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COUNCIL ON THE AGEING (AUSTRALIA)

A SUBMISSION TO THE AUSTRALIAN SENATE COMMUNITY AFFAIRS REFERENCES COMMITTEE

INQUIRY INTO THE GST AND
RELATED TAX REFORM PROPOSALS

January 1999

OVERVIEW

OLDER AUSTRALIANS: AN INTRODUCTION

RESPONSE TO SENATE INQUIRY TERMS OF REFERENCE

Term of reference:
The impacts of the proposals on the living standards of Australian households, especially those on low incomes

Recommendations

Term of reference:
The scope and effectiveness of the proposals on charities, aged care services, welfare services

Recommendations

Term of reference:
The effects of proposals on public, private and community housing

Recommendations

Term of reference:
The effects of the proposed private health insurance rebate

Recommendations

References

Overview

Older people have now had time to consider the overall impact of the Government's tax reform package and in particular, the GST. They remain unconvinced by the Government's claims that they will be better off – or at least not worse off - than they are at present come the introduction of the GST and the compensation that is offered in July 2000.

The purpose of this submission to the Senate Inquiry is to recommend improvements to the tax package so that older Australians will not be disadvantaged by tax reform. COTA is also most concerned that the risk to the most vulnerable older people is removed from the tax package.

Our main purpose in this submission is to address the term of reference set out by the Senate Community Affairs References Committee:

In addition, we respond to three of the other terms of reference:

In discussing the issues for each of these terms of reference we believe it important in the first instance that the Senate Committee is fully acquainted with some of the salient facts about the circumstances of older Australians.

Older Australians: an introduction

Most older Australians are on a low income and most receive a full or part Age Pension as the following tables 1 and 2 indicate.

Table 1: Income sources for people 65 and over -1996-97

Principal income source

Single person income units

Married couples income units
Wages/salaries 0.4% 5%
Business/Partnership income 1.5% 3.1%
Other private income 15.6% 26.2%
Gov't pension/ Allowance 81.4% 64.9%

Source: 1996-97 Income Distribution, Australia, ABS - Catalogue No. 6523, Tables 11 and 21.

Table 2: Weekly income for people 65 and over - 1996-97

gross weekly income $

 Single person
Income units		 Married couple Income units
0-199 54.8% 4.6%
200-299 29.9% 25.3%
300-399 7.2% 31.8%
400-499 3.0% 13.8%
500-599 2.0% 8.4%
600+ 2.8% 15.8%

Source: 1996-97 Income Distribution, Australia, ABS - Catalogue No. 6523, Tables 11 and 21.

Table 3 shows some of the key characteristics of the Age pensioner population.

Table 3: Characteristics of Age Pensioner population

Age Pensioners

Number

%

Rate

Maximum rate

Reduced rate

 

1 143 111

539 507

 

67.9

32.1

Home ownership

Homeowners

Non homeowners

 

1 142 636

539 982

 

67.9

32.1

Marital status

Single

Couple

 

800 426

882 192

 

47.6

52.4

Total Age Pensioners

1 682 618

100

Source: Department of Family and Community Services Customers: A Statistical Overview 1998

A continuous theme of older people contacting COTA at the present time is the difficulty of managing on a day to day basis. Most of this evidence is anecdotal but it is not difficult to see from the recent studies completed by the Social Policy Research Centre at the University of New South Wales why older people are contacting COTA on this issue.

The group at highest risk are those receiving a full Age Pension with little or no supplementary private income.

Table 4 shows that there are significant gaps between expenditure requirements and income for single older people in all housing situations. Couples – table 5 - reliant on the full Age Pension generally fare better than singles – most are home owners – but the margin between total expenditure needs and income is only a few dollars.

While relatively few older people are in private rental accommodation, their situation is particularly vulnerable.

