The GSA represents the full range of income earners who chose to join and contribute to a GSF or NPF scheme. The GSA seeks to maintain the provisions of these schemes and to engage with the Government to have anomalies corrected. Members of these schemes are current or retired government employees (and their surviving spouses) have a superannuation contract with the Crown.
Tax and your annuity
[At the 2016 Council it was agreed that this issue would no longer be pursued. For a number of years the GSA has expended considerable effort on this cause and has made no progress. It is not expected that this situation will change in the near future. This is not to say that the matter may not be resurrected should circumstances change. This subject has been removed from the Strategic Plan and is no longer on the Board agenda.]
The main outstanding anomaly in the schemes is the fixed annuity reduction imposed in 1990 in substitution for tax, taking full effect in 1999.
From 1 April 1990, a major change was made affecting the taxation of contributions to superannuation schemes, earnings on fund investments and annuities paid. Prior to these changes, contributions to the scheme by employees and by employers were exempt tax, up to certain limits, investment earnings were exempt, and annuities were taxed as ordinary income. This is described as an EET (exempt/exempt/taxed) regime.
In the TTE (taxed/taxed/exempt) regime applied from April 1990, all contributions to the scheme and earnings on the invested funds became fully taxed and annuities tax exempt. For annuitants who retired prior to 1 April 1990, their annuities were reduced by the rate of the “G” tax code. For those retiring from 1 April 1990, the amount of the annuity reduction progressively increased to a maximum of 30% for those retiring from 1 October 1999 (40% for NPF). These figures were loosely based on the taxation rates that existed at the time of the change.
Details of your annuity and the basis of its calculation, including the 1990 reduction, are included (for most GSF annuitants) in the letter sent to you on retirement and from Datacom each March advising you about your cost of living adjustment. It is recommended that you retain these letters with other personal papers for future reference.
As the reduced annuity is deemed tax paid, it is not assessable for income tax. (But members should note that the annuity is assessable for all forms of Government subsidy).
It is the GSA view that a 30% reduction factor is no longer appropriate as the tax regime has changed significantly since it was imposed. The GSA has lobbied Government for a number of years on this issue and our lobbying culminated in a GSA petition tabled in Parliament in 2011:
That the House of Representatives call on the Government in its role as employer to adjust the annuities payable to members of the Government Superannuation Fund and the National Provident Fund to reflect taxes applicable in 2011 rather than the currently reduced annuities that reflect 1990 taxes.
See Tax and your annuity: the case for equity for the GSA submission.
As members will now be aware, the submission achieved very little. Subsequent attempts to engage with Government on this matter have met with no response.
At the September 2015 Annual Council it was resolved that the GSA would go back to square one and conduct a full review of everything we have on this matter to see if there may be another way in which we can better represent our case. The Board will be reporting the results of this review to the 2016 Council.
[At the 2016 Council, it was agreed that the only avenue availabe to pursue this issue is through a Petition to Parliament. The Board has set up a working group to prepare a petition for presentation in 2017].
One area which we have been attempting to address is the application of cost of living adjustments in a fair and equitable manner to all GSF and NPF annuitants. We believe that the present situation seriously affects a small group of annuitants, many of whom are elderly women who can least afford to be disadvantaged.
Since 1969 there has been a gradual move towards indexing GSF annuities against inflation. This was done in negotiation between the Government on behalf of the Crown, and the state sector unions on behalf of contributors. The major moves were made first in 1969 when contributors obtained a 60% initial CPI adjustment. This was increased to 70% of CPI in 1975, and in 1985 annuitants who did not withdraw from the settlement received the full 100% adjustment.
That left however the pre-1985 retirees short of the full adjustment and their annuities continued to be eroded by inflation. Following promises by both Labour and National that this anomaly would be rectified, a further change was made in 2006 to bring the indexation for this group to 90%, and legislation supposedly completing the process to ensure that all annuitants got the full adjustment was passed in 2009. We say supposedly, because a change in the formula for calculating the final adjustment differed from the previous four adjustments, meaning that the final adjustment did not achieve the 100% cost of living indexation that was intended and erosion of annuities of pre-1985 retirees continues. The new formula indexes the index, not the annuity.
The 2009 legislation was a complete derogation of the political commitments given to our Association over the previous two decades which extend back from Dr Cullen to Ministers Wyatt Creech and Peter Gresham in the early 1990s. Those commitments to full 90% and then 100% indexation of CoLA were made consistently, and were unequivocally given by Ministers in terms of the then existing legislation. That this commitment should be radically changed in the 2009 Amendment without consultation, where a changed formula gave a progression from 90% to under 91% actual indexation, can only be described as a travesty of public policy.
A fair resolution would not have been costly. The cost of the full increase of CoLA Indexation from 90% to 100% would have been fully known as it was comparable to the cost of the increase in 2006 from 80% Indexation to 90% indexation. Given the ages of those affected and their certain reduction in numbers since 2008, the cost would now be much less and will continue to diminish.
