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Older people reliant on the Age Pension as their principal source of income, fear that they will be worse off following the implementation of the Coalition Government's plans for tax reform.
After careful consideration of the package, COTA believes that the Government has failed to convince age pensioners with little or no additional private income, that they will not be disadvantaged by the reforms.
We are perturbed by this because COTA believes that tax reform is essential.
The Government has insisted that pensioners will be looked after under the package. However, this is not very clear from the information presented to date. Older people on the age pension are at risk of being worse off. Many older people find this level of risk unacceptable.
Food is not excluded from the GST. This is a serious deficiency in the package. Age pensioner households spend on average around 28 per cent of their weekly budget on food whereas wage and salary earner households only spend around 18 per cent. COTA is of the view that the Government should be able to demonstrate how pensioners will be better off. It has failed so far to do this.
The Government should remember that it is not so long ago that it lost the trust of older people when it tried to shift more of the cost of aged care on to frail older people themselves.
Older people have suffered cuts to important programs and services such as the Commonwealth Dental Health Program. They are subject to more user charges including more for Home and Community Care. They are experiencing ever longer waits for treatment in public hospitals.
We must be clear that this tax package is not just about personal incomes. It is also about the cuts to services which are helping to pay for the generous compensation to middle and high income groups.
A most serious anomaly in the tax package relates to the rebates for private health insurance amounting to nearly $7 billion over 4 years. While the 30 per cent rebate on private health insurance will make it more affordable for some older people, it will continue to remain out of reach of many, especially those on the lowest incomes.
Furthermore, private health insurers have a history of absorbing the value of rebates in increased premiums.
COTA considers that the Government would be more successful in convincing pensioners it is genuinely concerned with their well-being by improving quality and access to public hospitals.
It will rankle with many older people that the Government is able to afford $7 billion to subsidise private health insurance but will not be able to afford a decent public hospital system - and for that matter - good dental health services and other important community care programs.
The message is clear. There are over 1.1 million people who receive a full pension. There are also many non-pensioners on low incomes. Many of these people are doing their own calculations and believe they will be the worse off under tax reform.
COTA calls on the Prime Minister to show his leadership and commit his Government to review the levels of direct and indirect compensation to pensioners.
Without that commitment, COTA regrettably cannot support this tax reform package.
In assessing the tax reform package, it is important to understand its key purposes and design features.
At the centre of the tax package is the 10 per cent Goods and Services Tax (GST) which is levied at all stages of production and distribution. While sales tax has randomly been applied to some goods in the past, the GST covers most goods and services, greatly expanding the tax base.
There are few items that are excluded from the GST. They include goods and services in the health, education and community services areas. Those important to older people are discussed under benchmark 3 further on in this paper.
A GST consists of both input taxes and output taxes. A GST paid by the business on its purchase of goods and services is an input tax. A GST charged on its sales is an output tax.
The input tax is subtracted from the output tax for a given period to give the amount of GST payable to the Australian Tax Office (ATO) for that period. A GST is paid (as an input tax) and collected (as an output tax) by businesses and organisations registered with the ATO. Registered persons will lodge GST returns to the ATO either monthly or quarterly
Where the output tax paid exceeds the input tax, payment of the excess output tax is forwarded to the ATO. If the input tax exceeds the output tax, the ATO will refund the excess.
The Government claims that GST provides important benefits to business:
Some business groups argue that the GST imposes considerable burden in terms of administration and record-keeping.
The GST requires a range of compensation measures to different population groups. Those relevant to older people are discussed below.
The GST would abolish 10 taxes.
Only one of these is a Commonwealth tax but it is the most signifcant of the taxes to be abolished - the wholesale sales tax.
The nine state taxes to be abolished are:
The tax package would see reform of excise duties on petrol, diesel, alcohol and tobacco.
The Government is proposing to reduce excise on petrol and diesel. Although subject to a GST, registered businesses will be able to claim an input tax credit for the GST payable on fuel for business purposes.
In addition, there will be a diesel fuel credit for registered businesses which is paid through the GST system. This may reduce transport costs in rural and remote areas.