Table 4. Expenditure requirements for a 70 year old single woman on a low cost budget per week

Housing tenure Total costs Income support Gap
Private renter $281 $181.35+

$37.60 (a)

$62.05

28.4%
Owner $216.50 $181.35 (b) $35.15

19.3%
Public renter $194.35 $181.35 (c) $13

7.1%

(a) Age Pension ($178.65), Pharmaceutical Allowance ($2.70) and Rent Assistance ($37.60)
(b) Age Pension and Pharmaceutical Allowance
(c) Age Pension and Pharmaceutical Allowance (public renters pay 20-25% of their income on rent - but are not eligible for Rent Assistance
Source: Saunders et al (1998) Development of Indicative Budget Standards, Social Policy Research Centre, Policy Research Paper No. 74, (CPI adjustment to September quarter 1998)

Table 5: Expenditure requirements for a retired couple on a low cost budget per week

Housing tenure Total costs Income support Gap
Private renter $364 $303.50+

$35.50 (a)

$25

28.4%
Owner $298.40 $303.50 (b) -
Public renter $300.40 $303.50 (c) -

(a) Age Pension ($298.10), Pharmaceutical Allowance ($2.70 each) and Rent Assistance ($35.50)
(b) Age Pension and Pharmaceutical Allowance
(c) Age Pension and Pharmaceutical Allowance (public renters pay 20-25% of their income on rent - but are not eligible for Rent Assistance
Source: Saunders et al (1998) Development of Indicative Budget Standards, Social Policy Research Centre, Policy Research Paper No. 74, (CPI adjustment to September quarter 1998)

The low cost budget standard for which these costs have been calculated is characterised by the Social Policy Research Centre as:

one which may require frugal and careful management of resources but would still allow social and economic participation consistent with community standards and enable the individual to fulfil community expectations in the workplace, at home and in the community. It describes a level below which it becomes increasingly difficult to maintain an acceptable living standard because of the increased risk of deprivation and disadvantage (Budget Standards Unit, Newsheet No. 4, May 1998, p3).

Response to Senate Inquiry Terms of Reference

TERM OF REFERENCE

THE IMPACTS OF THE PROPOSALS ON THE LIVING STANDARDS OF AUSTRALIAN HOUSEHOLDS, ESPECIALLY THOSE ON LOW INCOMES.

With respect to this term of reference COTA wishes to raise two matters: first, the price effect of the GST on the purchasing power of older Australians and second, the adequacy of the proposed compensation package.

The impacts on prices of the GST

For low income older Australians, the critical issue relates to the impact on prices of the GST.

At dispute is the Government's claim that the GST will have a 1.9 per cent price effect in the Consumer Price Index (CPI) which will apply to all population groups (the price impact will be somewhat higher in the first year). The Council on the Ageing is, however, most perturbed by the evidence that the price impact may be higher for retired people, particularly those on low incomes.

The Government's reasoning for using the standard population-wide CPI to adjust social security payments for the GST price effect is that this is the standard practice for the regular inflation adjustments for these payments. The Government insists firstly, that there is no appropriate methodology available for ascertaining whether or not there will be specific price effects for specific population groups. Secondly, it points to the failure of past Australian and overseas attempts to establish a case that specific population groups, particularly age pensioners, have a different CPI from the rest of the population. (See pages 162-163 of Tax reform: not a new tax, a new tax system.)

COTA does not accept these arguments for the following reasons.

  1. The Government does not take into account the impact of the tax mix switch on the relative costs of a range of individual goods and services and the inherent possibility that some groups may be harder hit than others as new goods and services are brought into the tax net.
  2.  
  3. The Government has focussed on net price increase rather than differential price increases for different types of baskets of goods and services. There is strong evidence that the structure of the basket of goods and services consumed by older retired, low income people is quite different from wage and salary earners.

