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05 May 14 Commission of Audit taxation and superannuation recommendations

On 1 May 2014 the Treasurer released the report of the National Commission of Audit: Towards Responsible Government. Phase 1 of the report contains 64 recommendations. Phase 2 makes a further 22 recommendations.

The following is a summary of those recommendations in Phase 1 that have taxation and superannuation implications.

Recommendation 1: Fiscal framework and rules

The Commission recommends the Government adopt a high-level fiscal strategy which seeks to achieve underlying cash surpluses, on average, over the cycle; improve the government’s balance sheet over time; and limit the size of government, as a proportion of GDP. This should include ensuring that taxation receipts remain below 24% of GDP.

Recommendation 3: Better balance sheet management – unfunded superannuation liabilities

The Commission recommends that the government:

a. close the Military Superannuation and Benefits Scheme to new entrants, with a new scheme established based on an accumulation plan opened for new Australian Defence Force members

b. as part of prudent financial management, move over time to a “funded model” for existing defined benefit superannuation schemes, and

c. in recognition of the upfront costs of a “funded model” approach, consider allowing earlier drawdowns from the Future Fund to offset the costs of the new military accumulation scheme and future funding of existing defined benefit schemes. This would require amendments to the Future Fund Act 2006.

Recommendation 8: Reforming the Federation – addressing vertical fiscal imbalance

The Commission recommends that:

a. the degree of vertical fiscal imbalance in the Federation be substantially reduced. This should be achieved by providing the States with access to the Commonwealth’s personal income tax base

b. to facilitate this proposal, the Commonwealth should make room and reduce its personal income tax rate by an equivalent percentage point amount to a new State surcharge to ensure that taxes do not rise overall. Revenue raised would be hypothecated to the States, and

c. the States be provided with a capacity to periodically vary the surcharge they impose as a means of injecting further competition into the Federation.

Recommendation 9: Reforming the Federation – arrangements for addressing horizontal fiscal equalisation

The Commission recommends that, as part of a reformed approach to addressing vertical fiscal imbalance, new arrangements also be implemented to address issues with horizontal fiscal equalisation. This would involve:

a. sharing all GST revenue on an equal per capita basis

b. the Commonwealth providing an additional grant to current recipient States to ensure that no State is worse off compared to the existing equalisation process, and

c. distribution of the additional equalisation grant from the Commonwealth being determined by the Commonwealth Grants Commission.

Recommendation 12: Age Pension – establishing a new benchmark

The Commission recommends that changes be made to make it more sustainable by:

a. changing current Age Pension indexation arrangements to a new benchmark of 28% of Average Weekly Earnings and maintaining other price indexation arrangements, and

b. transitioning to this arrangement, approximately over a 15 year period, by indexing the Age Pension maximum base rate at a rate equal to the higher of the growth in the Consumer Price Index or the Pensioner and Beneficiary Living Cost Index until it is equal to 28% of Average Weekly Earnings.

Recommendation 13: Age Pension – tighter targeting of eligibility

The Commission recommends that changes be made in future to ensure it is more sustainable, affordable and better targeted by:

a. formally linking the eligibility age of the Age Pension to 77% of life expectancy at age 65 from 2033. This will result in the eligibility age for the Age Pension increasing to around 70 by 2053. The proposed change would not affect anyone born before 1965

b. replacing the current income and assets tests with a single comprehensive means test. Under this approach the existing assets test would be abolished with the income test extended by deeming income from a greater range of assets. The new comprehensive means test would apply prospectively to new recipients of the Age Pension from 2027-28 onwards

c. including in the new means test the value of the principal residence above a relatively high threshold. The threshold in 2027-28 would be equivalent to the indexed value of a residence valued today at $750,000 for coupled pensioners and the indexed value of a residence valued today at $500,000 for a single pensioner. This change would apply prospectively to new recipients of the Age Pension from 2027-28 onwards, and

d. increasing the income test withdrawal (taper) rate from 50% to 75%. This change would apply prospectively to new recipients of the Age Pension from 2027-28 onwards.

Recommendation 14: Superannuation preservation age

The Commission recommends some changes be made to the superannuation system to complement changes being recommended for the Age Pension by:

a. increasing the superannuation preservation age to five years below the Age Pension age

b. extending the current phased increase in the preservation age by an extra four years so the preservation age reaches 62 by 2027, and

c. increasing the preservation age in conjunction with the Commission’s proposed increases in the Age Pension age thereafter.