There will be luxury car tax imposed of 25 per cent on a car valued at $60,000 or over.
The GST revenue would substitute for Financial Assistance Grants currently paid to the States and Territories. This would give the States and Territories a guaranteed source of revenue and allow the abolition of a number of regressive and inefficient state taxes.
The fourth major strand of the tax package relates to changes to personal income tax. The tax package delivers substantial benefits to income tax payers by changes to marginal tax rates, tax thresholds and tax scales.
| Current scale taxable income | Current tax rate % | New scale taxable income | New tax rate % |
|---|---|---|---|
| $0-5,400 | 0 | $0-6,000 | 0 |
| $5,401-20,700 | 20 | $6,001-20,000 | 17 |
| $20,701-38,000 | 34 | $20,000-50,000 | 30 |
| $38,001-50,000 | 43 | ||
| $50,001 | 47 | $50,001-75,000 | 40 |
| $75,001 | 47 |
Source: Tax Reform: not a new tax, a new tax system
The personal income tax cuts are the major selling point of the package.
These tax benefits are paid for from the projected Budget surplus. The effect of the GST itself is more or less revenue neutral.
| Year | 1999-2000 | 2000-01 | 2001-02 | 2002-03 |
|---|---|---|---|---|
| Budget Surplus | 4.73 | 8.61 | 14.59 | not available |
| personal income tax cuts | -13.06 | -13.52 | -14.49 | |
| total of all other revenue measures | -1.16 | 8.3 | 8.72 | 7.24 |
| impact on underlying C'wealth budget | -1.16 | -4.76 | -4.80 | - 7.25 |
| Adjusted Budget Balance | 3.57 | 3.85 | 9.79 | not available |
Sources: 1998-99 Budget Paper No 1 and Tax Reform: not a new tax, a new tax system.
The Government's capacity to pay for the income tax cuts is predicated on the assumption that there will be a rate of economic growth of 3.5 per cent. However, a number of commentators have speculated that the Asian economic crisis may yet have an effect in terms of investment and growth in Australia, reducing growth levels in forward years. This in turn would reduce the revenue take of Government and erode the projected Budget surplus.
In addition, we note that the tax scales have not been adjusted since 1993 and 7 years will have elapsed before they are adjusted in 2000. No mention has been made of indexing the rates.
There are questions about some areas of health and community services in terms of exclusion from the GST.
As far as COTA is concerned, the sustainability of the tax package depends on:
Prior to the release of the Coalition Government's Tax Reform Package, the Council on the Ageing developed a set of benchmarks for assessing the package. Our assessment of the Tax Package is based on our benchmarks. In addition, our discussion under each of the benchmarks provides important descriptive information about the nature of the tax package derived from the Government's Tax Reform: not a new tax but a new tax system document.
In the first instance COTA has been concerned that older people as a group are not worse off under the proposals. We have excluded wealthy people from consideration in this analysis as they are generally well placed to protect their own interests in the event of any government policy change. In this context, the wealthy are defined as those with incomes in the top 10 per cent of people aged 65 and over.
The Government claims that older people generally will not be worse off under the proposed compensation measures.
There is a range of compensation measures for older people as full pensioners, part pensioners or self-funded retirees which would come into effect from 1 July 2000.
There are two types of compensation for the GST involved in the tax reform package: income compensation and assets compensation. In addition to these compensations for the GST, the Government has brought in a secondary policy objective of encouraging private health insurance. This could be seen in a third category as an inducement rather than a compensation. The elements of the income and assets compensation and the inducement are described in the boxes on pages 11 and 12.
The question we pose under the first benchmark is whether or not any major groups of older people will be worse off under the tax reform proposal.
Many older people will obtain considerable benefit from the savings and supplementary bonuses, the refundable imputation credits, the private health insurance rebates and the easing of the pension taper rate. Most of these beneficiaries will be the better off part- pensioners and non-pensioner retirees.