The Household Expenditure Survey

The Melbourne Institute's analysis of Household Expenditure Survey (HES) data (Johnson et al,1998a, 1998b) provides a useful breakdown of the relative expenditures between population groups over the categories of goods and services covered by the HES. For our purposes, we compare retired, single person households to non-retired, single households and retired couple households to non-retired couple households. As shown in tables 1 and 2 above, older people are highly represented in the lowest income population groups, so it is also of interest to examine the comparative levels of expenditure between groups as in table 5 below.

Our first area of interest in the HES is those areas where low income, older people have considerably higher expenditure than their counterparts in the population.

Table 6: Shares of household expenditure by demographic groups, Australia, 1993-94 (%)

Expenditure Category

Single person, retired

Single person, Not retired

Couple only, at least one retired person

Couple only, no retired persons

Food and non-alcoholic beverages

21%

13.58%

21.42%

15.18%

Fuel and power

4.68%

2.72%

3.76%

2.43%

Medical care and health

5.50%

3.48%

6.23%

4.43%

Household services and operations

7.73%

4.3%

5.99%

4.47%

Source: Johnson et al, tables 2.4 and 4.3, Melbourne Institute, 1998, Report no. 2, Indirect Taxes: Evaluation of Options for Reform.

Table 7: Shares of total expenditure by quintile

Expenditure category

Poorest 20%

Middle 20%

Richest 20%

Food and non-alcoholic beverages

24.6

18.5

12.5

Fuel and power

5.5

3.0

1.6

Medical care and health

5.1

4.2

3.1

Household services and operations

7.6

5.1

3.5

Source: Johnson et al, tables 2.4 and 4.3, Melbourne Institute, 1998, Report no. 2, Indirect Taxes: Evaluation of Options for Reform.

Viewed together both these tables show that for a low income, retired older person or couple, there are significant areas of sensitivity to price increases compared to other groups – particularly in food and non-alcoholic beverages which take up a very large proportion of income.

However, the price effects of the GST for low income, retired older people should also not be underestimated for fuel and power, medical care and health, household services and operations which combined constitute:

Household services

Increased prices in households services and operations are a particular concern of older people because they are more reliant on outside services to maintain a home and garden. Household services commonly used by older people that will be subject to a GST include:

While older people who are able to receive such services through Home and Community Care (HACC) will not be paying GST, HACC is a seriously stretched program and many people are either missing out altogether or having their services cut back. This is a major issue that COTA has raised in its 1999-2000 Federal Budget Submission.

Due to the deficiencies of HACC services, many older people must make up the short-falls through their own private means. They will be paying a GST on the services they need to remain in their own home.

It should also be noted that older people are more likely to have household items repaired than buy new items. A consistent issue which COTA has raised with the Government is that the Age Pension is insufficient to allow older people to save up for new items such as white goods and major repairs. The GST will add a further impediment.

Medical

The extent to which medical care and health costs will be affected by the GST is still as yet not clear. The Report of the Tax Consultative Committee (the Vos Report) set out a very wide range of medical services and health care products that will be GST free. However, an important exception for older people is over-the-counter medicines. COTA is concerned about the imposition of the GST on over-the-counter medicines which many older people use – for instance anti-inflammatory cream for arthritis and aspirin for pain relief.

The Australian Consumers' Association in their submission to this inquiry show that Australians spend $880 million per year on over the counter medicines and that these non-prescription medicines represent a higher percentage of households expenditure per day (51 cents) than prescription medicines (31 cents). The ACA also point out that the use of OTC medicines increases with age.

Fuel and Power

For the category of expenditure – fuel and power – COTA notes that older people spend a large proportion of their time at home and thus have a higher reliance on domestic fuel and power than other groups. COTA is particularly concerned about price increases in this area as we know that older people have a tendency to cut back on usage and deprive themselves of essential heating and cooling if the cost is deemed to be prohibitive. Cutting back can lead to health problems and erode the quality of life.

Food

By far the largest expenditure item for low income older people is food. HES data suggests that retired people spend around 21 per cent of total expenditure on food.

