The Second View

21.108. The second view adopts the proposals advanced in the first view, subject to five main differences. The first difference requires that a reasonable benefit from an approved superannuation fund, as described in the following paragraphs, should be a standard amount for which any employee or self-employed person may qualify. The amount of saving made by a person or in respect of him to be tax-assisted, up to a common stated maximum, will depend on capacity to save.

21.109. The second of the five differences is connected with the first and requires that the maximum amounts of contributions to an approved fund to be allowed as tax deductions should be limited only by a requirement that the standard amount of total benefit should be gradually built up.

21.110. The third difference requires that only benefits flowing from an approved superannuation fund should receive the forward-spreading treatment described in paragraph 21.77. This treatment involves a concession which should apply only to receipts that may fairly be said to be the return to the taxpayer of income invested by him or in respect of him by his employer in long-term saving the consumption of which has thus been deferred. Other receipts should be subject to anti-bunching provisions of the type proposed in Chapter 23 (paragraphs 23.34–23.37) for capital gains, unless applied in the purchase of an annuity in accordance with paragraph 21.73. Alternatively, the taxpayer would be able to make use of the income-equalisation scheme proposed by the Committee in Chapter 14.

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21.111. The fourth difference requires that an employee's interest in contributions made in respect of him by his employer, after a qualifying period, should be vested, in the sense that on retirement these contributions and accumulations of income will be available to him, or on ceasing to be a member of the fund other than by retirement they will be retained for him in the fund until he reaches retiring age, or they will be transferred to his account with another approved fund, or they will be paid to him and attract income tax. If the tax law gives its assistance to savings that are subject to forfeiture on the employee leaving his employment, it is assisting the restriction on mobility of labour that the prospect of forfeiture involves.

21.112. The fifth difference requires that there should be a complete assimilation of the tax treatment of a lump sum paid on retirement and a pension paid on retirement from an approved superannuation fund.

21.113. The first, second, fourth and fifth differences, more especially the fourth, would cause difficulties for many existing superannuation schemes and it would be necessary to give effect to them by new law which would apply to a person who is not a member of an existing scheme or who withdraws from an existing scheme.

21.114. This new law would seek to give effect to the following principles:

  • (a) The maximum amount of long-term saving for which any tax assistance can be expected should be the same for everyone.
  • (b) The maximum amount of the deduction against earned income available to a person for contributions to an approved superannuation fund should be the same for everyone.
  • (c) Contributions made by an employer in respect of his employee to an approved fund should be treated as income of the employee, but the total of those contributions and the employee's own contributions would be allowable deductions by the employee within the amount referred to in (b). Equality of treatment of the employed person and the self-employed person would in this way be assured.
  • (d) The fund to which contributions would be made must be an ‘approved’ fund—i.e. approved by the Commissioner or some other government authority which may take over his function. A cardinal condition of approval should be that an employee's interest in contributions made in respect of him by his employer is vested, in the sense explained in paragraph 21.111.
  • (e) To be approved a fund should give to the taxpayer a right to receive all contributions and accumulations in the form of a lump sum on his retirement. He may elect to take a pension, in which event he will be taxed on a notional receipt of the lump sum and will be taxed on pension receipts as if he had received the lump sum and then applied it in payment for the pension. In the result, the amount of each pension receipt that is a return of the payment for the pension will be free of tax. Equality of treatment of a lump-sum receipt and a pension would in this way be assured.
  • (f) A lump-sum receipt from an approved superannuation scheme should receive special income tax treatment, a portion up to a stated amount being exempt from tax and a further portion, where applicable, being subject to forward spreading. In today's circumstances, up to the first $50,000, say,

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    should be exempt from tax and up to a further $100,000 subjected to forward spreading over ten years by the method shown in paragraph 21.76(b).
  • (g) When the new law comes into operation, only schemes complying with it should be allowed to admit new members; and a person by or in respect of whom contributions continue to be made to a fund approved under the old law should not be entitled to join a fund complying with the new law.

21.115. The way in which some of these principles would be expressed in the details of the proposed law requires some elaboration.

21.116. The amount of tax-assisted saving. At present prices tax-assisted saving might be set at $150,000. The authority supervising approval of funds would need to be satisfied by the trustees of a fund that any member's estimated entitlement will not exceed the maximum on his retirement. For this purpose the authority need only be concerned with the amounts already standing to the credit of the employee or self-employed person and the estimated earning rate of the fund. If it appears that the maximum will be exceeded, the fund would not be allowed to accept contributions by, or in respect of, the taxpayer.

21.117. Contributions to the fund. The amount of contributions that may be made to a fund and that will be deductible against earned income should be set at a figure which, if made over a period of the full working life, will produce with accumulations an amount not exceeding $150,000, with provision for benefit on early retirement due to ill health and for dependants on the taxpayer's death. There should, however, be some increase in the amount of deductible contributions with the age of the taxpayer to allow for later entry into a scheme and to take account of inflation. The amount of contributions deductible should be reviewed annually. The employer's contributions to an approved fund are treated as employee contributions. The deductibility by the employer of his contributions will follow general principles in regard to the deduction by an employer of salary paid to his employee.

21.118. It is not contemplated that the increase in allowable deductions by reference to the age of the taxpayer should be such as to make any substantial allowance for late entry. Tax assistance should be given only to long-term saving.

21.119. Approved funds. The tests of approval should be applied to all schemes in respect of which tax assistance is claimed. Thus a fund that does not give an employee a vested interest in the employer's contributions would not be approved under the new law. Only an amount received on retirement standing to the credit of the employee's account in an approved fund would receive the treatment proposed in paragraph 21.114 (f). Exemption from tax on its income would be available only to an approved fund. Contributions would be deductible only if made to such a fund.

21.120. The taxing of receipts from an approved fund. Provided the amount received does not exceed the ceiling of $150,000, it will be taxed as proposed in paragraph 21.114 (f) if the taxpayer is over fifty-five or it is paid as a result of the death of the contributor or his early retirement due to ill health. The supervision of approved funds will not always ensure that the taxpayer's entitlement does not exceed this figure. To the extent that it does, the receipt by the taxpayer should be subject to tax in the same fashion as an unfunded retiring allowance.

21.121. If the taxpayer is not yet fifty-five at the time of the receipt and he has not retired due to ill health, the receipt should be treated as an unfunded retiring allowance and taxed as proposed in paragraph 21.110. However, the taxpayer should be

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allowed a deduction of a contribution he makes to another fund subject to the new law, and the fund should be allowed to accept his contribution, provided the contribution will not involve the consequence that the taxpayer's entitlement on retirement will exceed the maximum of $150,000. He will thus ‘roll-over’ his entitlement from one new fund into another.

21.122. A taxpayer who, in similar circumstances, receives an amount from a fund approved under the old law should also be allowed a deduction of any part of it contributed to a fund approved under the new law, subject to the same qualification. He will thus ‘roll-over’ his entitlement from an old fund into a new fund.

21.123. The phasing out of funds approved under the old law. The fact that only funds approved under the new law would be allowed to take in new members and the restrictions that would preclude a continuing member of a fund approved under the old law from joining a new fund, must in time ensure that old funds disappear. It might however be anticipated that old funds will tend to be converted to new funds.

21.124. Some employer-employee funds would continue, but the financial advantages of new funds for employees, other than those on high incomes, would generate a significant pressure for conversion. In addition, pressure for conversion would arise from the vesting of an employee's interest under the new law, which may not be available under the old law.