The Government holds the view that older people will be over-compensated for the GST and will generally have more disposable income than they do at present. The table below shows the net benefit to different groups of retired people from the tax package after the cost of living adjustment for the GST.
| Pension
increase
The Government believes that the GST will have an overall price effect of 1.9 per cent. The package provides for a 4 per cent increase in the maximum rate of the Age Pension and all other social security and veterans' payments. The Government believes this four per cent rise will over-compensate for the price effect. It has also made a commitment to keep social security and veteran's payments 1.5 per cent higher than what they would have been had normal indexation arrangements applied. The major payments relevant to older people are: Age Pension Age service pension Carer payment Mature age allowance Rent assistance Bereavement allowance Pharmaceutical allowance Veterans' allowances Telephone allowance Remote area allowance Easing of the pension taper rate The lowering of the pension withdrawal rate from 50 cents to 40 cents in the dollar will give 45,000 additional self funded retirees some pension income and a concession card. The 845,000 part-rate pensioners will be able to keep an extra 10 cents of pension for every dollar of private income they receive above the income test free areas. |
Pension income test
The Coalition Government proposes a 2.5 per cent increase in the income test free areas applied to all pensions and benefits. For a single age pensioner the free area increases from $50 per week to $51.25 per week. COTA believes the income test free areas should be indexed annually. This 2.5 per cent increase is only a catch-up from when it was last adjusted on 1 July 1996. The cut-off income level to receive some age pension will rise from $22,750 to $28,850 for singles and from $38,200 to $48,330 for couples. Income tax cuts Older people with taxable income will benefit from the income tax cuts. The tax-free threshold is increased to $6000 per year. The new tax scales are indicated in the table below. COTA notes that the new tax threshold of $6000 would have been achieved had it been subject to normal CPI adjustment in any case. Pensioner rebate There will be an increase in the Pensioner Tax Rebate and the Tax Rebate for low income aged persons of $250 a year for single people and $175 for each of a married couple. The Government estimates that an additional 70,000 pensioners and self-funded retirees will not pay tax and 330,000 older people will have their tax reduced as a result of this measure. |
| Aged persons
savings bonus
Older people of pension eligible age will receive a maximum of $1000 savings bonus as a one-off payment phased out between incomes of $20,000 and $30,000. This is an untaxed payment to people aged 60 and over who draw some private income from savings and investment including superannuation and annuities. The Government pays $1 for each $1 of net personal income from savings and investments. Self funded retirees supplementary bonus Lower income self-funded retirees will benefit from an untaxed supplementary bonus available to people of age pension age on 1 July 2000 but not in receipt of a pension. It is worth a maximum of $2000 per person phased out between $20,000 and $30,000 of taxable income as a one-off payment. The Government pays $1 for each $1 of net personal income from savings and investments. This is a lump sum payment in lieu of an income supplement of $200 per year for 10 years. The personal income from savings and investments can be assessed for either 1998-99 or 1999-2000. |
Refundable imputation credits
Self funded retirees and part pensioners with shares may benefit from refundable franking credits. The introduction of refundable imputation credits mean that people on tax scales below that imposed on company dividends can get the full benefits from these credits and potentially could mean a significant increase in income for some people. The tax document gives an example of a person with a taxable income of $12,000 getting a benefit of 20 per cent in income from this measure. Provisional tax Some older people will benefit from the abolition of provisional tax Capital gains tax A capital gain arising from the disposal of an active asset of a business qualifies for a CGT exemption where the proceeds are used for retirement. |
| Private health insurance
People with private health insurance will benefit from the private health insurance rebates which are 30 per cent of premiums. The rebate will not be means tested. It will be paid as either a tax rebate on asessment or as a direct payment from the Government. |
COTA has identified a number of problems with the compensation package particularly for pensioners, but also for low income non-pensioners.
The Government's figures are based on the assumption of a population-wide Consumer Price Index (CPI). That is to say an "average" basket of goods and services for the population as a whole.
The basket of goods used for the CPI does not reflect the consumption patterns of older Australians. Consequently the level of compensation for those who rely entirely or mostly on the pension will be too low.
Older people spend more on food, health-related items and energy (gas and electricity) as a proportion of their income than the rest of the community. Food and energy and many medical services and medicines (those not covered by Medicare or the PBS) will be subject to a GST.
