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19 May 2022

Is an Australian Death Duty Inevitable?

lawyers-perth

As the saying goes, there are only two certainties in life – death and taxes; but is a death tax for Australia also a certainty?

Death duties were abolished in Australia in 1979 and we are one the last countries in the Western world not to have any inheritance tax.  But every once and a while the idea is floated out of Canberra that death duties of some stripe may be coming back- and this seems to happen more each time there is a federal election.

On the eve of the Federal election on 21 May 2022 we answer a few of the questions on death duties we get asked all the time.

What is an Inheritance Tax?

An inheritance tax is a tax levied against the value of a deceased estate. Australia does not currently have any inheritance taxes.

The final report of the Henry Review (more formally known as the Future Tax System Review)[1] concluded that a bequest tax would be an economically efficient way of raising revenue and would allow reductions in other, less efficient taxes.

The review stopped short however of recommending the introduction of a bequest tax, but believes that there should be full community discussion and consultation on the options considering most OECD countries impose bequest taxes.

There are different types of inheritance tax around the globe but essentially it either lands as a tax on an individual beneficiaries share of an inheritance, or on the whole estate itself.

Death Tax By Another Name?

Although Australia does not have an inheritance tax, there are other tax obligations that can arise on death. These can include:

  • Capital Gains Tax;
  • tax against the income of the estate;
  • existing tax liabilities of the deceased;
  • stamp duty and transfer duties;
  • inheritance tax which may be levied against overseas assets by foreign governments, or taxes that may be applied to non-resident beneficiaries; and
  • tax which may be applied to superannuation benefits.

It has been noted by others that some of these taxes could be seen as sort of de facto inheritance taxes, especially Capital Gains Tax which might accrue on the transfer of an asset simply because of death.

Why might Australia need an inheritance tax?

Whether an Australian Inheritance Tax of Death Duty is inevitable is tied up squarely with whether our superannuation system is enough to deal with the changing demographics of our country.

Although it is now ingrained in our culture, Superannuation only became compulsory in Australia in 1992 when the Keating Government introduced a new system known as the “Superannuation Guarantee”. Under this system we now know well, employers were required to make superannuation contributions on behalf of their employees from July 1992. Compulsory superannuation contribution amounts have increased from 3% in 1992 to 10% currently, with 0.5% rises set every year until it reaches 12% from July 2025.

This policy has led to a significant shift in the way in which Australian households’ wealth is distributed. Australian households’ average total value of superannuation funds increased from $141,400 in 2009-10 to $229,900 in 2019-20. Superannuation funds are now Australian households second largest asset, behind the family home. [2]

But the real issue behind possible death duties is that Australian societal demographics are rapidly changing.

A death tax might be inevitable if our Super system is not sufficient to look after our elderly citizens, especially as the elderly are a fast-growing segment of our population due to slowing population growth and lower birth rates.

The baby boom generation (those born between the years 1946 and 1964) are reaching retirement and in the 20 years between 2000 and 2020, the proportion of the population aged 65 years and over has leapt from 12.4% to 16.3%.

This economically powerful group is projected to increase more rapidly over the next decade[3]. With inheritances from the baby boom generation set to significantly increase in the next few decades it is predicted some $3.6 trillion dollars (yes, that’s 3,600 thousand billion dollars) is set to transfer down the line.

With this amount of wealth, it’s easy to see why a government might view inheritance tax as a way to increase taxation revenue whilst simultaneously reducing wealth inequality between the generations.

The Productivity Commission has released a research paper late last year which addressed the question of whether inheritances are increasing wealth inequality in Australia. The report projects a four-fold increase in the total value of inheritances, with the wealthy naturally passing greater wealth to their heirs, and in doing so increasing the gap between the haves and the have nots.

But ultimately, the greatest reason for why death duties may be inevitable is that the retiring and retired boomers do not pay as much tax as the generations below them.  Without the income tax and with the increased burden of pensions for Australians living longer than ever before in the history of humankind, the fear is we just don’t have enough taxes coming through to keep the system afloat.

In that case, the question is where does the Government find the money?  One answer is to increase existing taxes, such as income tax or an increase in GST. The other is an inheritance tax.

 What do other countries do?

Australia is one of only four countries in the OECD who do not have death duties- the others are Canada, Mexico and the Slovak Republic.

The United States has a double whammy, levying estate taxes at both State and Federal levels. An estate tax is assessed on the estate itself, before its assets are distributed. Six U.S. states have Inheritance taxes may be imposed on the bequest’s beneficiaries and federal estate tax is triggered on estates with values exceeding $12.06 million. The rate of estate taxes is on a sliding scale, from 18% to 40%.

The United Kingdom levies Inheritance Tax on estates valued above a £325,000 threshold but also has exemptions from the tax if the estate is going to the deceased’s spouse or partner or to charities.

The UK inheritance tax is a flat 40%, which can be reduced to 36% if more than 10% of the net value of the estate is bequeathed to charity. It has long been seen as a clever way to get people to make bequests charity by making it tax effective.

At the end of the day, we know that any government that tries to introduce a death tax will likely be punished by voters at the ballot box.  But it still begs the question, is it, ultimately inevitable?

[1] Australia’s future tax system Report to the Treasurer (Final Report, December 2009) Part One, Overview

[2] Australian Bureau of Statistics, Household Income and Wealth, Australia, 2019-20 (Catalogue No 6523.0, 28 April 2022)

[3] Australian Bureau of Statistics, Twenty Years of Population Change (Report, 17 December 2020)