COTA is very concerned about the effects on older people of the increase in prices as a result of the GST of staple foods that have previously not been subject to tax. These are the fundamentals of a healthy diet for older people – fruit and vegetables, bread and cereals, meat and fish. While some food items like ice-cream and biscuits will have less tax as a result of the abolition of wholesale sales tax, such items tend to be further from the core of the diet of an older person seeking to be reasonably healthy.

For some time COTA has been concerned about the nutritional deficits of older people especially those living alone. COTA believes that habits of frugality in terms of essential, healthy food items will be exacerbated by the new tax imposts.

Combining all four categories of expenditure listed in the tables above (food and non-alcoholic beverages, fuel and power, household services and operations and medical services and health) we see that the four categories combined constitute:

Older people in rural and remote areas

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.

COTA has identified older people in rural and remote areas as a particularly vulnerable group.

Other HES expenditure categories

For an additional 6 of the expenditure categories in the HES, retired persons' expenditure, as a proportion of their total expenditure, does not differ significantly from that of their non-retired counterparts. These categories cover

There are a number of HES expenditure categories in which retired people spend less as a proportion of their total expenditure than their non-retired counterparts.

Table 8: Shares of selected household expenditure by demographic groups, Australia, 1993-94 (per cent)

Expenditure Category

Single person, retired

Single person, Not retired

Couple only, at least one retired person

Couple only, no retired persons

Current housing costs (interest, rent, rates, insurance etc)

15.05%

19.44%

10.05%

12.59%

Transport

11.25%

14.10%

12.94%

14.35%

Recreation and entertainment

10.86%

13.23%

14.38%

13.56%

Renovations/additions to housing etc

3.64%

8.07%

3.48%

9.83%

Source: Johnson et al, tables 2.4 and 4.3, Melbourne Institute, 1998, Report no. 2, Indirect Taxes: Evaluation of Options for Reform.

It could be argued that the lower spending of retired people in these categories balances out their higher spending in the four areas identified earlier where retired persons have higher expenditure than their non-retired counterparts in food and non-alcoholic beverages, fuel and power, medical services and health and household services and operations.

However it is important to note the characteristics of expenditure in the four areas according to household wealth in the following table.

Table 9: Shares of total expenditure by quintile

Expenditure category

Poorest 20%

Middle 20%

Richest 20%

Current housing costs (mainly interest and rent payments)

19.3%

14.2%

8.7%

Transport

9.4%

13.5%

14.5%

Recreation and entertainment

8.8%

11.1%

12.3%

Renovations/additions to housing

0.5%

2.8%

13.5%

Source: Johnson et al, tables 2.4 and 4.3, Melbourne Institute, 1998, Report no. 2, Indirect Taxes: Evaluation of Options for Reform.

We note that for the poorest households current housing costs absorb a higher proportion of total expenditure than for middle and richest groups. It is only in the area of current housing costs that retired people have some apparent advantage compared to their non-retired counterparts. This is due to the high rates of home ownership compared to other groups and it is a comparatively small advantage.

For older people on very low incomes in the private rental market there is of course comparative disadvantage to other population groups and to all home owners. While rents will be input-taxed only, there are nevertheless significant concerns about the flow on effects to tenants from landlords of price rises in maintenance and fees faced by landlords.

For the expenditure categories of transport, recreation and entertainment, and renovations/additions to housing, expenditure as a proportion of total expenditure increases with household wealth. Indeed the wealthiest 20 per cent spend 13.5 per cent on capital improvements compared to a mere 0.5 per cent for the poorest groups and only 2.8 per cent for the middle group.

It is clear from the Melbourne Institute's work that for the three categories of expenditure -transport, recreation and entertainment, and capital improvements – relative spending increases with increasing wealth. Indeed, this is intuitively apparent – wealthier individuals drive more expensive cars, consume more leisure and pleasure and are able to frequently upgrade their housing with extensions, interior decorating and general improvements.