The table on page 15 shows that for the lowest income groups, the margin for error, if expenditure patterns exceed the CPI average is very slender and that there is a likelihood many older people could be worse off.
COTA has serious concerns that this CPI measure does not adequately reflect the expenditure patterns of older people.
In 2000 the ratio of pension to MTAWE will exceed 25 per cent. There is no assurance from the Government that the higher relativity will be maintained. On the contrary, the Government has indicated its intention to maintain the pension at 25 per cent of MTAWE. This means compensation built into the pension can be whittled away through CPI increases not being passed on.
There is a further problem in relation to the Government's legislated commitment to maintain the Age Pension at 25 per cent of Male Total Average Weekly Earning. The pension (an income) is measured against MTAWE (an income item). The compensation of 4 per cent is on CPI which is an expenditure index.
MTAWE will be relatively more valuable to the wage earner as income tax bracket changes will increase the take home pay. To maintain pension/wage relativity, the benchmark for the pension will need to be increased.
Over recent years, the commitment of the Commonwealth Government to MTAWE has been based on an assumption that 25 per cent of MTAWE provides pensioners with a benchmark for determining adequacy of the pension in comparison to the rest of the community. It is a benchmark which, in effect, has tracked wage rises.
However, the tax cuts erode the relevance of the MTAWE commitment because, although MTAWE stays the same, the disposable income of working people is improved taking account of the GST cost of living adjustment.
COTA believes to maintain the relativitiy of the pension to MTAWE, the 25 per cent benchmark must be adjusted upwards. This will then recognise the relativity of pension to MTAWE.
State housing authorities generally charge between 20 and 25 per cent of gross income for public rental accommodation.
COTA is concerned that the compensation in the form of increased pension payments for low income older people will be absorbed by the state housing authorities.
The effect of the GST on private renters will need to be closely monitored as pensioners in private rental are a very disadvantaged group.
Landlords do not charge a GST but they do pay GST on their inputs - they are input-taxed. This is likely to mean a price effect on rents even though they are not subject to a GST.
While rent assistance will be increased by 4 per cent along with all other social security payments, the situation for private renters is nevertheless uncertain.
The Government has stated that the pension increase will be paid from 1 July 2000 while acknowledging that some state charges will not be removed until half way through the year. It is possible that the compensation will not be adequate in the first year for this reason.
In assessing the tax package COTA has looked to its overall fairness. The Government's own figures presented between pages 199 and 203 of the document Tax Reform: not a new tax, a new tax system would appear to show that the package delivers substantial benefits to higher income groups rather than low income groups.
We have constructed a summary table of the net benefits from the tax package.
| Private income | Net benefit to single age pensioner | Net benefit to age pensioner couple | Net benefit to single self funded retiree | Net benefit to self-funded retiree couple |
|---|---|---|---|---|
| $0 | $2.90 | $4.81 | $0 | $0 |
| $5000 | $9.43 | $6.17 | $3 | $7.51 |
| $10,000 | $19.05 | $23.48 | $1.21 | $5.94 |
| $20,000 | $25.06 | $36.51 | $9.70 | $2.42 |
| $30,000 | $53.14 | $7.78 | $18.06 | |
| $40,000 | $50.42 | $16.66 | $18.16 | |
| $50,000 | $39.60 | $15 | ||
| $60,000 | $51.18 | $15.56 | ||
| $80,000 | $67.62 | $33.31 | ||
| $100,000 | $63.93 | $79.20 |
Source: Tables pp 199-203, Tax Reform: not a new tax, a new tax system
A single full pensioner, with no or little private income, receives a $6.48 per week pension increase to cover the GST effect. $3.60 is absorbed in a cost of living adjustment, leaving a net benefit of $2.90 or 1.5 per cent net increase.
A married couple on full pension with little or no private income is in the same position. They have a pension rise of $10.82. $6 is absorbed in a cost of living adjustment leaving a net benefit of $4.81.
On the other hand, high income self-funded retirees and well-off people seem to do well out of a combination of income tax cuts, changes to provisional tax, franking credits, savings bonuses, and private health insurance rebates.
