall sides of government. In any case, we will have no choice in this regard if you want to achieve and maintain an internationally competitive taxation system. Thank you.

PAUL CLITHEROE:

Thank you. It seems we were back to where we were in session 1 where our 35% and 25% - it seems I'm not being taxed enough or maybe I'm paying too much. I am going to move to Miranda Stewart from University of Melbourne. Maybe you can shed some light on my puzzlement.

MIRANDA STEWART:

Thank you. We have had a lot of discussion over the last two days about new taxes and bad taxes. There seems to be a lot of bad taxes. It is correct, as Greg said, that personal income tax is the most important tax. I think that has actually been emphasised in this forum. It generates the most revenue of any tax. It raises half of federal tax revenues, 140 billion in 2010-11. Personal income tax needs to be strengthened, not reduced, in importance in the tax system. The various principles are well-known and I will say a little bit about those but I think it is important to make the revenue point very clear, particularly in this era where we seem to have a general consensus across business and other sectors that we need to maintain or possibly increase our expenditure on age and health in the future.

It is widely understood the income tax may affect individual incentives, choices to work. It is critical to assess the critical evidence of how people will behave. Our choices are shaped by a lot of other factors: child care costs, family, where we live. As Tim Lyons said, there is evidence that high effective marginal rates affect womens' choices to work and affect the decision when they are looking after children and the decisions of people with disability income support. Tax rates do not appear to affect significantly the work decisions on middle and high wage earners facing the 40% and 45% rates.

Differences in tax rates do, however, generate tax planning opportunities and productivity. In our current system there are strong incentives for high income earners/business owners to invest in lower taxed superannuation, in geared rental real estate and to earn and retain cash in a company with a lower rate which would only be exacerbated if we were to go down the business tax reform path or to split income through discretionary trusts. I think we need to think hard about the base and some of this tax planning activity, at least, is wasteful activity we wish to prevent.

Focusing then on that base and thinking more about that, we could think a little bit also about simplicity and fairness. The income taxes undoubtedly are our most complex tax. It is partly because it is our most wide-ranging and significant tax. By design it affects most of us and the particular activity most of us do but it is also a product of those incentives and structural flaws in the system. Our focus should be on those and it also should be on making income tax simpler for the majority of individuals, for example, by dealing properly with work-related expenses, whether that is a high standard deduction or some other mode, and by dramatically simplifying concessions for fringe benefits or removing the equity altogether.

On a fairness perspective, the income tax is our fairest tax. It applies ideally at a progressive rate across income and gains of all residential individuals. The concept of income is intended to catch the economic power or resources at the disposal of individuals at a rate which would reflect that ability to pay. We have a tax on pay, widely divergent rates and concessions on all sorts of different modes on income-generation and assets. In fact, active business income benefits less from some of these than, for example, others. So it is essential for fairness and efficiency that we effectively tax our investment income and gains in the system and that we remove some of the disproportionate concessions for some kinds of saving and investment.

So the Henry Review recommendations in this regard gives us a good base, I think the 40% net savings discount of expenditure expenses and incoming gains and their recommendations for superannuation. It is a great privilege to be speaking here today and I look forward to the debate. Thank you.

PAUL CLITHEROE:

Before you jump on your mics, can you restrain for a second? I have a summary of the 148 submissions. I noted where many of you are coming from. What I prefer to do is draw on a couple of contrasting views, do you think, just for a little while? We have a fairly long session here and I notice superannuation is a burning issue. Can we merge the first topics: current structure of income tax, how can it remain simpler and fairer? Can we stick to that for a moment? If super comes in, that is fine. Julian, could I just ask you to kick us off here, please?

JULIAN DISNEY:

Thanks. Just on the question of simpler and fairer, there are three things I would highlight as, firstly, being major causes of complexity and major reasons why more middle Australians are using tax accountants but which also are examples of upside down welfare, not just middle class welfare, which is wrongly criticised. These are upside down; in other words, they pay more to richer people than others. They also cause a massive loss of revenue.

We have identified the need to find more important things and it is here. There are some fairly simple examples. Politically different, maybe, but a little we need to acknowledge there. One is superannuation, but I won't flow on that since you want to come to it later.

The second is trusts, and almost everything I am going to mention has actually been identified in one or more
official inquiry as something we should do something about in the last 20 years. So it is not radical and nearly all of them are in Ken Henry's proposal. Trusts we need to address. It is getting badly out of hand. Of course, there are some purposes for some trusts but they are exploding and it is going to be harder and harder to wind them back. We should tax them as a private company. One of the interesting thing from Ken's point, some of the things we need to do we are already doing in the social security system. One example is deeming income on assets and I think there is a lot to be learnt from that.

The third one I want to mention is negative gearing. There is a very big loss of money in negative gearing. It also is a major reason why so many people now are caught up in a culture of tax avoidance. It is now called "tax effective behaviour". Negative gearing, trusts, excessive salary sacrifice, FTB on cars, those things have brought tax avoidance techniques to the heart of Australia and I think we need to wind them back. It creates a culture that is not good, it creates complexity, it loses a lot of money that we need for much better purposes.

So all of those I would highlight. Some mention has been made before of the eligible termination payments. There are a lot of things around here which have been identified for a long time as to where we can get the money but I want to finish by emphasising my main concern, anyway, in these things, is usually not for the money they get, it is for the adverse impact they have on economic social or environmental behaviour. That is the biggest plus or minus on the tax system. There can be too much emphasis on the revenue but they do have the added benefit of generating revenue.

PAUL CLITHEROE:

There are three more people I would like to call on. Eleri Morgan-Thomas, Mission Australia.

ELERI MORGAN-THOMAS:

We have some concerns about negative gearing and capital gains tax and let me up back that a little bit. If we assume a social policy objective of Australia is to have a private rental market, and that's part of the reason why we have capital gains tax and negative gearing - except there are possibly other reasons for that, capital gains tax exemptions that are particularly related to private rental - what we actually see for people who have been working in housing for a long time is there are long-term structure problems in the private rental market. There is a supply problem. I don't think there is any doubt about that. There is quality and price problems. They particularly affect people on low income. We are seeing flattening prices in house price and we are seeing disinvestment in the private rental market. So we think there is going to be a continuing supply problem and there will be other people here who could quantify some of that for us.

If you think about capital gains as an open-ended subsidy, we assume there are 2 million investors who supply private rental houses. There could be perhaps two and a half million of those. If we were to meet your supply problem, even bigger. That is actually revenue foregone that government almost actually can't control the size of, assuming there are investors who want to do that.

What we think is, in order to fix the supply problem, let's shift our thinking about how we meet our public policy objective of having a private rental market and shift some of that into institutional investors. It has actually got a more controllable product. We can control things around affordability. It is about thinking about a public/private partnership. Instead of having 2 million pub/private partnerships, let's think about a few of them. Let's think about how we can use some of the money we can forego in capital gains tax and negative gearing and put that into social investment bonds. The ones that could be directed to housing is a way to spend some of our super fund money.

If we have an attractive product that was tax effective for institutional investors, we could augment good products, like the National Rental Affordability Scheme, which means we could target affordable housing. That is a way to solve it effectively by shifting some of our subsidy from personal tax over to company or corporate tax to institutional investors but we need the right incentives.

I would encourage us to think about things like that because I think things like that could be done for a much better social outcome.

PAUL CLITHEROE:

Peter Davidson.

PETER DAVIDSON:

Tax reform is more likely to be achieved and more likely to do good if fairness and efficiency march together. The logic of the Henry report recommendations on personal income tax is clear. We should tax investment income at lower rates than earnings overall because capital is more mobile but we should at least tax it more consistently. Because presently, we do tax most forms of investment income much lower than others but some are taxed at higher rates than others. Capital gains are taxed concessionally, super, housing and so on. So there is a bias to invest more in housing and to drive up prices in those markets.

Secondly, taxes on labour earnings should be more consistent, for example, through a standard deduction and tighter substantiation for higher work-related expense claims. If we went down that track, then fairness and efficiency could march together. Some of our base proposals - I will only mention the ones that haven't been mentioned already - include employment termination payments other than redundancy, the so-called "golden handshakes", which are taxed at flat rates of 15-30% up to a threshold. Why not tax them like redundancy payments? The deductions and offsets for medical expenses; self-education; the Education Tax Refund; Senior Australians tax offset; the capital gains tax small business concessions, which mean that many people need not pay capital gains tax at all on their assets; and the private companies and trusts.

One option to deal with the growing gap between the corporate tax rate and the top marginal tax rate is to tax retained earnings in private companies at the top marginal rate, which we used to do before those two tax rates diverged in the 1980s. Now, that may sound harsh but those small business owners who would ordinarily pay tax at lower rates than the corporate rate can, of course, pay themselves a higher wage or high dividend, so it is really a disincentive to avoid tax by retaining income in private companies rather than an increase in tax on small businesses generally. We estimate that, at a minimum, $5 billion, also, per year, could be saved by closing off some of these shelters and loopholes.

PAUL CLITHEROE:

You will be a joy to the Treasurer's ears. We seem to be potentially saving some money here, Treasurer. I think we spent a lot last session so this is probably a good thing, I suspect. I have got one more and then it is over to you. Mr Carnegie, I was having all my friends ringing me saying cut your microphone off after they saw you on TV. I share your views. We are pleased to hear about more money. Could you give us a quick snapshot on somewhat less time than you did on TV last night?

MARK CARNEGIE:

I am with Miranda, not Greg, in terms of what is the effect of incrementally taxing the top 15% of taxpayers more. As you know, my view is they should carry 15% more burden than they are currently doing at the moment. I believe the series of loopholes that have been discussed in terms of having some independent review looking at how to best put that burden on the top 15% of taxpayers would be a good idea, but my point is that the intergenerational issue of equity that comes up again and again here at the moment needs to be addressed urgently and, therefore, the money that comes from that needs to be spent in an independent way inside a sovereign wealth fund looking at those issues rather than being frittered away by government. The idea I'm
being painted as some pro government let's spend away person seems to be the wrong characteristic here. We have a problem between us, our children and grandchildren and we need to do something about it and I think the people who have generated nearly $700 billion of household net worth over the last several years should be shouldering a disproportionate amount of that burden at the moment.

