Comparison of the Two Views.

21.125. The two views put forward are alternatives but it is of course possible to construct other alternatives combining aspects of each. The Committee does not express a preference for one view over the other, and some members of the Committee would not wish to commit themselves to certain aspects of each view.

21.126. A comparison of the major aspects of the two views is briefly summarised in the following paragraphs.

21.127. The first view, in its application to employee superannuation, follows closely the present law in giving tax concessions to provisions for retirement benefits, which may not always involve long-term saving, if they are considered reasonable having regard to earnings from employment. The second view believes that tax concessions should be given only to long-term saving and that there should be a maximum standard tax-assisted benefit available to all persons in employment but not directly related to their employment earnings.

21.128. The first view also follows the present law in giving concessional tax treatment to a lump-sum payment on retirement whether or not any provision has been built up to meet the payment. Under the second view a lump-sum benefit paid on retirement other than from funds that have been built up from long-term saving would not receive any tax concession. Thus a non-funded benefit received from a scheme of the type now generally used in the public sector would not qualify for any concessional treatment in the hands of the recipient.

21.129. The basic approaches of the two views to achieve parity in taxing a pension benefit and a lump-sum benefit also differ. Under the first view pensions would continue to be fully taxable as at present and lump-sum benefits would fall to be taxed on the assumption that the total amount was to be paid by equal annual instalments over the fifteen years subsequent to retirement and that this instalment would be the sole annual income of the recipient in that period. Admittedly, true parity would not be

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achieved in this way in many instances. Under the second view parity would be sought by requiring that on his retirement an employee should always be entitled to take a lump-sum benefit. The first $50,000 of this lump sum would be exempt from tax and the balance of up to $100,000 would be subject to forward spreading on the basis applying under the first view but over a ten-year period. If the retired person elected to take a pension, he would be taxed at the time of election as if he had received a lump sum, and he would be exempt from tax on so much of the pension receipts as represented the sum he had applied in purchasing the pension. Parity in taxing a lump sum and a pension flowing from an approved fund would thus be substantially achieved.

21.130. Under the first view an employer would be able, subject to the Commissioner's discretion to disallow irregular contributions, to make tax deductible contributions for the later years of an employee's service in an effort to ensure that his total retirement benefit was reasonable in relation to his remuneration close to retirement and these contributions would not be income of the employee. Under the second view, where the approach is that only long-term saving should qualify for tax assistance, the consequence might be different. Although the employer would obtain a deduction for an additional contribution to meet this eventuality, the employee might be taxed on the additional contribution: he could fail to obtain a deduction for the contribution, which would have been treated as his income, because it exceeded the set maximum annual contribution for a person in his circumstances.

21.131. Under the first view it is not proposed that there should be a requirement that the employer's contribution for an employee's benefit be vested. Under the second view it is a basic principle that a contribution by an employer to an approved fund is to be allocated as being for the benefit of identified employees. The approach of the second view will therefore impose vesting on benefits flowing from contributions by both the employer and the employee to an approved fund.

21.132. Expenses in varying trust deeds to fit in with the first view should be minor and thereafter there ought to be no continuing added costs. Under the second view, which requires more substantial changes to the rules of existing funds, and in some cases the institution of new funds and the running down of old ones, the initial administrative costs could tend to be heavy. It also seems that there will be heavier continuing administrative costs under the second view due to the requirement to keep separate accounts for the contributions and share of earnings of all members of the fund, including some members who have left the employer's service but have not yet reached retiring age. In addition each employee would need to be advised annually of the employer's contribution to the approved fund for his benefit.

21.133. In the first view the present flexibility in the adoption of a type of fund—for example, an accumulating fund or an actuarial-type deferred benefit fund—would continue. Under the second view an accumulation-type fund only would in practice be permitted. An actuarial-type fund, which is now used by many business organisations, would be incompatible with the requirements of the second view: these funds by their very nature do not identify a specific contribution for each member or the annual division of the total fund in proportion to the actuarial liability of the benefit planned for each member on retirement.