Implications

COTA argues that the price impact of the GST should take account of the different propensities to consume for different goods and services for different income groups. The specific goods and services that make up the basket which determines the consumer price index needs to be weighted so that a correct evaluation of the impact of the price increase on different population groups can be determined.

Tables 6 and 7 above show that just four categories of expenditure – food and non-alcoholic beverages, fuel and power, medical services and health and household services and operations – account for around 40 per cent of expenditure for retired, lower income older people. This is a much higher proportion than for comparable non-retired groups and higher income groups.

COTA believes that there is high degree of risk in the Government's assumption of a 1.9 per cent price increase and the compensation package it has designed. The margin for error for older people on the full pension is particularly slender.

The compensation package

COTA has identified a number of problems with the compensation package.

1. Pension increase

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 4 per cent rise will over-compensate for its estimated price effect of 1.9 per cent. It does concede that the price effect will be higher than 1.9 per cent in the first year.

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.

COTA has a number of concerns about the adequacy of the 4 per cent pension increase.

Table 10 below shows that for age pensioners with no additional income the net benefit from the compensation package, taking account the price effect of 1.9 per cent, will be $2.89 per week for a single person and $4.81 for a couple. For pensioners with private income up to $5000 the compensation is slightly higher but the Government has included in its calculations the Aged Persons Savings Bonus which is a one-off payment in the first year. The Aged Persons Savings Bonus provides persons aged 60 or more drawing some private income from savings and investment a maximum of $1000 where total income is less than $30,000.

The compensation for Age Pensioners with some private income then is less than that indicated in the Government's tables after the first year.

COTA believes that the "cameos" provided by the Government in Not a new tax, a new tax system overestimate the benefit to older persons of the tax package.

Based on our analysis above, it is quite conceivable that for some older people the price effect of the GST will be significantly greater that 1.9 per cent.

Table 10: Net Benefit to Age Pensioners

Private income

Net benefit to single age pensioner

Net benefit to age pensioner couple

$0

$2.89

$4.81

$5000

$9.43

$6.17

Source: Tables pp 199-203, Tax Reform: not a new tax, a new tax system

2. The 25 per cent of Male Total Average Weekly Earnings (MTAWE) Benchmark

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 relativity of the pension to MTAWE, the 25 per cent benchmark must be adjusted upwards. This will then recognise the relativity of pension to MTAWE.

3. Easing of the pension taper rate

A second element of the compensation package for older Australians is the 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.

COTA has welcomed this initiative in helping improve the standard of living of those able to generate some income from financial assets. The initiative is a cost to the Government of around

$400 million per year.

However, we are concerned that there is no similar level of assistance offered to those who either have no financial assets or very limited financial assets – indeed the very group that is most vulnerable in terms of the price effect of the GST.

4. 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 and for couples the free areas increase from $88 per week to $90.20.

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.

5. 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. COTA notes that the new tax threshold of $6000 would have been achieved had it been subject to normal CPI adjustment in any case.

6. Aged persons savings bonus and self funded retirees supplementary bonus

The Government proposes two sorts of compensation for older people with some private income from financial assets.

A maximum of $1000 Aged Persons 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.

Lower income self-funded retirees will receive 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 1999-2000.

COTA's major concerns are that these are one-off payments that do not compensate for the ongoing devaluation of older person's financial assets as a result of the GST. Older people in the income ranges stipulated will not be significant beneficiaries of the income tax cuts and yet they have paid income tax on their savings over their life time.

No compensation for retired people under 60

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 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 problem of public unit trusts

A significant number of older people derive income from money they have invested in public unit trusts including property, equity and cash management trusts. These investments have not been made for tax minimisation purposes but to provide a reliable income stream in retirement often to provide some additional private income. Under the new tax arrangements returns from these trusts will be automatically taxed at source at the higher company tax rate. This means older people on low incomes will lose some of the income stream and will have to lodge a tax return to claim a refund. COTA supports the Government's intention to clamp down on tax minimization schemes. COTA believes however that public unit trusts must be excluded from the provisions.