PAUL CLITHEROE:

I think this takes us to the heart of the conversation. That's the last thing I am going to ask. What takes us to the heart of this conversation is we have so many weapons. If you are going to increase my tax by 15%, we have company structures, trust structures, partnerships, superannuation. What it actually does, if that is to happen, for example if we accept it as a concept, you are talking about some pretty significant sort of changes.

MARK CARNEGIE:

I agree. The second thing that seems to have been completely missed here is globally the economic (inaudible) of capitalism are flowing to a narrow group of people. Facebook kills Myspace. That happens at the biggest level. The number of global wining is shrinking all the time. The number of individual winners is shrinking. Unless those people are willing to stand up and say "We will shoulder some of societal responsible," we will be facing the sort of nightmare that Europe and the US has at the moment. We are lucky as a country. The richer of us are very lucky and we need to stand up and take responsibility and do something about this yawning demographic problem.

PAUL CLITHEROE:

Thank you. Over to you, Gary.

GARY WEAVEN:

I want to come in and support what he just said. It is obscene to hear people talking about reducing top tier marginal tax rates in this current environment. I'm not sure, however, Mark, that it is necessarily the case that a government-appointed board will do a better job with investing the money than a private sector. I would back our track record against sovereign funds, but on the intergenerational issue, while I actually agree that part of the task is to re-examine these rates, including the way in which superannuation incentives are structured, but clearly, superannuation is part of this intergenerational issue. I noticed that mining interests said that the industry was paying a 41% tax rate. Well, another way of looking at that, of course, is they are paying a zero tax rate but they are paying 41% of their profits to the Australian people in return for the raw materials that the Australian people own that they give to the mining industry. So these things are all matters of perception, is the point.

I think when you have got booming commodity prices, record commodity prices, it is imperative that that be shared across the community, including with future generations. So I do think that the big task is to ensure that governments of any political colour don't waste future tax gains. The progressive scales, together with growth and inflation, mean there will be occasions when tax cuts can be made. I think they must not be wasted. They ought to be directed to things like people's superannuation accounts, and that can be targeted to people most in need, lower income people and people with intermittent work histories, such as working women. So they would be my priorities but the general sentiment of what Mark said I 100% support.

HELEN HODGSON:

I would like to start by looking again at the issues that Julia and Peter raised in relation to companies and trusts. First of all, I agree we have to get the higher burden on the higher end of the tax system and companies and trusts are one of the tools that are used to shift that burden downwards. There are two key issues. One is the income-splitting, where you can divide the income between other family members with lower tax rates, and I do acknowledge recently in the budget, which I think was a very promising move, it means that miners no longer get the advantage of the Low Income Tax Offset, which meant it effectively negated the avoidance measures in relation to miners receiving trust income. I think the more complex issue is one of retained earnings. At the moment there is nothing formally in the Tax Rules, except for a personality rate that is rarely applicable because you can easily get around it, but it is very easy to retain earnings in a company and there is nothing formal to prevent that from happening.

There is a review of trusts underway and I hope this addresses that, but at the moment the Commissioner is using administrative tools and other measures like the unpaid present entitlement rules in Division 7A that we heard about yesterday and that is creating confusion and complexity, but the confusion and complexities are there because we are trying to use administrative tools to deal with something that should be dealt with on a policy or legislative basis and that needs to be fixed.

One final thing, there has been some talk recently about a different tax minimisation. I don't know if it is quite that but we are talking about shifting the burden of tax away from the middle back to the high end. There has been some talk about the appropriate relief for child care fees and there are suggestions that it should be tax deductible. I would like to point out to people that they are doing exactly what we are now saying we should not be doing. If if it is a tax deductible form of child care relief, it means families in the higher tax rates get a much more significant benefit than women in the lower rates. That is exactly what we are trying to prevent at this particular forum. We are trying to create a simpler and fairer system and tax deductible child care meets neither of those tests.

PAUL CLITHEROE:

Chris Evans, University of New South Wales.

CHRIS EVANS:

This picks up a little bit on what Helen was saying. Peter earlier on was talking about fairness and efficiency marching together. My focus is much more on fairness and simplicity working together, and it is possible, acting more smartly than we currently do, to get both fairness and simplicity into a personal tax system, to enhance.

Some modelling we did recently suggested the removal of the tax-free threshold, it gives more to those at the higher end of the income scale than it does in terms of value to the rest. So getting rid of the tax-free threshold, getting rid of work-related expenses. We have a standard deduction which I don't think is achieving what it is setting out to achieve in terms of simplification. So getting rid of those two things and also getting rid of the 50% CGD discount combined with a low income tax rebate, which only gives the benefit to those you want to give it rather than to everybody, which is what the tax-free threshold does, and lower tax rates across the board, but particularly focussed at the lower end, you can do all those things in a revenue neutral fashion. You can gain the benefits we talked about: more fairness, more simplistic enhancement plans.

The immediate thing you say is "good policy", "bad policy". It is not. We served 34,000 personal taxpayers with that package and we got more than 60% support from it from across the board. There were losers and winners. The losers were in my tax band and I would have been one of the losers from it, but it made sense. So you can have fairness and simplicity with those sorts of changes.

PAUL CLITHEROE:

I think I am about to do my personal finances more destruction. Lin from Uniting Care Australia, I agree with your views but come on, remove more money from me.

LIN HATFIELD DODDS:

We discussed at morning tea the last session spent $100 billion and what we are going to do. I have an example proposal of how we could pull about $35 billion from revenue and we could spend it on the things that matter. We know Australians want to invest in essential services and ageing population, health
and infrastructure. We have the resources to tackle any problem we want to. We have to be prepared to go through it. We can get those ways through more and better taxes. A decision as a nation to walk away from the original minimum tax proposal is costing around $20 billion a year. If we put in place a new all encompassing mineral resource tax, we are going to raise $20 million a year.

We can go after loopholes: superannuation and capital gains. Super, around $10 billion of the $27 billion we spend a year on superannuation tax concessions accrue to Australia's 5% most wealthy citizens. There is no way that is equitable. We could do something else with that $10 billion. The last thing is capital gains. By only taxing at half the ordinary rate we are losing more than $5 billion a year.

The last thing I would say, if tax is the price of a good society, our current tax arrangements are saying that our essential services need to shop in the bargain bin. That is not okay.

PAUL CLITHEROE:

From the Gratin Institute.

SAUL ESLAKE:

I have some sympathy with Mark Carnegie's submission that the upper payer of tax income should be paying the higher tax. US experience shows that people will tend to borrow in order to sustain levels of consumer spending in the face of stagnant incomes. That was one of the factors leading up to the financial crisis. But I don't believe that you need to have higher rates of tax or to reduce the thresholds at which higher rates of tax become payable in order to achieve that objective. You can achieve it, I think, by going after some of the loopholes with which our income tax system is riddled. Striking that, by contrast, with the reforms of the last 25 years, the income tax reforms of '86-88, the income tax reforms of the late 90s and those at the beginning of this decade, most of the personal income tax decisions taken in the last 10-15 years have been in the opposite direction. They have been about narrowing the base, in some cases lower the rates, but they have been about narrowing the base.

We have a personal tax income which singles out particular types of spending, particular forms of business organisation and particular modes of saving or investment for more favourable treatment trends available to others. Without there being any legitimate policy objective as distinct from policy motive for doing that, although they are more generous, they are required to achieve a legitimate policy objective. These discriminations built into the tax system usually favour upper income taxpayers. They greatly add to the complexity of the system that two-thirds of taxpayers need professional assistance to file their tax returns.

We have a personal income tax system that rewards accumulation of bodies through borrowing and speculating and penalising it through working and saving. Politicians say we need more of the latter and less of the former. I want to give three specific examples of that. Some of them have been touched on before.

First, negative gearing provides a subsidy of $4.5 billion per annum to those who are affluent enough to sustain paying more in rent than they receive in rental dividends at the expense of those who can't or chose not to do it. It allows them to defer or reduce tax. There are now 1.7 million of them and they vote, which is why that subject is off the agenda for both major political parties, but there is no legitimate policy objective served by allowing people to do that. 92% of investors in rental property buy established property so it does nothing to increase the supply of housing or keep rents down. The US has never had negative gearing, yet they have never had a rental vacancy rate of less than 5%. We have negative gearing and we have never had a vacancy rate in rental properties of 6%, over 5%.

It is simply not true, as advocates of negative gearing say, that the brief suspension of it in the 80s led to a surge in rents. There is no country in the world that allows negative gearing as generously as the Australian tax system does. So the Henry Review recommendation, which is to scale back the capital gains discount to 40% and to only allow investment deductions of the same rate, as a fair compromise that should be taken up by governments.

The second thing I want to mention is tax breaks for seniors. I can't think of any single policy reason why people over the age of 60 or 65 should pay less tax on the same amount of income than people under the age of 65. Another contender for the title of Worst Policy Decision in the taxpayers' eyes in the last 20 years was a decision in 2006 to exempt entirely from income tax income received through superannuation funds by people over the age of 60. If you asked anyone over the age of 40 if you think they will have that concession by the time they get to 60, the answer is "No". The big problem is, as the proportion of the population aged over 60 or 65 increases, the cost to revenue of those unjustified concessions will only escalate. At the same time, of course, the requirements for extra spending associated with the ageing of the population will increase.

The third one I want to mention is trusts. Others have mentioned it before. I understand people, farmers in particular but others, want to operate their business activity through trusts to protect their assets or to assist the transfer of business from one generation to another. But my point is simply that while they are entitled to do that, there should be no tax advantage that accrues to anyone from choosing to operate their businesses through those forms of incomes. I think through these kinds of measures and others which people have mentioned or will mention when we talk about superannuation, it is possible to achieve the goal of getting upper income taxpayers to pay more tax without having what I think - and I agree with business representatives on this point - would be the negative consequences for economic activity and incentives of increased marginal rates of tax or reducing the thresholds at which the existing higher rates of tax become payable.