They will benefit from income tax cuts on an ongoing basis. A single retired person on a private income of $45,000 will get a tax cut benefit of $40 per week, of which only
$11.61 is absorbed by the cost of living adjustment, leaving a net benefit of $28 per week.
A retired married couple on $90,000 receives a net tax benefit of $56.26.
The compensation package provides higher compensation to those with higher incomes.
The compensation package does not provide assistance to those close to retirement or retired and under 60.
These groups are not eligible for the aged persons savings bonus or the self funded retirees supplementary bonus
This is a serious anomaly given that early retirement is commonplace and yet those under 60 do not receive compensation for the effect of the GST on the value of their savings.
Many people still in paid employment or unemployed, but coming towards the end of their working life, will also find that the value of their savings on which they have paid tax all their lives has been eroded and they will not benefit from tax cuts.
The 30 per cent rebate on private health insurance benefits the higher income groups more than lower income groups who will still not be able to afford to buy private health insurance.
The Government is using the term GST-free in place of zero-rated. This means a business neither pays input tax on purchases nor charges an output tax (GST) on the sale of goods and services.
Most health costs and community services are zero-rated or GST- free but food is not. COTA has welcomed the Government's exclusion of health and community services from the GST.
The Government has indicated that the precise scope of health services for the aged that will be GST-free will be the subject of consultation following the election (Treasury Fact Sheet 233).
GST-free medical services will cover:
A full list of GST-free medical services will be decided at a later date
Health care at hospitals, nursing homes and hostels will be GST free.
COTA is seeking to ensure that all prescribed services in nursing homes are GST-free. These cover accommodation, furnishings, bedding, laundry, toiletries, cleaning services, meals, maintenance of premises, staff on call, bathing, toileting, dressing, mobility, continence management, communication, rehabilitation support, recreation, nursing and personal care services and equipment, basic pharmaceuticals, therapy services and oxygen.
So far, the Government has advised that goods and services to nursing home residents will be GST-free in the course of treatment or care. Additional charges for services such as haircuts and TV hire will be subject to the GST.
Medical appliances for people with severe medical conditions will be GST-free, including wheel chairs, crutches and artificial limbs.
The precise scope is still to be worked out.
Nursing home services provided to older people in their own homes, including Home and Community Care (HACC) services, will be GST-free but it is not clear if this will apply to services that are contracted out.
GST free will include: charitable activities of charities, public benevolent institutions, community groups and religious organisations.
Non commercial supplies of goods and services will also be GST free.
The commercial activities of these bodies will be taxable. The impact of this measure is uncertain but may decrease subsidies from the commercial operations to the charitable activities.
The impact of limiting packaging of salaries in charitable organisations is yet to be assessed.
Separate charges for health services received within a retirement village will be GST-free.
NB The construction and sale of new homes will be subject to the GST in the normal manner even where the home is part of a retirement complex. The sale of an existing home will not be taxed.
Pharmaceuticals provided under prescription through the Pharmaceutical Benefits Scheme will be GST-free.
There are questions though about over-the-counter medicines. These medicines include painkillers, antacids, cough and cold medicines, antihistamines, creams and lotions to manage conditions such as eczema and thrush, appliances such as nebulisers, dressings and swabs. Older people have high levels of use of these medical items.
The Pharmacy Guild has asked the Tax Consultative Committee to extend the GST free provision to:
A final list of qualifying drugs is to be determined.
As food and non-prescription medicines are very significant items of expenditure in the Budget's of older people, they are disadvantaged by the overall structure of the tax package.
It is worth noting that the non-commercial activities of government are outside the scope of the GST.
The following are GST-free:
Gas and electricity are subject to a GST.
COTA has concerns for the reasons stated above that the compensation may not be adequate especially in light of the inclusion of all food in the GST.
The Australian Bureau of Statistics in a paper on the Feasibility of Constructing Price Indexes for Special Population Groups (1995) presents information to show that age pensioner households spend almost 28 per cent of income on food compared to 18.5 per cent for wage and salary earner households.
COTA believes that food should be GST-free but in the event it is not, compensation should be dramatically improved.
