22 April 2018

Dear Kelly,

It is with sorrow rather than anger that John McMurrick and I write this open letter to you.

On 4 April 2018 you circulated to “higginsliberals” an email regarding superannuation. It was headed “The choice could not be clearer”.

That email included a link to a speech about superannuation, which you said you gave on that day to the Australian Financial Review’s Banking and Wealth Summit (see attached copy [at bottom of this page]; addressee redacted).

When John and I read your email we were gobsmacked! What you now say sits in marked contrast to your past acts.

In our opinion, for the reasons that follow and for so long as you remain in Parliament, you no longer deserve to be known as the Member for Higgins; you should be known as the Member for Hypocrisy.

Your email and our response

Your email begins: “Fundamentally, the Liberal Party stands for those Australians who work hard to build a better future for themselves and their families. Our superannuation system must reward those who save for their future….”.

Later you say: “ [In my speech] I spoke about the Turnbull Government’s plans to make sure our superannuation system… delivers certainty and stability so Australians can plan for their retirement in confidence”.

However, as you are well aware, in May 2016, by the Turnbull/Morrison Budget, many Australians who had worked hard to build a better future for themselves and their families and who had saved in accordance with successive governments’ superannuation rules (including those made by Coalition governments) were not to be rewarded but were to be punished by the Liberal Party.

You were instrumental in effecting those changes to the superannuation system.

Those changes delivered uncertainty and instability.

Australians can no longer plan for their retirement in confidence.

You have turned superannuation from a long-term, multi-decades, retirement income system into, at best, an annual Federal Budget-to-Budget saving proposition.

That is a contradiction in terms.

It is unsustainable.

Background to Turnbull/Morrison Budget 2016

In February 2016, Scott Morrison rightly cautioned against what he called the ‘effective retrospectivity’ of raising taxes or restrictions on the pension phase of superannuation after attracting and trapping savings in superannuation for some 40 years under the earlier legislated tax rules.

Then, in May 2016, Scott Morrison and you did just that.

Both of you failed to include in the Turnbull/Morrison Budget 2016 appropriate ‘grandfathering’ provisions which have accompanied every major adverse change in pensions and superannuation tax for the last 40 years.

Scott Morrison and you, with the support of the Coalition, destroyed many Australians’ confidence and trust in the superannuation system.

But that’s not all.

By what follows, Scott Morrison and you gratuitously insulted every Australian that had faithfully conformed with the previous superannuation rules and had, in the process, lawfully saved a substantial amount for their retirement.

Explanatory Memorandum for 3 Superannuation Bills, November 2016

On 9 November 2016, to give effect to those superannuation changes, Scott Morrison presented the Coalition’s superannuation package to Parliament. The changes wrought by that package came into practical operation on 1 July 2017.

To publicly explain and justify those superannuation changes to Parliament, Scott Morrison and you circulated and relied in Parliament upon a 364 page “Explanatory Memorandum”.

The Explanatory Memorandum states on its cover page “Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP”.

In turn, the Explanatory Memorandum expressly refers to, and provides links to, a Grattan Institute media release and report (see attached extract [at bottom of this page]).

That Grattan Institute material shows, on its cover, an image of three of the bronze pigs on display in the Rundle Street Mall, Adelaide [1].

Bronze pigs in Rundle Street Mall, Adelaide

We, and other self-funded superannuants, believe that The Grattan Institute’s prominent use of that image of those bronze pigs was not merely a juvenile attempt at humour.

It was a none-to-subtle insulting implication that Australians that had faithfully conformed with successive governments’ superannuation rules and had substantial superannuation savings were, nonetheless,  greedy pigs with their ‘snouts in the trough’.

Yet there it is in Scott Morrison’s and your Explanatory Memorandum to Parliament which you used to justify and explain your superannuation changes.

Your comment in your email regarding Labor’s proposed changes and our response

In your email you say: “In contrast, Labor plans to make changes that will make it harder for people to be self-reliant in their retirement,….”(emphasis in original).

In our opinion, it is Scott Morrison and you, supported by the Coalition who have made it harder for people to be self-reliant in their retirement, principally by the adverse superannuation changes announced in the Turnbull/Morrison Budget 2016 and its subsequent legislation.

Labor gratefully supported that legislation in which you failed to include appropriate ‘grandfathering’ provisions.

Labor could not believe its luck!

True it is, that Labor plans to make it even harder, than the Coalition has, for people to be self-reliant in their retirement. But surely it is hypocritical to draw attention to Labor’s proposed adverse superannuation changes whilst studiously ignoring those in which you played a major part.

The choice could not be clearer

Finally, the heading of your email, namely “The choice could not be clearer”, may well prove to be true.  But, because of your past actions and that of Scott Morrison and the Coalition, not in a way that you and many of the recipient “higginsliberals” would prefer to see happen.