PAUL CLITHEROE:

For those of you gnashing your teeth and wanting to argue the other side of negative gearing, we want to do that. In the summary of the 138 submissions, negative gearing came up regularly. What is interesting is the left-hand side of my sheet here, which is those who believe it is an inappropriate tax, is the biggest of all lists. However, we need to get balance in this debate. First of all, I'm going to turn to the birthday boy.

EVERALD COMPTON:

Did you have my cake or not?

PAUL CLITHEROE:

They got in first, and also, it had that new Fat Tax. Everald Crompton, one place I agree very strongly with is, I strongly hope both you and I are here in 10 year's time with the Treasurer. I am hoping we are reviewing the fantastic changes to the fairness and equity of our system rather than redoing this stuff over again in terms of progress. I went to the web site and did my life expectancy. At 56 years my life expectancy is slightly over 90 already.

EVERALD COMPTON:

Thank you for that. I would like to take up again the issue of superannuation for senior Australians who want to stay in the workforce. At the moment, the ability to have the superannuation guarantee cuts out at age 70. It will go to 75 in 2013, if I have read Wayne's paper right. I was past 70 when they brought in the 70 limit and I am well past 75 for the second one. One of the things in my plan to live for the next 10 years is that Wayne Swan will catch up with me on this guarantee in that time. In fact, it should be abolished. If I want to work at age 100, why should I not have that, particularly as I can't get WorkCover? I haven't been able to get WorkCover since I was 70, which is the greatest discrimination of all time. Therefore, because you have got to try and get a policy for yourself, there should be some compensation somewhere else f
or that. I have never been able to get WorkCover because the insurance companies take one look at me and decide I am going to fall down the step. What they don't realise is because that is not because of age, it is because of my passion for scotch whiskey. You can't get covered. The only way that it will happen will be if governments provide WorkCover, even if you are working until you are 100.

The other issue that goes along with that is there should be no incentives in the superannuation system anywhere for people to retire early. My brother, years ago, retired aged 55 because that was the best time he could get the most out of his super fund. We hope that no-one will get an incentive to retire before they are 70. I agree with the point made. Even though it is going to affect me, I want to look like an honest taxpayer. As we get older, and more and more Australians are getting superannuation which is not taxed, it is going to be a burden on the country and at some point even old blokes like me have to pay that. The point is, it will be an inequitable situation and we have got to face up to the fact that that ought to happen.

PAUL CLITHEROE:

I am with you. I am going to be working to at least 90, with you, so we will probably both be employed when we are here in 10 year's time. Judy Yates, University of Sydney.

JUDY YATES:

I just want to comment on the role of the tax system in contributing to the income Commonwealth inequality we have in our society. It is propping up the bottom, and that is excellent, but what we are getting is increasing inequality that Mark talked about. I think the tax system is actually contributing to the wealth accumulation. Again I am back on housing but housing is not the only component. We have got 70% of the wealth is held by the top 20% of wealth-holders. Almost half of that is owner occupied housing, or partly investment and partly owner occupied housing. We can keep our rates down by expanding our tax base.

So back on owner occupied housing again. There is $40 billion tax exemptions go to the family home. Don't worry, Treasurer, I'm not going to suggest you tax more often but I think we can talk about how we can extract the part of the gain that has come from our society as income growers, as population voters. We need to talk about how we can extract that and share it equally amongst the society. We should start talking about things like the capital gains tax on superannuation gains. Then we don't have to worry about tax deductible interest. That is only a part of it, but it is a huge expansion to our tax base and it would improve the inequality in our system.

PAUL CLITHEROE:

Mr Koch.

DAVID KOCH:

To get away from the way tax increases (inaudible), I think that is a fundamental issue at the moment. We have 1.7 million people who have investment properties. That is middle income earners. They are people who live in the western suburbs of Sydney who go along to the guy called the "Equity Mate". Remember that advertising column said "Don't sit on the equity in your house, borrow against it. Let the tax man pay half. Buy a boat or go overseas", which is just suicide, "or invest in a rental property". So it is not just the rich doing this, and the negative gearing on shared portfolios is exactly the same.

I come across so many average income earners who are negative gearing who are on the Gold Coast. "Why did you do that?", "Negative gear attraction." So from purely looking after average Australians and pointing them in the right direction to invest conservatively as well, particularly in the investment environment we are in at the moment and I dare say over the next five or 10 years, the tax concessions at the moment are pushing average Australian investors way up the risk scale more than they should be.

PAUL CLITHEROE:

Thank you. David Crosbie, Community Council for Australia.

DAVID CROSBIE:

Some of this discussion is based on the kind of assumption that I'm not sure is accurate, and that is, if we want to build a stronger, fairer community that we need to collect more taxes and redistribute it. I know we need to do some of it but some of what we also need to do is encourage Australians and our communities to take more responsibility and be more engaged than the kind of community they live in. I think to do that we need to look at the kinds of concessions that we give to people to be involved in not-for-profit organisations to be involved in and engaged in our local communities, and at the moment those kinds of concessions are skewed. They are skewed to certain kinds of recipients and we skew into looking after ourselves. I think often throughout this Tax Reform the whole implication is our way of sharing is to collect more tax. I think what we should be trying to do is build a community that takes more ownership of its own community and provide the kind of incentives that we need for people to be volunteers, for people to give to local environment, sport, art, music, social welfare, housing, health, and at the moment it doesn't work because of the way we define to every recipient and the way we actually put barriers in the place of not-for-profits and in the place of volunteering. We could save more money and engage Australians more if we kind of deregulated the not-for-profit sector.

BRUCE BONYHADY:

There are some things that can be done to increase involvement of citizens in the community either through volunteering and through greater philanthropy. It is about making sure the community understands and welcomes this and that people's respect and standing in the community is enhanced through those sorts of activities. There are some things that I think governments can do, that we can all do to enhance the reputation and standing of people who do that, but in terms of this particular forum in terms of tax concessions, there is also some work in terms of simplification in terms of the definition of "charity", and I know the government is working on that. They are also working on the structure of public ancillary funds. All these things will contribute to a greater community over time.

PAUL CLITHEROE:

Do you want to throw into that?

TIM LYONS:

Very quickly. Without wishing to say that philanthropy and volunteering isn't a good thing, I think it is important that we acknowledge that there is a sense in which this could be said to be antidemocratic. In the end it is for the community to decide through the laws that our parliament makes what contribution wealthy people should make and what that money gets spent on. Take the example, we have all gone to some of those cities in the United States. It might have been to something like Carnegie Hall but the community may have actually rather had a hospital than an opera house. While we shouldn't have incentives for people not to give or volunteer or participate, there is a fundamental democratic point, which is as a community we are entitled to say this is the way in which we should collect resources and this is what we want to spend it on, and the way we do that is parliament, not necessarily the individual decisions of givers.

PAUL CLITHEROE:

I am going to be taxed an extra 10%, my superannuation, I am working until 90 but I will be back here. Now my private ancillary fund, which donates to the arts, is buying a hospital. Negative gearing has been having a pretty tough time. I know a gentlemen back here. Eddie, would you like to say a word? I'm struggling for a defender.

EDDIE KUTNER:

Thank you.

PAUL CLITHEROE:

Eddie Kutner in the property industry.

EDDIE KUTNER:

Negative gearing is a topic that seems to inflame passions and I would like to say all the comments I am going to make here is against encouraging reasonable conservative i
nvestment. Nobody is talking about speculating. In fact, we are not talking about speculators, we are talking about investors. Critics tried to put these investments against owner occupiers and suggest that affordable is eroded by negative gearing. Nothing is further from the truth. Were it not for negative gearing, many investors could not or would not afford to invest in property. You would find that developments would not proceed, shortages would be increased an be aggravated and so rents would be increased. The other thing is, if governments were asked to replace the funds that investors mobilise into rental properties, I think the burden on government would be far greater than it currently is in terms of the tax incentive. Don't forget, properties are eventually paid off.

There are a couple of other very important points to make in answer to some of the comments here today. It is important to note that it is not the wealthy that are accessing the benefits of negative gearing. The majority of people accessing negative gearing are, in fact, middle income earners providing for their retirement.

The other comment about the type of housing, the NAB Residential Property Survey, in March 2011, in that quarter said "Australian investors have become much more important in driving new residential developments. Resident investors are now expected to account for 33% of the market in the next 12 months". So that is investor funds being mobilised to provide new housing.

I will repeat myself from what I said yesterday. It is only the provision of new housing that can either resolve the shortage, or, alternatively, ameliorate the affordability crisis we currently have. The last thing we need to do now is discourage investors. Investors are significant funders. In reality, if you are looking at the fairness test, negative gearing is simply claiming your costs against income generated. It is no different to any other form of tax treatment on any other form of investment. So I say that we need to look at the test, some of the theories and I might even call them "myths" that have been expounded here today. I think negative gearing plays a responsible part in providing accommodation.

The other thing is, the Australian society does encourage Australians to be productive and investing is another way of self-superanuating. So I think it is a very defendable provision.

PAUL CLITHEROE:

As I am trotting back, does anyone care to make a comment about that? David Koch. Simon, I owe you. I will come back to you next.

DAVID KOCH:

I suppose the argument is: does a negative gearing benefit on a normal productive asset just go on for time in memorial or is it time to put some limits on it and so "Okay, for the first five years"? If it is not producing an income, why are you there? My point before was that it is middle income earners. It actually doesn't stack up to negatively gear property if you look at the risk rewards for it. It is stupid. It is there purely for the attraction of being told "Let the tax man pay half". That's it. I'm not saying get rid of negative gearing altogether but there has got to be a limit on it. It just can't go on for ever when somebody with money in a savings account gets taxed at double the rate at, say, capital gains. That's the inequity in it. It just skews people who are not as informed as maybe most of us in terms of where they are investing their money.