Benefits of tax package to better-off older people

There are some elements of the tax package from which older people will benefit – particularly those who are better-off relative to the Age Pensioner population.

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 and capital gains tax

Some older people will benefit from the abolition of provisional 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.

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.

Private health insurance rebate

The 30 per cent private health insurance rebate will benefit those who can afford to take out private health insurance and pay the gaps in health care costs. COTA estimates that most Age Pensioners will still not be able to afford to use the private health system so that the rebate is a benefit only going to the better off.

Risk in the compensation package

Over time older people are at risk that the value of the compensation is eroded by cut-backs in social welfare as governments seek to contain budget deficits. In addition, the compensation could be eroded by an increase in the rate of the GST. The latter is less of a risk than the former as the Government has chosen to ensure that the rate of the GST will not rise over the long term 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. COTA accepts that the guarantee that the rate will not rise is a reasonable one in the circumstances.

However, the compensation package is far more fragile and at risk of erosion over the long term as has occurred in New Zealand. To ensure that the value of the compensation is maintained, it is important that cast-iron legislation is formulated to ensure:

Conclusion

The Government has crafted the tax package so as to deliver significant income tax cuts to many well-off Australian households. In contrast, the compensation package for older Australians – the vast majority of whom have no or comparatively little taxable income – would seem to deliver few benefits. As we have shown, many older Australians are vulnerable to being made worse off under the GST than they are at present.

COTA is of the view that the tax package and in particular the GST carries with it a high level of risk for older Australians. The task for the Government is now to eliminate all elements of risk for older people particularly those on the lowest incomes.

COTA considers that revisions are required of the tax package to make it work more fairly for older Australians.

Recommendations

The Council on the Ageing recommends that:

1. The compensation package for low income older Australians be increased to reflect more realistically the increased costs that will be incurred by the imposition of the GST. In order to accurately set the level of compensation, the Government will need to reassess the price impact on older people of the GST and determine a more adequate level of compensation.

In particular, compensation will need to cover two major elements:

a. All income support payments, the most important being the Age Pension: the level of compensation will need to be set to ensure that there is a wide margin for error to cover those whose expenditure differs from the average, such as those in rural and remote areas.

b. The adequacy of the one-off Aged Persons Savings Bonus and Self-funded Retirees Supplementary Bonus in terms of the ongoing consequences of the GST on the value of financial assets.

2. The Government establish an independent committee of experts to review and advise Government on the adequacy of compensation for various income groups, pensioner and other beneficiaries.

3. The Government amend the legislation which holds the Age Pension at 25 per cent of Male Total Average Weekly Earnings (MTAWE) so that it becomes 27 per cent of MTAWE to account for the substantial tax cuts that will be awarded to wage and salary earners.

4. The value of the compensation package is maintained over time by legislation which ensures that all pension and other income support payments remain in line with cost of living increases. Such legislation currently exists to maintain the single Age Pension at 25 per cent of Male Total Average Weekly Earnings. This legislation should be extended to all facets of the compensation package.

5. Retired people under the age of 60 be brought into the compensation net and be eligible to receive the Aged Persons Savings Bonus and Self-funded Retirees Supplementary Bonus

6. Generous income tax cuts for higher income earners be rationalised to redistribute the benefits of tax reform to lower income people in the form of more adequate compensation.

7. Public unit trusts including cash management, equity and property trusts be excluded from the provisions to tax all trusts at the corporate rate.

Note: GST on food

COTA is aware that a number of other groups are seeking the exclusion of food from the GST as this is the largest proportion of expenditure of low income people. This submission argues that older people's budgets will be severely affected by the imposition of the GST on a range of goods and services including food and we are therefore seeking appropriate levels of compensation to cover these price increases to ensure that there is no risk that some older people will be made worse off.