Sincerely,

Jack Hammond and John McMurrick

On behalf of themselves and Save Our Super (saveoursuper.org.au)
_______________________________________

Attachments to the open letter:
The choice could not be clearer

Explanatory memo superannuation bills 2016 extract – p 275

Footnote to the open letter:
[1] The Explanatory Memorandum refers to The Grattan Institute’s 24 November 2015 report, “Super tax targeting” by John Daley and Brendan Coates: see page 275, paragraph 14.12, footnote 2.
Click on the link on footnote 2, “2 Grattan Institute, media release, ‘For fairness and a stronger Budget, it is time to target super tax breaks’, 24 November 2015,  http://grattan.edu.au/for-fairness-and-a-stronger-budget-it-is-time-to-target-super-tax-breaks/.”
Click on the link at foot of that page “Read the report“.
That link will take you to The Grattan Institute report “Super tax targeting “ dated 24 November 2015 by John Daley and Brendan Coates.
The report’s cover page shows the image of those bronze pigs in the Rundle Street Mall, Adelaide.
Note: The Grattan Institute’s website has been updated since the publication of that document. However, the article itself and the image of the 3 pigs remain.

The historic use of appropriate grandfathering provisions to protect those who were significantly affected by major superannuation rule changes, justifies their use in the Coalition’s Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016) and Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016).

However, none of Save Our Super’s appropriate grandfathering provisions are included in those two Acts.

Jack Hammond, QC, founder of Save Our Super

Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official

Any government must retain the right to change policies as circumstances change over time. Policy change always poses two questions: Is the change an improvement? And is it properly implemented? This article focusses on implementation issues, which are particularly important when changing super laws. (In an article to appear in the June 2017 edition of the SuperGuide newsletter, Jack and Terry will evaluate whether the July 2017 changes constitute an improvement.)

Since the income tax law first specified taxation of superannuation in 1915, it has always legislated taxation treatment over the contribution, accumulation and drawdown phases of this uniquely long-lived financial product. Unless the law included specification of how superannuation will be taxed on withdrawal, no one would accept the restrictions and uncertainties from long-term saving in super, even if contributions and accumulation were favourably treated.

The legally specified tax treatment affects three generations:

• young workers seldom contributing more than the Super Guarantee minimum
• mid-career savers maximising super contributions after managing the expenses of family formation, housing and education
• retirees expecting the living standards they saved for.

Young workers are compelled through the Super Guarantee to contribute to super as soon as they first earn $450 (gross) in a month – a trigger that has never been increased since its introduction in 1992 and is now lower than the dole. Drawdown of funds is prohibited (save in limited circumstances) over a working life which can exceed 40 years, and then superannuation savings have to last a retirement which may be a further 30 years or more.

These extremely long commitments by savers make superannuation policy change particularly sensitive.

What is grandfathering, and why is it so important for retirement planning?

‘Grandfathering’ means that transitional provisions continue to apply an old rule to certain existing scenarios, or certain individuals. ‘Grandfathering’ provisions continue to apply an old rule to some existing situations while a new rule will apply to all future cases. Frequently, the grandfathering exemption is limited; it may extend for a set time, or it may be lost under certain circumstances.

A retired Treasury officer, Terrence O’Brien, had written to The Australian newspaper on 11 May 2016 about the 2016 Budget’s superannuation measures. He said:

Past increases in superannuation taxation used to be grandfathered, so as not to disadvantage those who had responded in good faith to previous incentives to save for their retirement income. Grandfathering reflected the commitments that governments encouraged or compelled workers to undertake when locking their savings away for 40 or 50 years. …

Jack contacted Terry to seek elaboration of those claims. The conversations gave rise to an article for the Centre for Independent Studies titled ‘Grandfathering super tax increases’, and a series of submissions by Save Our Super to Treasury on exposure drafts of the legislation, and to Ministers, backbenchers, and the Senate committee that examined the Bills that have now become law.

Grandfathering has been used frequently, often for the purely pragmatic reason of gaining democratic support for a change that might otherwise be defeated.

In applications such as superannuation law, grandfathering gains an important moral dimension, and a further practical dimension. Morally, it honours legal commitments governments have made to citizens and on which citizens have lawfully based their affairs, while applying the new rules prospectively to citizens who have the flexibility to adapt to them. Practically, it is ideal for addressing fiscal or demographic challenges that are developing slowly. It can permit early action to prevent a problem worsening, without reducing the living standards of current retirees.

Save Our Super submissions noted that people had lawfully saved, planned and retired on the basis of legislated super rules introduced only a decade earlier, in the Costello Simplified Superannuation System reforms of 2007. They had been encouraged into depositing funds into super under the legislation of one set of rules, only to have those rules changed to their disadvantage after placing their funds irrevocably into the super system, and indeed after retirement in many cases.