PAUL CLITHEROE:

I do promise, Simon. Simon Schrapel from UnitingCare Wesley in Adelaide

SIMON SCHRAPEL:

I want to return to the issue. Having spent the previous session focusing on the inequities in the transfer system and the costs associated with doing that, I think it is appropriate we come up with measures to help pay for fixing those inequities in the transfer system. We do have a personal income tax system that is progressive but it is not behaving progressively. What do I mean by that? A lot of it has been covered with some of the examples that have been provided early. To give you a graphic demonstration of what this means at the highest end of the effective tax rates, people are actually paying 4 cents in the dollar. If you get that on your general income earnings, that's what you will be paying. If you earn that in bank interest, that's what you will be paying. But if you earn it on capital gains with the 50% discount, you will only be paying 22.5%. If you are putting it in super, you are only pay 15% against that income. Golden handshakes were mentioned earlier, payouts, 15-30%; 30% on income retained in a private company and 15% on discretionary trust income if you are splitting that with a family member.

That is a range of measures that people can use at the top end to reduce their tax. Whilst we think we have a very progressive personal income tax system, the facts are actually quite the opposite. It is those gaps or holes or loopholes as they have been referred to before that we need to be paying most attention to. Some people have provided figures about what we would actually recover in foregone tax if we were able to address those issues.

Just a little snapshot here of an article I took out the paper recently. You can see it is rent because it relates to a trip that a number of doctors were able to take to New Zealand to enjoy the Rugby World Cup. But a $4,700 complete tax deductible trip for those doctors at which they will only be spending 6% of their time doing things in relation to learning and education that relate to their jobs. It is those sorts of perks that we need to address.

PAUL CLITHEROE:

Nicola from the Brotherhood of Saint Laurence.

NICOLA BALLENDEN:

I just wanted to pick up on one of the very brave defenders, some of the points the brave defender of negative gearing made and challenge them. We got the wonderful Judy Yates to do an analysis of the beneficiaries of negative gearing within the tax system and it is not just negative gearing, it is also the capital gains tax discount, and she found that wealthy negatively geared property investors in the top 20% of incomes were getting around $4,500 in tax benefits in relation to investment properties.

So to put that in a little bit of context, if you were getting the maximum amount of Commonwealth Rent Assistance you would be getting a subsidy of around $2,420 a year. This is from 2009. So you can see we are actually giving wealthy property investors more through the tax system than we are giving to people on the top rate of Commonwealth Rent Assistance. So it is indeed, as Julia said, an absolute upside down welfare.

I would also make the point that, unlike shares, you can negatively gear. You can also claim depreciation expenses with property which you can't with the shared portfolio.

We would absolutely support all of the recommendations in the Henry Review around equalising the tax treatment of different forms of investment income. In the absence of that, I think we would absolutely agree with David Koch; that it is time to talk about limiting negative gearing. There may not be the political will to abolish it, we acknowledge that, it is inequitable, and it also does probably put up the price of housing. So it punishes disadvantaged people twice. They are not in a position to make use of this tax concession ever and it is also pushing housing more out of reach for them if they want to purchase it.

PAUL CLITHEROE:

Prime Minister.

JULIA GILLARD:

I wanted to make a quick point following up from the discussion over here, which is why, of course, we are having these two sessions in sequence, the transfer payment session and then the discussion about personal income tax. I think it is important at every point that we remind ourselves the lived experience of Australians is how these two systems interact and work together or too often pull in opposite directions.

So as we are talking about sim
plification proposals, and there was a suggestion before about taking away the tax-free threshold and how that would work as a simplification proposal, I think we do have to bear in mind how those proposals intersect with the transfer system that we have and, consequently, the effective marginal tax rates that people making a journey into work perhaps from welfare or perhaps from being in a circumstance where they have been out of the workforce for other reasons, like caring for children, actually what confronts them as they make that journey.

So we are very proud of having structured a part of the carbon pricing reform so that we are tripling the tax-free threshold. That will bring out of the tax system entirely almost half a million people. They will go from paying tax to paying no tax. And in terms of the incentives for work that Miranda talked about at the low income end, the incentives to work at that low income end will be predominantly work incentives for women. So of that half a million, around 300,000 are women; so 60%. Whereas in our workforce overall, 40% are women. So it is a change taking people from paying tax to paying no tax, predominantly a change directed at working women, and they would be working women either making a journey from welfare to work or more likely secondary income earners who have been out of the workforce for a period of time and are making the calculations to come back into the workforce.

We should not forget the real world dollar effect of these changes. If you are talking about a woman, for example, who earned $16,000 a year in a part-time job, at the moment, if she took an extra shift maybe earning an extra $4,000 a year she would lose $600 in tax. As a result of this change she will not pay tax at all. That is a big shift. $600 for someone who is in that income range is a lot of money and a lot of people are earning in that income range - and we have obviously got trade union officials here who would be able to bring more expertise than me to this question - but for someone in that income range, $16,000, $20,000, to access another $600 through a pay rise would be a very difficult thing for them to do.

So we have always got to bare in mine, even though we have in some ways led you to separate discussions about the tax system and the transfer system, the intersection between them and the incentives that they send to people and particularly the important message about the value of work and the value of participation, which then comes to a set of questions about ageing and dependency ratios which have also been a backdrop to this discussion.

PAUL CLITHEROE:

Thank you, Prime Minister. I think I owe you a visit. Linda Lavarch, Not-For-Profit Sector Reform Council.

LINDA LAVARCH:

Firstly, can I say congratulations to the government, to you, Prime Minister, and the Treasurer. We are seeing a once in a lifetime opportunity to improve the regulatory environment with the Not-For-Profit Sector. You have been the only government with the appetite to do that. Thank you on behalf of the sector. I know they are welcome and positive initiatives, like the setting up of the Charities Commission, which will take effect from next year, and the commitment to have a statutory definition of "charity".

When it comes to the tax treatment and the tax assessments and concessions and exemptions given to the Not-For-Profit Sector, it is a system that I think Anne O'Connell describes as having evolved by historical accident in many ways. It is a very complex system and it needs simplifying. So in the theme of a simpler, fairer tax system, I would urge you to put that on the agenda; that we look at simplifying the tax concession exemption system for charities and not-for-profits.

Secondly, it is very notable that there is no guiding principle or no clear statement as to why we give concessions and exemptions to our charities and not-for-profits.  It is obvious but I think as a country and as a society we need to make a clear statement that our not-for-profit and charitable sector provides public goods. That is to be supported by government and as a sector of society embraced by government that we all work together to provide public benefit, that we all work together to strengthen the wellbeing of Australia. So if there was a clear statement - coming back to the ACTU statement where they set out a set of principles that they believe should underpin tax reform - I would suggest that we add to that a recognition that there should be tax concessions or exemptions provided to those entities that provide public goods as well and that should form part and parcel of our tax system and be recognised in it and carried forward into future tax systems.

The other issue I just wanted to raise quickly - Miranda raised it in relation to the FTP concessions. I know that Lin had some proposals in relation to how those current FTP concessions operate. I didn't mean to sort of dob you in there Lin, but there is a whole lot of discussion around the operation of the FTP concessions for PBIs. Simon raised an issue previously in relation to the Meals and Entertainment Allowance and the potential for abuse of that. I believe that in the sector there is an appetite for further discussion about how those concessions operate.

We note that in the discussion paper for the forum that there is no indication that you will look at those concessions and that is in support of the sector and that is very much welcomed, but what I believe - and I would very much defer to a few others - is that there is an appetite to have a look at this closely and I would ask whether that can be considered at all.

PAUL CLITHEROE:

Thank you for that. You might get one absolute tip the Prime Minister cannot argue with at all. You might note when the Prime Minister spoke she moved the mic closer to herself and we heard the Prime Minister more clearly. Can I offer that to you as a tip, if your voice is not strong. Shane Goodwood from the Housing Association.

SHANE GOODWOOD:

My comments will be mainly around negative gearing. I think I would like to start with three points that David Koch made. The first is, negative gearing is a form of investment and it applies not just to housing. It applies to a range of different investments and I think David mentioned shares. There is an element of risk involved, as with any investment, and I will return to that.

David also made the good point that we need to have a discussion around taxation of different rates of investment and we haven't had much of a discussion about that yet today. Removing negative gearing doesn't necessarily improve the way we treat other forms of investment if we are to have some equilibrium, or even some realignment.

Eddie makes the good point too. I think this has been a bit lost in the debate today. There may be some contrary views but negative gearing does add to housing supply. It adds to new housing supply. There was an important caveat in the Henry report that before we start tackling things like negative gearing and capital gains tax, we need to fix the supply constraints that are currently seeing us deliver far less housing than we need to if we are going to house the future generations of Australia.

But just returning to negative gearing for a second, some of the criticism here today is based on the presumption that negative gearing is an exploitation of a loophole which provides investors with a tax arbitrage. That simply isn't the case. A negative geared investment contains a risk. It will only provide a benefit to the investor when the accumulated capital gains after tax over the holding period outweigh the cashflow losses incurred during the holding period. If this is not the case, then the investor is left with losses. Adding to this, property investment is relatively illiquid with high transaction costs at around 15%, well above those of virtually all other investments. Over th
e years many investors in property, almost all other asset classes have pursued negative gearing investments that have not paid off. So it is not necessarily the road to richness.

PAUL CLITHEROE:

I have to give you a one minute warning.

SHANE GOODWOOD:

The other point I make in conclusion, we have a taxation system which is based on income being accessible and outgoings being deductible. You have to look at the whole system. You cannot look at it in isolation.

PAUL CLITHEROE:

Judith Sloan, National Seniors Australia

JUDITH SLOAN:

My comments follow on well from those. A general issue is the undertreatment in all our discussion about tax reform is how you transition from one arrangements to another. John had a good idea. We had a discussion at morning tea. The complications of transitioning from one arrangement to another is very substantial and this would be true in the case of negative gearing. The members at National Seniors, a lot of them are involved in negative gearing; are property owners; a lot of them are not rich people. They have made investment decisions, they have made asset allocation decisions in good faith based on the parameters of the tax and transfer system at a point in time. There is a risk in the continuity of those but the thing is, from a government's point of view, I think they have to limit those risks, and that means when you transition you often get involved in grandfathering arrangements as we have seen in the past. Grandfathering arrangements involve complications.