In summary, the problem of the erosion of Government Superannuation by inflation was recognised and given partial compensation in 1969. In 1972 a Government commissioned report noted that the erosion of Government Superannuation (even with partial indexation) was unfair and iniquitous. Thus in 1985 all existing contributors had the opportunity to receive 100% Indexation of CoLA. The need to apply this to those already retired was recognised and repeatedly promised. That the final step should be severely minimised by using a new formula for calculating 100% from 2009 breaks long standing promises.
It is disappointing to our Association that the current government feels unable to make changes to this legislation. We continue to submit that the costs of doing so would be small compared with the goodwill of restoring long-standing and unequivocal government commitments to provide full 100% indexation of CoLA to pre 1985 retirees.
(The Hansard transcripts of the First, Second, and Third Readings of the Government Superannuation Fund Amendment Bill 2009 can be viewed by clicking here.)
In October 2015 the GSA agreed to support a pre-annuitant member employed in the health sector who was challenging the Government Superannuation Fund Authority (GSFA)on their interpretation of what elements of his salary package were eligible for superannuation, or “superable”. The member’s salary is made up from a number of building blocks, some of which are termed “allowances”. The member and his employer have been contributing on the major part of his remuneration, including these “allowances”, for over 20 years. However, when this member wrote to Datacom in 2015 to ascertain what his annuity would be should he choose to retire at some stage over the next few years he received a major shock.
Applying a very strict ruling on what allowances were superable, the GSFA determined that a large portion of his remuneration would not count in the final salary calculations which woulddetermine his annuity, even though he and his employer had been contributing for all these years. The GSFA argued that the Act gives the GSFA the authority to determine what allowances can be regarded as salary. In this case they applied a definition, of their own invention, that allowances could not be classified as salary if “they are not correlated in any way to base salary”. In other words, unless an allowance moves in step with salary it cannot be counted as salary.
The GSA sought legal advice and we mounted a serious challenge to the GSFA ruling. We also received support from the Association of Salaried Medical Specialists (ASMS). Our case was based on the fact that some of the allowances that had been disallowed had been paid to this member since he commenced his employment 20 plus years ago and they have always been part of his total salary package. We argued that the law does not require allowances to move in step with salary, therefore this arbitrary definition of what constituted an allowance was not in accordance with the Act.
The case came before the Government Superannuation Appeals Board in August 2016. Three of the four allowances in question were ruled to be eligible for superannuation. The one which was excluded was an allowance being paid for additional duties being performed for a year at another DHB. Its temporary nature was the issue.
All in all, our member is delighted with the result. As is the GSA, which, at considerable expense, chose to support this member.
This case has highlighted something we believe all those still in the workplace should be aware of. There are many members still in employment who are now on a variety of remuneration packages. Some packages are built up like building blocks with all kinds of different “allowances”. In many cases these include additional remuneration for taking on more responsibility or extra duties for lengthy periods of time.
Those in this situation need to be aware that the GSFA may challenge parts of their remuneration when calculating final salary for superannuation purposes. It is always to the employee’s advantage to have their remuneration classified as salary. If your remuneration is made up of building blocks labelled “base salary” and allowances, it is to your definite advantage to have your remuneration in the former category. Members should be aware of this issue and take appropriate steps to safeguard their retirement interests by examining their existing employment contract and getting as much into salary as possible.
We note also that the GSFA continues to reject any suggestion that what it terms as "Higher Duties Allowances" are superable. We have had cases where members and employers have been paying their GSF contributions on remuneration only to discover at retirement that significant elements of the remuneration did not qualify in the calculation of the final annuity. Members are advised to check with their employers to see exactly what GSF contributions are being paid.
In January 2015 the GSA canvassed members on the subject of the GSF Employer’s Contribution and how this was handled by current employers. The evidence that we gathered showsedus that the matter of the employer’s contribution and how it is dealt with depends very much on the employer. We have noticed a growing tendency for employees to be on "total remuneration" packages and to have all or part of the employer’s contribution included in their remuneration package. This can mean that any movement in the employer’s contribution has a net effect on take home salary. This practice appears commonplace, but by no means universal. There are a number of employers who are quite happy to continue as in the past, and there are still many employees protected from this practice by collective employment agreements.
We sought legal advice on based on the information which our members provided. The views we have received from the QC who we briefed on this matter are not what we had optimistically hoped for. In summary, the legal opinion is that it is not possible to identify real cases which could have sufficient general application that an overall benefit to a group of members could be achieved. While there are a number of members who have been disadvantaged, some substantially, by what has occurred, each case appears to be fact-specific. It is the opinion of our QC that if any member wished to contest the matter, each case would need to be investigated and put forward on an individual basis.
The legal view also reminded us of the one case which has gone to court, Sears in 1975, which, on appeal, found in favour of the employer.
Given that the GSA is not in a position to take individual cases to court where we cannot establish a principle and apply it to others, the Board has decided that unless there is a significant change in circumstances, we will not pursue this issue any further. While we appreciate that this will be disappointing to many members, we believe that this is the appropriate course of action for our Association.
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