Recommendation 17: Short to medium-term health care reforms

The Commission recommends the Commonwealth Government pursue reforms to improve the health system as soon as practicable including:

a. requiring higher-income earners to take out private health insurance for basic health services in place of Medicare; and precluding them from accessing the private health insurance rebate

b. the introduction of co-payments for all Medicare funded services, underpinned by a new safety net arrangement that would operate once a patient has exceeded 15 visits or services in a year. General patients would pay $15.00 per service up to the safety net threshold and $7.50 per service once the safety net threshold has been exceeded. Concession card holders would pay $5.00 per service up to the safety net threshold and $2.50 per service once the safety net threshold has been exceeded

c. implement arrangements to ensure that consumers are not able to insure against the co-payment and that medical practitioners who wish to bulk bill are not able to waive the co-payment

d. encouraging the States to introduce a co-payment structure for public hospital emergency departments for less urgent conditions that could be appropriately treated in a general practice setting

e. increasing the threshold for the General Extended Medicare Safety Net to $4,000, while maintaining the Concessional Extended Medicare Safety Net threshold at existing levels. Safety net arrangements for Medicare and the Pharmaceutical Benefits Scheme should be retained to ensure support for people facing significant hardship, albeit with some adjustments

f. reviewing the Medicare Benefits Schedule to identify and remove ineffective items, replace expensive items with less expensive alternatives where available and investigate options for cost recovery for applications to list items on the Schedule

g. reforming the private health insurance market to provide greater incentives for efficient and cost effective health management through deregulating price setting arrangements, allowing health funds to expand their coverage to primary care settings, relaxing community-rating to allow health funds to vary premiums to account for a limited number of lifestyle factors, including smoking; and reforming the arrangements by which insurers equalise risks through the sector;

h. limiting the Commonwealth’s contribution to efficient growth in the cost of public hospital services to 45% applying from 2014-15 and — with the exception of activity based funding — reducing the health reporting requirements significantly that the Commonwealth places on the States, and

i. extending the current scope of health professional practices (for example, pharmacists and nurse practitioners) to address the future needs of Australia’s health care system.

Recommendation 20: Family Tax Benefits

The Commission recommends Family Tax Benefit arrangements be better targeted to those in need and simplified to boost workforce participation including by:

a. changing arrangements for Family Tax Benefit Part A by introducing a new single means test, with the maximum rate of the benefit paid up to a family adjusted taxable income of $48,837 and then phasing out at 20 cents in the dollar until the payment reaches nil

b. abolishing Family Tax Benefit Part B

c. introducing a new Family Tax Benefit Part A supplement to be paid to sole parent families who have a child under the age of eight. The supplement should be the same as the current maximum rates of Family Tax Benefit Part B ($4,241 for a family with a child under five, or $3,070 for those whose youngest child is aged five to eight years)

d. changing the per child rates to be based on the current Family Tax Benefit Part A rates for a first child and paid at 90% of this for second and subsequent children, and

e. removing the Large Family Supplement and Multiple Birth Allowance recognising that the costs of children are sufficiently covered by the basic rates.

Recommendation 30: Higher education arrangements

The Commission recommends a number of changes be made to existing arrangements to better account for the private benefits of higher education and improve performance of the sector including:

a. decreasing the average proportion of higher education costs paid by the Commonwealth through the Commonwealth Grants Scheme from 59% to 45% and increasing the average proportion of costs paid by students from 41% to 55%

b. tasking the Minister for Education with developing options to increase competition in Australia’s education system through a partial or full deregulation of fees for bachelor degrees, taking into account any relevant recommendations of the Review of the Demand Driven Funding System. The Minister should report to the Prime Minister in 12 months’ time on progress and a preferred way forward

c. reducing the cost to the Commonwealth of the Higher Education Loan Programme by: i. increasing the interest rate applying to HELP loans from the current rate (equal to movements in the CPI) to a rate which reflects the full cost to the Commonwealth of making the loan (incorporating the government borrowing rate, as well as the cost of bad debts and administration costs); ii. increasing the repayment of HELP debt through reducing the threshold for HELP repayment from $51,309 per year to the minimum wage of $32,354 (with a low starting repayment rate of only 2.5%); iii.changing the indexation arrangements for the HELP repayment income threshold from movement in Average Weekly Earnings to movements in the CPI); and iv. streamlining the five current HELP schemes, including removing SA-HELP and aligning administrative fee arrangements and incentive payments for early repayment.

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