COTA is not convinced that low income older people in rural and remote areas will be adequately compensated.
While the price of fuel may decline with the changes to fuel excise, many highly priced goods and services in rural and remote areas compared to urban areas, including food, household services, electricity and gas, will be subject to a GST.
Prices may fall, however, for some goods and services as a result of reduction in diesel and petrol prices.
The impact of the tax reform on rural and remote areas is yet to be assessed by COTA.
The mechanism that the Government has chosen to ensure that the rate of the GST will not rise over the long term is by giving each State Government and both Houses of the Australian Parliament a veto over any rate rise.
Some commentators have suggested that the GST could become a growth tax for the States.
However, the guarantee that the rate will not rise is a reasonable one in the circumstances.
As far as COTA is concerned, the sustainability of the tax package depends on:
One of COTA's most significant concerns is that little attention has been paid in the tax package to Government expenditure in important social programs and infrastructure. On the contrary, the package is based on the vast expenditure cuts which are included in forward estimates into the next century.
One of the primary purposes of tax reform has been to improve Australia's declining revenue base.
Over the last few years there have been massive expenditure cuts affecting services to older people as the Government has sought to get the Budget into surplus.
Older people have paid for the Budget surplus through increased user charges, delays in getting services, waiting lists for treatment or not getting services at all.
These are all real and tangible costs to older Australians.
The tax package does not compensate for these costs. The Government has not indicated that it will bring expenditure on essential services and community infrastructure up to a more acceptable level in terms of need.
The Government has chosen to spend the revenue garnered from tax reform on income tax cuts to middle and high income earners.
As noted in the introduction, this is a most serious issue for older people. The $7 billion that is being spent on these tax rebates is highly wasteful. The money would have been a significant boost to public hospitals.
COTA has argued for many years that private health insurance should not be propped up by Government. Rebates are a form of industry protection and forestall the much required structural reform of this out-moded industry sector. The $7 billion will bring about little or no new services but it will boost entrepreneurs' incomes. COTA with the Australian Consumers' Association has recently undertaken an extensive analysis of our health system. This is available through COTA or the ACA website at www.choice.com.au.
The $7 billion for private health insurance subsidies needs to be set against the wide range of cuts to services for older people:
COTA believes that the tax package damages the progressive nature of Australia's tax system. It skews benefits to higher income earners. Higher income earners benefit in both absolute and relative terms. This is readily apparent from the tables presented by the Government in the main document on tax reform.
The tax rebates for private health insurance are very regressive benefiting high income earners.
The Government would appear to have gone some way to repairing the tax base in their proposal but a full picture is yet to emerge of how thorough the approach is. COTA is not pleased that the Government is foregoing this opportunity to close more tax avoidance loopholes.
One of the most positive aspects of the package is that trusts will be taxed on the same basis as companies.
The GST revenue will replace Commonwealth payments to the States specifically the Financial Assistance Grants (FAGs). These are untied payments from the Commonwealth to the States for general purposes.
A critical question concerns, however, the fate of Specific Purpose Payments paid by the Commonwealth to the States and Territories.
The Specific Purpose Payments provide funds for important social programs funded by the Commonwealth.
They include payments for Home and Community Care and public hospitals. It is not clear how these programs will be affected by the changed funding arrangements.
COTA is concerned that the tax package places too much emphasis on income tax cuts.
One of the greatest dangers of the package is the assumption that GDP growth targets will be achieved. If they are not achieved the Government will have three alternatives. It will have to renege on its income tax promises, run a deficit or cut expenditure.
COTA fears that the Government would again turn to expenditure cuts in important social programs and infrastructure to finance its income tax promises.
We are unable to make a judgement about the efficacy of the tax package against this criterion at this stage except to note that there is a potential for improved economic performance in that:
Copyright © 1997 Council on the Ageing.
All rights reserved.
Revised: 23 October, 2001; Dec 2002
COTA National Seniors Policy Secretariat [formerly Council
on the Ageing (Australia)
Level 2, 3 Bowen Crescent, Melbourne Vic 3004
Tel (03) 9820 2655 Fax (03) 9820 9886
email cota@cota.org.au