The risk with compensation is that it can become eroded over time. If the Government does not agree to increasing compensation to the levels COTA has specified in this submission with rigorous legislation to maintain its adequacy in relation to cost of living increases, then we would argue that food should be excluded from the GST.

TERM OF REFERENCE:

THE SCOPE AND EFFECTIVENESS OF THE PROPOSALS ON CHARITIES, AGED CARE SERVICES, AND WELFARE SERVICES

Fringe Benefits Tax changes

COTA is most concerned about the impact of the proposed changes to Fringe Benefits Tax as these apply to charities and the delivery of aged care and welfare services. The proposed changes will have profound effects on the operating capacity of many charitable organisations. Changes in FBT arrangements will mean a reductions in employment in the sector and consequent cuts to important services. It is COTA's experience that staff in the charitable sector are generally paid less than staff in equivalent private enterprise and the public sector. Salary packaging helps to make up some of the difference and to attract high quality staff.

The Council on the Ageing broadly supports the analysis and recommendations made in the submissions to this Inquiry made by the Taxation Reform and Community Services Alliance and Aged Care Australia. We refer the Committee to these submissions.

Recommendations

COTA recommends that the proposed changes to Fringe Benefits Tax be revised so that charitable organisations will not be disadvantaged in terms of salaries paid to staff and services delivered.

TERM OF REFERENCE:

THE EFFECTS OF PROPOSALS ON PUBLIC, PRIVATE AND COMMUNITY HOUSING

Public renters

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.

Private renters

The effect of the GST on private renters will need to be closely monitored. Pensioners in private rental are a very disadvantaged group as our tables at the beginning of this submission show.

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.

Body corporate and management fees

A number of COTA members have raised concerns about the impact of the GST on body corporate and management fees in units, retirement villages and relocatable homes.

Community housing

COTA has serious concerns about the impact of the tax package in particular the effect of the GST on community housing.

The Community Housing Program (CHP) provides rental housing managed by community organisations and local government for low income people. In particular, this approach to housing provision can directly respond to the special needs of certain groups of older people.

For example, a good option for many older people could be placement in an Abbeyfield house which provides a permanent form of accommodation for older people with special needs but for whom residential aged care is not an appropriate or desired option. Abbeyfield housing is a form of shared housing which is developed by local communities or communities of interest. Each house provides accommodation for up to ten older people in private bed sitting rooms with en suites and their own tea making facility.

Each house has a live-in housekeeper who provides support but not care. Residents look after themselves, their own rooms and maintain their independence.

Under the proposed tax reform changes, the charitable organisations which have developed community housing programs will be disadvantaged by changes in FBT arrangements. They will also face increased costs in building new housing units.

Other accommodation types

COTA has concerns about the effect of the GST on disadvantaged older people living in boarding houses, special accommodation, private hotels and caravan parks on either a short or long term basis. It seems that a range of problems may arise for such people where the accommodation is deemed to be provided on a short term basis rather than long term rental. This means that they will be charged a GST. In contrast people with long term leases (over 28 days) will not be subject to GST. Rents are input-taxed but not out-put taxed. COTA believes that the position of older people living in boarding houses, special accommodation, private hotels and caravan parks must be given the same exemption from the GST as other people in private rental accommodation with the appropriate adjustments to income support payments to take account of the flow-on effects of input taxes into rents.

Recommendations

The Council on the Ageing recommends that:

  1. Older people in public housing and private rental accommodation be adequately protected from rent increases with the introduction of the GST.
  2. Charitable organisations providing community housing be protected from changes in FBT arrangements which will erode their capacity to develop projects for low income older people.
  3. The Government reassess the impact of the GST on body corporate and management fees in units, retirement villages and relocatable homes and ensure adequate compensation for those affected.
  4. The position of older people living in boarding houses, special accommodation, private hotels and caravan parks must be given the same exemption from the GST as other people in private rental accommodation with the appropriate adjustments to income support payment to take account of the flow-on effects of input taxes into rents.