Justice Asprey on grandfathering superannuation law changes

Although contemporary politicians seem to have forgotten, grandfathering significantly adverse changes in superannuation law has a valuable 40-year history in Australia. Prime Minister Whitlam commissioned Justice Kenneth Asprey to propose tax reform through a Taxation Review Committee that reported in 1975. One important focus of Justice Asprey was exploring how to make superannuation serve retirement income objectives more effectively, with minimum disruption to life savings plans. He offered five timeless insights in Chapter 21 of the Asprey Report, officially titled the Taxation Review Committee Full Report (released on 31 January 1975):

• 21.9. Finally, and most importantly, it must be borne in mind that the matters with which the Committee is here dealing involve long-term commitments entered into by taxpayers on the basis of the existing taxation structure. It would be unfair to such persons if a significantly different taxation structure were to be introduced without adequate and reasonable transitional arrangements. . . .
• 21.61. . . . Many people, particularly those nearing retirement, have made their plans for the future on the assumption that the amounts they receive on retirement would continue to be taxed on the present basis. The legitimate expectations of such people deserve the utmost consideration. To change suddenly to a harsher basis of taxing such receipts would generate justifiable complaints that the legislation was retrospective in nature, since the amounts concerned would normally have accrued over a considerable period—possibly over the entire working life of the person concerned. . . .
• 21.64. There is nonetheless a limit to the extent to which concern over such retrospectivity can be allowed to influence recommendations for a fundamental change in the tax structure. Pushed to its extreme such an argument leads to a legislative straitjacket where it is impossible to make changes to any revenue law for fear of disadvantaging those who have made their plans on the basis of the existing legislation. . . .
• 21.81. . . . [I]t is necessary to distinguish legitimate expectations from mere hopes. A person who is one day from retirement obviously has a legitimate expectation that his retiring allowance or superannuation benefit which may have accrued over forty years or more will be accorded the present treatment. On the other hand, it is unrealistic and unnecessary to give much weight to the expectations of the twenty-year-old as to the tax treatment of his ultimate retirement benefits.
• 21.82. In theory the approach might be that only amounts which can be regarded as accruing after the date of the legislation should be subject to the new treatment. This would prevent radically different treatment of the man who retires one day after that date and the man who retires one day before. It would also largely remove any complaints about retroactivity in the new legislation. . . .

Source: The Taxation Review Committee Full Report (31 January 1975), Chapter 21: Income Taxation in Relation to Superannuation and Life Insurance.

While there was little immediate application of the recommendations from the Asprey Report, it subsequently steered Australian tax reform for some 30 years in several key areas. When Treasurer Keating radically increased the tax on superannuation lump sum payments in 1983, he succeeded by applying the Asprey principles exactly: he ensured the ten-fold increase in tax on a lump sum benefit applied only to those dollars of the lump sum saved after the change; any savings pre-dating the change and the earnings on them continued to be taxed under the more concessional rules applying when they were saved. There have since been many other examples of the use of the Asprey grandfathering principles to adverse changes in both superannuation and the Age Pension (for details of these examples, see Terry O’Brien’s article, Grandfathering super tax increases https://www.cis.org.au/app/uploads/2016/08/32-3-obrien-terrence.pdf .

The frequent recourse to grandfathering significantly adverse policy changes, over more than 40 years, has set the reasonable expectations of citizens for how any necessary changes should be made. It is the violation of those expectations that helps explain the vociferous opposition many super savers have expressed to the Coalition Government, and to Save Our Super.

Certain July 2017 super changes are retrospective

As recently as February 2016, Treasurer Morrison seemed to understand the importance of grandfathering and the detrimental effect of retrospective changes. In his speech to the SMSF Association 2016 National Conference in February 2016, he said:

One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.

Source: Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016 (emphasis added).

In Save Our Super’s view, the five Asprey principles remain the best practical guide to how to introduce any necessary adverse changes in superannuation law while avoiding ‘effective retrospectivity’. They should have been used for the adverse measures in the 2016 Budget (with those changes taking effect from 1 July 2017), as Save Our Super submitted at the time. Even now, they should be applied to mitigate the destruction of trust and confidence in superannuation arising from those measures.

Jack Hammond, QC, founder of Save Our Super

Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official

About the authors:

Jack Hammond: Save Our Super’s founder is Jack Hammond QC, a Victorian barrister for more than three decades. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne. During his time at the Victorian Bar, Jack became the inaugural President of the Melbourne community town planning group Save Our Suburbs.

Terrence O’Brien: Terrence O’Brien is a retired senior Commonwealth public servant. He is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation policy, fiscal policy and international economic issues. His most senior positions have also included several years in the Office of National Assessments, as senior resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and at the Productivity Commission.”

For more information…

For more information about the July 2017 super changes, see the following SuperGuide articles:

• https://www.superguide.com.au/retirement-planning/july-2017-super-changes
• https://www.superguide.com.au/retirement-planning/liberals-1-6-million-cap-pension-start-balances
• https://www.superguide.com.au/boost-your-superannuation/immediate-cut-non-concessional-contributions-caps
• https://www.superguide.com.au/boost-your-superannuation/over-50s-contributions-cap-cut
• https://www.superguide.com.au/boost-your-superannuation/super-tax-refund-for-lower-income-earners

This article was first published on 23 May 2017 on the superguide.com.au website. Click here to see the article.