I just think there has been quite a bit of discussion about the nirvana of preferred tax arrangements. It might sound a great idea to get rid of these things overnight but there would be very significant consequences for folk who actually have quite average incomes and who are in many ways trying to sort of do some self-provision, at least, for their retirements.

PAUL CLITHEROE:

I was about to call you Dave Oliver. Clearly you have changed. You are better looking. Michael O'Connor from the Construction, Forestry, Mining and Energy Union.

MICHAEL O'CONNOR:

I didn't hear anybody talk about changing the tax system overnight. I thought people talked about having a proper review of it, a proper discussion about it, implementing it in a sensible fashion.

From our point of view, we think that we would like to make two comments. First off, I wish we had had the tax forum when the Henry Review was published and released. I think we would have had a much better debate, particularly about taxing the mining industry - our organisation supported the original tax proposal - if we had this forum then and it is a real missed opportunity and hopefully we have all learnt from that.

Having dialogue with people from all parts of our community is important. Hearing ideas from all parts of our community is important. As someone said earlier, listening is very important. I think we should learn from this and I think we should have more of these sorts of events and we should defend the importance of these events. That is not being cynical.

When it comes to the personal tax, our organisation is very concerned about just one industry, the construction industry, where we are losing over $2 billion in tax. $2 billion in tax being lost because of shammed contracting. We have a situation where a worker turns up to a building site to get a labouring job and they are told to get an ABN number. That's ludicrous. An ABN number to be a labourer? We have people who work in the process industry, process workers in the poultry industry and other industries where they are told to get an ABN number. That is ridiculous. If we don't do something about this, the tax base is going to be eroded further. It is ridiculous and something needs to be done about it. We recognise that the government has recently announced some extra resources to go into compliance but we need to do more, and if we don't do more not only will this practice continue to be rife in the construction industry but it will spread. It will spread.

Most people would think that the contracting goes on little jobs in backyards and elsewhere, but these sham contracting arrangements are being found on major projects involving public listed companies on government projects. It is rife. We have had audits done where we have found huge hospital jobs where sham contracting has been rife. We cannot have a serious debate about tax unless people who are not paying their tax are forced to pay their tax or compelled to pay their tax, and we have a situation where employers, who are doing the right thing and put people on wages, paying their superannuation, can compete properly and fairly and not against exploiters exploiting this ABN problem that is going on and we think we need to do more about it.

Last thing, the Queensland government should also be commended on doing a review on sham contracting in the construction industry. The report should be released in the next week or two and we would encourage every other State government to have a look at that report and perhaps look at a similar process.

PAUL CLITHEROE:

Barry Ritchie, Association of Independent Retirees.

BARRY RITCHIE:

I think the discussion has been quite interesting but we have forgotten that the great percentage of people in Australia live on low or middle incomes. We have been addressing the small percentage of high income people and then we have put in tax structures that try to rip off, if you like, the high income people but they affect badly, as we have heard over the last couple of days, low and middle income earners.

Let me give you an example. We have talked about how to get older people to work. Well, think of a person who goes to work a couple of days a week at Bunnings who has a part-pension and who also has an allocated pension. Not a wealthy person by any means. That person gets superannuation taken out of his wage put into his superannuation fund but the rules don't allow him to take it as a pension unless he sets up a new pension. So if he works every fortnight, he gets paid every fortnight, a new pension has to be set up if he wants to use that money. So at the end of the year he has got 27 pensions and 26 of them pay him $4.50 a week. Now, that's because of a regulation that prohibits people adding to their pensions. Why does that regulation exist? Well, allegedly it exists as a means of stopping rorting by wealthy people. It would be far better to address the problem of the marginal tax rate or whatever it is that causes people not to pay their full benefit of tax than to put in taxation regulations that prohibit and affect people, the majority of people, on middle or low incomes.

I will give you another one, quite a quick one because I am just a little bit younger than you Everald. I thought I was going to be the oldest one here, but you beat me. I'm sorry about that. I'm 18 months younger than you.

Let me give you an example. There is a draft tax proposal sitting on the table at the moment. It's effect is the best time for me to die is on 1 July. Now, I ask you, some of these regulations, there has been no talk about the taxation regulations that exist in the system, the simplification and the impact they have on reducing incentives for people to work. So I raise that as an issue that hasn't really been debated.

While I'm talking, quickly, the superannuation system has developed very well indeed and the Labor government is to be congratulated for bringing it in and bringing in the new regulations but it has all been focussed on accumulation. All of the legislation that is before the government now, all of the thinking by the industry has been about accumulating money, but that's only half of it. It's the use of that money in retirement that is the issue that we are trying to drive and that issue is not addressed properly.

A
couple of days ago the small business people alluded to the fact that there are 2.5 million small business owners in Australia, roughly. A high proportion of those don't pay superannuation into the superannuation system, so they are outside it, but they pay full marginal tax rates on building up their assets, whereas in superannuation they only pay 15%. When they then come to retirement and they start to use up those assets, they still have to pay full marginal tax rates on that and that gets very hard if they have built up property or such thing and they have held it for a long time. Then when they come to sell that to use it for living on, they incur enormously high capital gains tax problems. It would be far better to separate the retirement system from the accumulation system to let everybody who accumulates money to live on in retirement access the retirement system when they retire. Now, they can do it within the compulsory superannuation system or they can do it outside and they can then move in, and there will be a cap or some such thing that sets the amount of money that can be put into that system but it removes an enormous amount of regulatory issues that exist in superannuation today and I would commend that model to people as a way of getting rid of capital gains tax problems for people in retirement and so on. Thank you.

PAUL CLITHEROE:

Thank you very much. I'm sure we will see you here in 10 years time to review our progress.

BARRY RITCHIE:

Yes, I'm looking forward to it.

PAUL CLITHEROE:

Peter Davidson, Australian Council of Social Service.

PETER DAVIDSON:

That was primarily because it brings us back to Everald Crompton's comments earlier and I was wanting to respond to those. At ACOSS, we agree with both Everald and the Independent Retirees, that people should have more flexibility to contribute to super while drawing down benefits so they can continue to participate in paid employment but under the present tax structure it can have perverse implications.

For example, if I'm over 55, which I'm not quite yet, I can churn my wages through my super account and ask the fund to pay me an equivalent benefit thereby reducing my marginal tax rate from 30%, 45% or whatever to 15% or less without saving a thing [ed. in superannuation]. So the flip side of greater flexibility for people to contribute and draw down simultaneously is that the Chinese wall between the so-called accumulation phase and the so-called benefits phase has been pulled down, it doesn't really exist any more, and that points to the Henry report's sensible proposal to tax fund earnings consistently in both so-called phases. That would remove a lot of opportunity for rorting and it would make for a fairer and more flexible system.

It does also raise the broader issue of who will pay for health and aged care services for an ageing population. NATSEM estimates that by 2030 half of all wealth will be held by people over 65, half of it, and it will be distributed much more unequally.

Before we call on low income earners to pay more for health and aged care either directly or through a higher GST, we need to think about strengthening the personal income tax system for people over 55. We need to think again about the fairness and efficiency of a higher tax-free threshold purely based on age. We have to think again about the fairness and efficiency of allowing people to churn their wages through their super to avoid tax without saving anything. I have my super in three funds. Two of them have written to me already suggesting I take advantage of this. And we have to think again about the fairness and efficiency of allowing people over 60 to avoid capital gains tax entirely by placing their assets in self-managed funds.

PAUL CLITHEROE:

Thank you. You are on my second bite of the cherry, which means you will be nicely briefed for me.

SAUL ESLAKE:

Two things. One, to express some dismay at what I think was the mean-spirited response of Tim Lyons of encouraging better philanthropy on the part of people. I think that is what I should encourage. What I ask the ACTU to recognise is there are people with goodwill here advocating things that would result in them paying more tax and it would be helpful to advancing the cause of getting the kinds of reforms you would like if that goodwill was reciprocated.

The second thing I want to say is in relation to the comments about negative gearing. One, there is hardly a country in the world that allows negative gearing in the way Australia does. When you are talking to foreigners about that you have to explain what it is. The Reserve Bank, in its submission to the 2003 Inquiry, spelt out in some detail how different other country's tax treatment is and they would have been more forceful about it had they not been heavied by the government of the day to turn down their commentary on the subject. If negative gearing is a good thing for the supply of housing and the level of affordability of rent, how come we have some problem with that in Australia than other countries who don't have negative gearing?

The other point is, over 95% of people buy established housing, not new housing. I know Eddie is committed to increasing the supply of housing. My point, and the point of all the evidence available, is negative gearing does not contribute a thing to achieving that objective. The problem is, there are 1.7 million taxpayers. That is 1.7 million voters who are into it. That's why both sides of politics were in a race to trawl it out as soon as Ken Henry even kind of sniffed around the edges of that and you can only achieve a form of this nature that is getting rid of something that is of no public policy objective which transforms $4.5 million of revenue that are better off for average taxpayers in the context of more far-reaching reform which we might not be able to do in present circumstances but which we need to be planning for.

PAUL CLITHEROE:

I am happy with the way this is drifting. As you know, we have been getting a lot more onto ageing and superannuation, anyway. I know some of you have been really patient. Thank you for being patient for me waiting for superannuation. We should move to that area now. If it is of particular interest to you, please make yourself known. Mark from the Financial Planning Association.

MARK RANTALL:

Thank you very much. I don't think anybody in this room would not support a better deal for the poor and financially distressed. Many of our members work with a lot of people who are in that situation on a pro bono basis. So well aware of that. I guess the other thing that seems to be flowing through here is broad in principle support of the Henry Review. From an organisation that has been under now a two-year review both through the future of financial advice reforms and also through the stronger super forms - it started out as the Cooper Review - one thing I would caution about is a measured and balanced approach to any changes that we might want to implement. Given that we are now at the back end of those reviews, we have now got a draft policy and legislation to go through parliament, I would caution any major changes particularly to the superannuation sphere coming out of this forum in the shorter term.