TERM OF REFERENCE:

THE EFFECTS OF THE PROPOSED PRIVATE HEALTH INSURANCE REBATE

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 assessment or as a direct payment from the Government.

COTA opposed this element of the Government's tax reform package for the following reasons.

  1. The link is diffuse and uncertain between the private health insurance subsidy and the policy objectives of increasing private health insurance membership and thereby reducing pressure on public hospitals. COTA argues that the subsidy scheme could worsen pressure on public hospitals by drawing away scarce medical specialist resources further into private practice. This would result in less people gaining access to public hospital care.
  2. The measure contains no obligation on the part of the private health funds to move towards greater efficiency and restructuring. The subsidy is a "free ride" in an era when industry and social assistance programs provided by government are tightly targetted and are usually accompanied by reform requirements, "mutual obligation" requirements and time limits. The Government has chosen to "own" the problem of private health insurance. It has failed to impose restructuring on an industry which has shied away from major consolidation. The Government has not taken the lead in creating a debate on alternatives to subsidies and has only just released a paper commissioned on unfunded lifetime community rating.
  3. The private health insurance incentive scheme introduced in July 1997 which provided for a rebate for private health insurance premium payments had no effect in bolstering private health insurance membership. The incentive scheme introduced in July 1997 failed because the insurers increased the price of insurance and the products did not improve. The net benefit for a low income earner currently on or eligible for the earlier incentive scheme will be only $90.
  4. The problems of the "gap" between private health insurance reimbursements and medical costs incurred during a bout of treatment as a private patient have not been addressed.
  5. The rebate applies to ancillary insurance which has no relation to issues of reducing demand in public hospital.
  6. The rebate is based on a percentage of an individual's private health insurance costs therefore there is no in-built discipline on the price of private health insurance.
  7. The more who take out private health insurance the higher the cost to the Government.
  8. Privately insured individuals may still use the public system for any procedures and particularly for emergency care, complicated care and for procedures likely to entail high copayments in the private system.

COTA is of the view that the private health insurance rebates are another element in the inherent inequality of the tax package favouring the better off able to afford large outlays for private health insurance.

Medicare provides Australia with a health system that is equitable, efficient and cost-effective by international standards. The latest information from the Australian Institute of Health and Welfare (Health Expenditure Bulletin, November 1998) shows that spending on health services in Australia is very stable at around 8.5 per cent of GDP over the 5 years to 1996-97.

The Government has passed the relevant legislation for the rebate and has in place a massive campaign to sell the scheme to the community.

Recommendations

COTA recommends that the Government seeks way of restoring equity to the health system by substantially improving the quality of public hospitals and restoring Commonwealth funds to public dental care.

References

Australian Bureau of Statistics (1998) Income Distribution 1996-97, Catalogue No. 6523.0

Costello P (1998) Tax Reform: not a new tax, a new tax system: the Howard Government's Plan for a New Tax System, AGPS, Canberra

Johnson D et al (1998a) Tax Reform: Equity and Efficiency Report No.2, Indirect Taxes: Evaluation of options for refom, Melbourne Institute of Applied Economic and Social Research

Johnson D et al (1998b) The Government's Tax Reform Package - Equity and Efficiency Effects of Indirect Tax Reform, Conference Paper delivered at Getting to Grips with the Tax Reform Debate conference at the University of Melbourne, 1 September 1998, Melbourne Institute of Applied Economic and Social Research

Saunders et al (1998) Development of Indicative Budget Standards for Australia, Social Policy Research Centre, University of New South Wales

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Copyright © 1998 Council on the Ageing. All rights reserved.
Date: January 1999
Revised: 30 October 2001

Council on the Ageing (Australia)
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