The facts are quite clear that we have an issue with an ageing population. There will be only 2.7 workers out of five workers today supporting those on a pension in 40 year's time; that pension costs will rise from 2.7% to 3.9% of GDP; and the SGS, as it is currently formed, will only reduce the pension expenditure by 6%. So many of the superannuation reforms that we have had, the superannuation guarantee charge in itself has been designed to reduce the reliance on the pension and many people, being a baby boomer myself, the party is actually over already and we have put in place plans to actually implement a self-fu
nded retirement. So we have to be careful not to shift the goal post too many times because the low-hanging fruit seems to be always superannuation, along with other things, and constant change to a system that has compulsion, to a system that is world class, to a system that everybody supports and understands is a world class system designed to incent people to fund their own retirement is a very positive thing and we should be careful about shifting the goal post just too often.

PAUL CLITHEROE:

I am meant to be the policeman here directing traffic. I will make the point, just to reinforce the point, in terms of many good - I am hearing lots of goodwill and spirit in this room - I know your point about if, for example, I agree with Mark, I pay more tax, the community will make good community decisions. I would like to make the point that like many people in this room, I personally put millions of dollars into charitable organisations of my money and we need to be careful about people with reasonable spirit.

TIM LYONS:

I'm sorry about that. That wasn't what I was intending to do. I think the point was a valid one.

PAUL CLITHEROE:

Agree.

TIM LYONS:

I might leave the superannuation because what I have is an FBT point. I reckon I have got one that we can collectively agree on and give it to the Treasurer and say "Let's just do this".

PAUL CLITHEROE:

Do you want to do that now? Anne reminded me that we had a comment on FBT earlier on and in my running sheet FBT is something that we needed to do.

TIM LYONS:

This is an FBT issue that has received some coverage recently. I think it qualifies as a flat-out rort and we could agree to get rid of it. That is, as I understand it, for all foreign workers, including 457 visa holders, they are able to receive living away from home and meal allowances, including coverage of accommodation from their employer, completely tax-free, an advantage which isn't available to any Australian worker. My understanding is there are now labour hire agencies actually advertising on the basis of this tax exemption saying "Come and use foreign workers for this. You can pay them a living away from home allowance and the Commonwealth provides a tax subsidy to that arrangement".

As I say, it is not available to domestic workers. It is not means tested. So relocating an American CEO who has an apartment overlooking the Opera House can have a package courtesy of the taxpayer. That seems to be something that is there that probably wasn't clearly thought of when the rules were written and it could just be closed up. You were looking for something that perhaps we could all agree on so I'm trying to give it to you.

PAUL CLITHEROE:

I think we are agreeing on quite a lot. I'm pleased. Anne, from University of Melbourne

ANNE O'CONNELL:

I would like to go further than that and suggest we abolish the Fringe Benefits Tax. It is a bad tax at all levels. It is inefficient in terms of revenue-raising. It is complex and has high compliance costs and the concessions that are available make it inequitable. It was originally introduced as an integrity measure because individuals weren't declaring when they got noncash benefits. There were also concerns about how you might value some benefits. We have come a long way. We have got reporting mechanisms so it is easy to see what the value is and the market value and other rules are well established.

The other thing that makes FBT a bad tax is the rorting that goes on. One example of this is doctors in the hospital sector who can take certain amounts of remuneration in the form of expense payments that they can use on meals and entertainment, and there are other examples. But even if we don't get rid of the tax, I think that sort of rorting needs to be addressed and I'm confident that the not-for-profit sector more generally is willing to have that matter considered.

PAUL CLITHEROE:

I was just checking something with Greg Smith.  I just noticed in his submission he was supporting the view about the inefficiency of the tax. Lin, a quick one. Look, I will come back to you on this. I don't want to keep losing people. David, I'm sure you are going to talk to me about superannuation. This is pretty important as well.

DAVID COX:

We did some fairly detailed modelling for our submissions to the Henry Review on how long people's superannuation would last.

To do that we used ASFA's well-established benchmarks of modest and comfortable. Modest for an individual is around $20,000 and comfortable around $40,000. What we found is that if people's superannuation balance is $100,000 or so, and if they are prepared to live modestly, it is going to last a long time, but if they want to live comfortably or closer to comfortably it is unfortunately going to run out. There is a kind of chilling statistic. There aren't that many people who have superannuation balances of half a million but if they try to live comfortably as an individual they will run out before their life expectancy, their age cohort life expectancy.

Now that goes to two factors. One is adequacy, and the government is addressing that with 9 to 12. The other is longevity. Most people don't appreciate how long they are going to live. They don't appreciate the sort of longevity improvements that are occurring generation after generation. If they are going to run out of money they are going to be totally dependent on the Age Pension, which is not a very comfortable way to spend the latter part of your life.

The Henry Review made one interesting statement; “The Review has identified the role that deferred annuities can play in an ageing society.”  I just want to talk about them as one of a suite of product innovations that could help people get through the latter years of their life.

A deferred annuity, if you are buying one for purely longevity insurance, if you were able to, and the reason that you can't is because the pension rules and the Tax Act are very specific and they only address the products that are in the market today. To put any new product into the market you have got to either torture the product or break the rules, and you can't break the rules.

So if you were going to buy one for purely longevity purposes, you could spend $10,000 as a 65-year-old male retiree and when you reached your age cohort  life expectancy, which would be some 25 years later, it would pay you the equivalent of half the Age Pension on top of your Age Pension. Now for somebody with a low starting balance, that is massively welfare-enhancing and they wouldn't be much affected by the means test.

For somebody who's got a bit more money and they are in one of the upper income deciles, it is a nice bit of insurance and it would be subject to both the Age Pension means test and the age care means test. The modelling we have had done subsequently and was appended to our submission shows that in fact that would save 3% of the Age Pension and age care costs in 2050.

So that's a massive benefit in terms of welfare, it's a massive amount of saving for the government in the future and it's a massive intergenerational equity benefit.

It would be a good thing if the government now got on with it and set up a process to have a look at those tax rules not just for deferred annuities but for all the other innovative products people want to put into the marketplace so we can get on with assuring people of a comfortable income from their superannuation well above the Age Pension entitlement.

PAUL CLITHEROE:

Thank you I think we have got to get our mind around that. It's not only the ageing population it's the idea. I think my colleague, Mr Pascoe where are you, referred to me as going to be a dribbling 90 year old.  Mate, I
will be beating you at golf.  There'll be no dribbling going on. No we will be healthy and well. Ross Clare Association of Super Funds.

ROSS CLARE:

Thanks for the opportunity to contribute. I have been very patient throughout the last day and a half because there have been quite a few things said about superannuation, many of them I think incorrect or misleading. I would like to differ from quite a few of the views that have been put.

I think, really, what we need is greater stability and confidence in superannuation and retirement arrangements rather than more change and uncertainty and complexity, which many people here seem to have been arguing for. If you survey the population - and I do from time to time - and you ask them in two decades time will our tax system be the same treatment for super, they will answer "No" quite reasonably. If you ask them if the Age Pension will be there in a couple of decades, they often answer "No", which is a worry because it is affordable. If you ask them about the taxation of the superannuation after age 60 being the same, they will come up with the same answer for much the same reasons.

The Age Pension is affordable and the taxation treatment of the over 60s is affordable for decades to come. The sad reality is most people aged over 60 don't have a lot of income. They never paid much tax and when that was brought in it didn't cost a lot. Going forward, it is likely to be the same. If you have a look at the tax treatment and equity, the superannuation and support for retirement income is remarkably equitable over the income decils. As both Ken Henry and Rob mentioned, you have to look at the system as a whole.

The other point, if you are looking at sort of distributions of wealth, the way you cut it, it comes up with all sorts of things. For instance, 70% of super assets are held by 40% of the population aged over 50. That's because they have had time to save. It is the nature of our society. Over the life cycle people build up assets. If you are talking about equity, I think you need more sophisticated thinking.

The other point I would like to make is that the Henry proposals on super have been popular with many I think partly because the government did not accept them. I don't think that it is either necessary or sufficient for a policy to be favoured. When the Treasury looked at the distributions and the revenue costs of the Henry Review proposals and you compare them to what is the impact of the increase in the SG to 12% and the low income earner's repayment, the government's measures are superior. It gives better take home pay, better retirement savings, better tax revenue. So in many ways the decision to go down the path the government did was a bit of a no-brainer once you have the superior policies set to put it into position.

There are some things we need to improve. David has already touched on the retirement area. I think that's where we have concentrated on the accumulation. What we need to do is think more about that later stage. I think we also have to think about the low to middle income earners. Unfortunately, we don't have enough affluent rich people in our society. If you focus on trying to tax them more and limit their opportunities, you won't achieve a lot. The SG increase, the low income earner's rebate work, the strongly distributional impact at the lower end and some measures that have been put like the higher contribution capped for those over 50 with assets less than 5,000, if you are looking at that it might generate another few million in revenue, cost the Tax Office $3 million a year to administer. Private compliance costs 30 or 40 million. It is superficially attractive.

That is my comments. I think I have covered everything.

PAUL CLITHEROE:

Nick. The reason I am going to Nick, we are so thrilled the Prime Minister is with us but to fit the Prime Minister in we needed to bump someone. No, he was a volunteer. He was happy to do it. So this is very fair and reasonable. Thanks for doing that, by the way, Nick.

NICK GRUEN:

Julia, it could have been me. Anyway, I'm pleased that you are up there.

I guess I wanted to draw attention to a tension in the superannuation system, which is, we have used compulsion to a large extent and at the same time we talk about incentives to save. In many ways I think you go one way or the other and we have decided to go with compulsion. I am generally not in favour of compulsion, usually much more in favour of incentives. I think the reason compulsion makes sense here is, firstly, that there is a pension sitting in the background and so we don't have the right incentives from the start. But the other reason is that in this area, using incentives to increase savings, it ends up making life hugely beneficial for those with savings already who are the wealth. So generally speaking, I think compulsion makes sense here.

In that context - I think it is important - we have a number of tasks. One, is to make the concessions that exist already more progressive. They are currently very regressive and we are making some progress on that following some of Henry's recommendations. I think we should also be happy, especially as we are increasing compulsion going from 9-12, to reduce the level of concessionality generally as well.

The other large problem for me is that it makes sense for people, when they are accumulating savings in their 20s and 30s, to be doing that in the form of a housing deposit and at the moment what we do is very inefficient because as people are trying to get a housing deposit together they are also contributing to their superannuation savings, which is not in the form of a housing deposit or is not accessible as a housing deposit. So I suggest that at some stage as we increase super that we allow that rather than the kind of Mickey Mouse system we have at the moment, which is a separate fund.

I am not saying when that should take place but I think it would make sense if we go in from 9-12. If people regard that as still needing to be targeted towards retirement income, that we actually go further than that, if necessary, because of the benefits of enabling somebody, when they start out, to draw down from their super savings for a housing deposit and then to go on saving. I think that would actually be politically attractive and one might take the opportunity to also withdraw the First Home Owner's Grant.

A final comment on a different subject.  Talking about super, one of the things we have done with super is we have used caps. So we got a degree of concessionality and we have said to people "We are going to cap your access to that". I think that is something we should use more generally when we come upon something that we can't do across the board for political reasons.

Julian Disney mentioned CGT on houses and I agree that is politically impossible. It may not be politically impossible at above some high level and again one could do that with negative gearing. So one could leave in place either transitionally or for a longer period of time some access for negative gearing, for instance 20% of the deductions, but say that that is it. That then addresses most of the concerns that people will have and attacks the largest rorts but it is a general proposition and I wish we would pursue more generally where we have this situation where we say we would like to do that, everyone agrees we should do that but there are political constraints. Capping can deal with those very often.

PAUL CLITHEROE:

Thank you for that. Don't worry about a thing, Prime Minister. When I mentioned the government is keen on funding research, he leapt out of his seat. He didn't say that, by the way. Fiona Reynolds.

FIONA REYNOLDS:

On the tax concessions for superannuation, I think they are always controversial but I think it is really important to remember that superannuation, unlike other investments, is
really the only one where you are asking people to hook up their money for 20, 30, 40 years and there has to be some concessions. That is not to say that there does not need to be equity there and I think the government has taken some steps with the caps to make sure that there is better equity, but I think one of the areas that we haven't talked a lot about in the Tax Forum are women, and women are disadvantaged when it comes to retirement and superannuation. It is one of the areas where, unless there is some form of government intervention to assist women to save more, things are not going to change.

Women are still retiring with half the retirement savings of their male counterparts. That is for a number of reasons. (A) we earn less; (b) because we spend time out of the workforce. But when it comes to retirement, the average seven year career break that a woman takes in her life costs her nearly $80,000 in missed superannuation and there are simple things that we can look at. I know they cost money but it is at the heart of equity. Things like making sure superannuation was on parental leave that is paid. There are other things in the tax system like under ordinary time earnings. Parental leave isn't listed there. Even if an employer pays it, they don't actually have to pay superannuation on it. And there are other things, like a $450 monthly threshold that you don't get super from unless you are earning $450 a month from any one employer. A lot of women work in small casual jobs and they might have a couple of casual jobs so they are not getting any superannuation.

So I think it is a area that needs to be looked at if we don't want to for ever have women retiring with less, remembering, also, that women live longer than men.

PAUL CLITHEROE:

David Whiteley from the Industry Super Network.

DAVID WHITELEY:

We have heard from people here that tax concessions on superannuation should be reviewed or even scrapped but certainly distributed more fairly. I just wanted to return to the basic purpose of the tax concession. Fiona alluded to this.

Within our current system they are fundamentally part of a social contract between the government and the people. Workers defer payment and consumption and in return they receive a tax benefit for doing so. One of the perversities have been many of the people who are least able to afford to defer their wages have not been reached in this tax concession and it is to the government's credit that they are trying to fix this up with the low income earner's co-contribution.

For superannuation industry itself, we have to relook at these tax concessions. I argue we should do this, firstly, from the foundation of this social contract, and then look at the incentives that we should be providing for voluntary contributions to ensure that we are consistently vigilant, both now and into the future, that we have got the balance right between the two, we have got the balance right between the very basic foundation of the social contract and then ensuring or providing for some incentive for people to save voluntarily.

I want to make a couple of points on that. Firstly, we need to be careful that we are not equating access to the Age Pension for people when they have retired. There is a benefit that should be matched by tax concession within their superannuation to wealthy Australians.

Secondly, I think all of us need to be prepared to support or consider supporting a more aggression distribution of tax beyond the government's proposal some time in the future. I say that not only for equity reasons.- of course they are probably the most important ones - but also, for the sustainability and the integrity of the superannuation system in the future. It has been something which I expected, I suspect, but I have certainly been struck by the number of people who have consistently spoken about the concessions with super and I think it is something which the industry now has to ensure everything we do is pushing towards ensuring that the destructive effect of these tax concessions is equitable.

PAUL CLITHEROE:

Thank you David. I would like to come to you, by the way, Andrea Slattery, Self Funding Association.

ANDREA SLATTERY:

I would like to concur with the Prime Minister's remarks before in relation to the important message about not only our accumulation of savings pattern but our dependency later in life in our ageing. David just raised the issue then in relation to being able to save. The government has actually incentivised to save. Dr Henry, through his report, implemented the fact that the reliance on the Age Pension in the future is the reason why we are saving now. So there is an ability for people to be able to save over time to put away those saving at this time and there needs to be some kind of incentive. I know we will go to David in a moment. He has done some research which actually shows there is no distinction between those that are actually relying on the government all their lives and those that are actually relying on their own way of saving.

So I think it is very important that we really look at the whole situation. I am looking at pillars 1 and 3, that of saving for your own retirement and that of the pension. They need to be looked at in tandem and not seen as a tax concession that has been provided and, therefore, a little honeypot that perhaps is around.

A couple of the things I would like to say from our industry is we actually support the majority of the government's recommendations that they brought through. So we support 9-12 would assist with adequacy. We support the low income rebate and we also support the superannuation guarantee going from 70-75. Along those lines we would also recommend removing the barriers that actually exist at the moment for our senior citizens to be able to continue in the workplace and to continue to provide super and opportunities for their retirement.

There is a lot of barriers that actually sit above the 65-year-old age group. At the moment, there is a three year bring forward rule, there is the work test and the age limit. I think we really need to address that and the cost back of those or the savings on those would be through the increase in earnings that can actually be received through those investments.

I think there is one other one that I would like to talk about, and that is, at the moment there is a recommendation currently that people who are over 50 who have less than half a million dollars, they will actually be able to have a system that will allow them to have a concessional contribution cap of $50,000. We have done some work with industry. Ross actually alluded to it a moment ago.

Treasury's figures indicate that the cost to actually put that system in place is quite significant and so we would actually like to see the $25,000 threshold that is indexed raised to $35,000 indexed and that would all be part and parcel, at the moment, of the current forward estimates. So that saving would actually allow people to be able to put away a little bit more when they were able to because the interesting thing about saving that is we do have lifestyle patterns and we can save at certain times.

PAUL CLITHEROE:

Thank you very much. Minister Shorten, I think that is an area you wish to comment on.

BILL SHORTEN:

Just in terms of the superannuation and the taxation system, clearly there is good points being made about improvements that can be made in accumulation. The census around 9-12% I think is important for the government to hear. Of course, I would remind people to read Ross Giddens' article in the Sydney Morning Herald when he said whenever the government attempts reforms, he said you look around for the army of supporters behind you and they are not up there on the trenches with you.

Please keep educating people outside of here on the super reforms. That also goes for the reforms in fina
ncial planning and stronger super. It would seem to me in the drawdown phase there is much consideration by the government but not a lot of point in building up a great system if, in the drawdown phase, there is inequity, challenges to sustainability of the system, and also, there is a challenge in terms of the fact that the first baby boomers are celebrating their 65th birthday this year and as a result, in the Henry Review they did recommend removing impediments to a range of innovative income streams. Certainly from the part of the portfolio that I look after, I hear loud and clear there is need for perhaps Treasury and industry to work on the drawdown phase and how we can innovate so people don't work hard their whole life and retire poor.

Also, I would also finally make this point. I thought there was a wisdom in what others were saying in the superannuation game. Whilst it is important that the tax concessional system is equitable and sustainable, we also need to be careful that one of the things that irritates people of all ages is the constant change to the tax treatment of superannuation. So I think there is a balancing act for government in that but I am mindful that constant tinkering with the tax treatment of superannuation undermines the confidence in the system as a whole, which I think is a distinct national advantage to Australia, our super system.

PAUL CLITHEROE:

Some people have not spoken at all. I am making a real effort to get to those people from the community and public sector unit.

NADINE FLOOD:

I think we all know the Australian superannuation scheme is an extraordinary achievement. I spent some time in the US some years ago and unions were saying "We can't believe you have the universal pension scheme and it is not dependent on an individual employer and if a company goes broke you don't lose it", and "You've got this thing called Medicare as well". "Actually, if your kids get sick we can take them to hospital." Then we told them about long service leave and they didn't believe it and we had to Google it to tell them that long service leave does exist. So it is worth us keeping the perspective that what all of this forum is about is maintaining a civil society. It is about having a society where people have an adequate retirement where, if they haven't had the capacity to have a job that allows them to save to that level, that they have an age pension that allows them to live with some dignity. That goes back to the Prime Minister's point about the connection between those, but I think what concerns me is I hear us go through each specific idea from each specific stakeholder and each specific speech. There is always a reason not to change. There is always a reason to retain a particularly generous concession. There is always a reason to do those things. The problem is, there is a more fundamental issue, which is, if we all do that and stick on our guns on those we won't deal with the demographic issue, which is how to have a tax pay which sustains that society. As we go through that, I think it is incumbent on all of us to remember that; that overarching goal is a shared one about a civil society and that does mean some difficult decisions for all of us.

PAUL CLITHEROE:

Paul Gerrans, University of Western Australia.

PAUL GERRANS:

I would like to pick up a point that Bill Shorten mentioned about stability of the system and not rushing into making changes. I think I would suggest perhaps the level of concessions that has been raised, there was a suggestion that it should be increased. I think what might be better first is to actually establish and articulate what the basis for a particular level is and stick to that. So think through a bit longer term as to what is an adequate level of income in retirement, and then, if we work backwards from that to establish adequate threshold levels or concession levels.

The other thing I would like to mention is picking up what David Cox mentioned about the drawdown phase, and we have done a fantastic job through the system in establishing a pool of funds. We haven't done as well in establishing the products that are suitable to draw that down and one of the attractions for the proposals that David was talking about is the way in which it helps interactions between the taxation and transfer system. By promoting longevity products or rural contingent life annuities you reduce the call on some of those payments, on some of those transfers, and in some of the modelling that Deloitte Touche has done it clearly articulates what they are. They are a win, win in that they address equity concerns and they address it for individuals allowing their accumulated balances to last longer. So I commend those.

The other issue raised about equity, again we look at raising or considering levels of concessions. Fiona Reynolds spoke about the issue of equity and the issue of women. The comment before that, we have a universal system, it is not actually universal because we do specifically exclude those who don't earn more than $450 from a single employee. So if we change concessions after having thought about what level they should actually be, they are the sorts of things we should look to change first.

PAUL CLITHEROE:

I found a way to by-pass the system. Could you flip this mic on? David, look at that. Fantastic. It is a good time to bring David in. I have known David for 30-odd years. Your contribution is well timed now.

DAVID KNOX:

Thank you, Paul. I'm a baby boomer too. When we come to looking at the super system, we need to come to look at our retirement income system and not just take super in isolation. We need to recognise we have the Age Pension, the compulsory super system and the voluntary top-up. As the Prime Minister said, we need to think of that as a great system interacting between all the systems together.

We also heard this afternoon about the fact we have done well in the accumulation phase. We haven't done as well in converting those accumulated benefits into income benefits. Therefore, I think we are in a position where we need to think seriously about deferred annuities, about income annuities and about other sorts of products that integrate the Age Pension and the super income system. We need to bring those together. Now is a good time to think about that.

The other point I would make, we have heard the super tax concession is under a bit of attack, if you like. Are people thinking about there is a spare $10 billion there if we were to remove this or that? In reality, that $10 billion or whatever number you want to pick is not there because if you were to reduce those concessions behaviour would change and the Treasurer wouldn't suddenly find $10 billion available to spend. We have got to be careful in the tax expenditure statements in the Treasury numbers that come out. Those dollars are not available for expenditure because super is a multi-year context. It is not a one-off year expenditure and its contributions, its investment income and its benefit payment. So those numbers are, in fact, quite misleading if you just take the tax expenditure statement as it is.

PAUL CLITHEROE:

Martin Codina, you are from Financial Services Council.

MARTIN CODINA:

I just want to touch on a few of the threads that have already been raised. The first is, we shouldn't forget about the outcomes, which is what David is talking about. The concessions, fine, we can look at them in isolation, but we shouldn't forget, under Treasury's modelling, by 2030 outlays on the Age Pension would be $10 billion a year as a result of superannuation. It is not money that disappears, it is money that gets returned to the taxpayer in that sense.

The other thing I would say, there seems to be a perception that the concessions are somehow unlimited. I think it has been helpful that a few people have talked about the caps that
are in place. Obviously they play an important role in terms of sustainability of the system.

The other thing I would say is, there is three pillars to our system and we shouldn't forget compulsory contributions alone will not deliver adequate retirement incomes. That is true for 12% and for 9%. We need to be careful about anything that removes incentives for people who can actually save in addition to the compulsory amount voluntarily again with the end benefit for all taxpayers that those people should hopefully not fall back at least to the same extent as others on public funding.

The other thing I would say is in a sense consistent with that, rather than looking at the concessions in super perhaps we need to look at means testing outside of super when it comes to the Age Pension. So in a sense you can strengthen the incentive to save through super by making sure you don't get access to the Age Pension inappropriately, if you like.

The final point I would like to make is picking up on some of the comments that Minister Shorten made which were well received. If I could put some words into his mouth, it was a suggestion that perhaps a Treasury-led process looking into that post retirement phase or post cumulative phase is something we should be very much doing at this very point in time. Just to reassure everybody around the room, it is not about more tax concessions for super, it is actually about streamlining a range of different regimes in terms of the way the pension works, in terms of the means testing eligibility and other things as well as superannuation regulations so we don't have the sort of outcomes that Barry was talking about, which I think made that very real.

PAUL CLITHEROE:

Julian, I first came to you 20 hours and 20 minutes ago. You have been waiting patiently, thank you.

JULIAN DISNEY:

Very quickly, before coming to super, I should clarify. Nick referred to me in relation to capital gains tax. I think I am talking about land tax. Also, to emphasise that I was only speaking about that at the top end. Ken Henry and the Property Council have rushed past me and after many years of flogging this horse I am left languishing in conservative rates but I am going to stay with that. I believe it should be done at the top end. What I am proposing, I think, is aptly described as tax on the family home. This is not tax at the top end. They tax shelters. The reason why as much has been paid for them, it is nothing to do with the family, it is to do with it being a tax shelter.

The other thing it is crucial to remember is the exemptions from land tax are anti-home ownership. They are in favour of current home owners. Indeed, they are really only in favour of people who bought their homes before about the year 2000. They are not in favour of home ownership in the longer term because they are inflating prices and making home ownership harder to get. This is a classic example of baby boomers are fine and other people are going to suffer.

With super, we have had a number of people say they are constantly changing. 20 years ago when this was brought in a number of us pointed out that it would be much better to do this in a much simpler way and that that was important, that is in order for this to be spread beyond 9%, and if it were the right product I would be quite happy for it to be spread quite a long way up but it has to be the right product. Firstly, simple; secondly, affordable; thirdly fair. We have now eventually, after those 20 years, got an interesting consensus from four directions as to how it should be done and we need to move forward with that. The consensus is based on taxing at the marginal rate but then providing a simple rebate or, for example, a flat rate cut in the marginal rate of 15% off every marginal rate. That's come from the Henry Review, it's come from the Industry Super Network, from the ACTU and ACOSS, and we only did half of that, and it is very good that it was done, the bit that particularly focussed on those that are worse off but those of us who are particularly concerned about disadvantaged people.

Also for the reasons the Ministers have rightly emphasised, we are very concerned about how we get the money to do the things that need to be done and there is a lot of wasted money. More importantly of all, perhaps, you can't spread this product until it has those characteristics that I described. So this continual call over the last two years, "Don't keep constantly changing", I'm afraid it doesn't cut any ice with me. There has been a civil method there from the beginning.

I want to finish by saying when the scheme was brought in, in a sense the labour market was changing under its feet and it was brought in at a time when there was a firm retirement age. Work patterns are different from what they are now or from what we want or will have to accept they are going to be in the future and it is out of date with the focus on an assumption that there is a day in full work and then you are retired and out of it. It is also out of date in not understanding that there is mid-life needs that need assistance with saving.

So what a number of us have proposed is a life-long savings accounts which provides forms of assistance for saving over the life cycle. There have been two steps in that direction in recent years but in a way they show the need to integrate it. There has been the first home saver's account and a recent initiative announced in relation to small savings in banks.

Overseas you will find they are moving towards a life-long savings account. Singapore has it in a patchy messy way better than ours but we need to get ahead of the game. It is all trying to spread out the incentive to save and the ability to draw to a reasonable extent on savings over your life.

PAUL CLITHEROE:

Darren Yates.

DARREN YATES:

I might start by saying I'm not a baby boomer and I'm a bit more nervous than I was a couple of days ago after all this discussion. It is positive to hear Everald and Barry saying they want to work beyond 65 years of age and hopefully many more Australians think that as well on behalf of our generation.

There have been quite a few issues raised over the last day and a half. I work in a tax practice in Albury and one thing I find on one reason why a lot of these issues are raised, such as Division 7A, sham contracting, various entity structures and complex groups etcetera, it is firstly because there is a culture, as Julian alluded to earlier. There is a culture in Australia of wanting to not pay the tax man. What so many people do instead of that is pay the money to a bank account, or when they are negative gearing on property and that sort of thing, which is a shame and people don't appreciate that. I think what has led to that culture is the difference in tax rates that personal individuals pay relative to companies. So that differential is really forcing people down that path. So over the long-term I would love to see those differences in rates be brought closer together.

PAUL CLITHEROE:

Ladies and gentlemen, we are rapidly running out of time here. My apologise, I think I managed to get everyone and some people a couple of times. Thank you for being brief, particularly the second time. It is appropriate, given the amount of talk about ageing and all these other issues and the working age, I think we should leave the last word to the birthday boy.

EVERALD COMPTON:

Can all this goodwill about my birthday continue for the next couple of years?

PAUL CLITHEROE:

You have got another 18 hours.

EVERALD COMPTON:

Could I ask that we look at the whole issue of simplicity with superannuation? I want to say it started in an age that is totally different to the age we are in now and, despite the efforts of my friend Bill Shorten to fix it up, it is inadequate to the way in which we are going ahead
. We will have to come to a point where we say "Let's scrap the scheme that we have got now". It is about in as good a state as the Greek economy. What we need to do is to give Bill Shorten authority to start a taskforce that says we will have a brand new superannuation system from 2015. We start afresh and look to what is needed in the future. All new people coming into the workforce in 2015 go onto that. Everybody that is in the existing one, they just keep going until they die and when they all die we will have the biggest national wake in the history of Australia because it is an irrelevance now. I think we should give Bill Shorten an authority to start again.

PAUL CLITHEROE:

You have got to talk to the boss there. Are you feeling safe, boss? All right. Thank you so much. I don't know what you think. I think it has been an interesting session with some real guts. I will leave you with my thought. I rather suspect the word "retirement" didn't exist 100 years ago. I suspect the word "retirement" may not get around as I get into my latter years, otherwise I wonder about how my red wine habit is going to sustain itself, particularly after Mr Carnegie and Lin is finished with me. I am happy to join you and work on. That's the end of me, ladies and gentlemen. You have seen the back of me. Michael Pascoe will be handling the last session. I will be observing. Thank you for your time. We move back here after lunch.