Should Australia re-introduce an inheritance tax?

By Leith van Onselen

ABC’s The Business aired an interesting segment examining calls for Australia to re-introdude an inheritance, which used to exist in Australia until late-1970s and early-1980s.

The segment features a number of experts including ‘rockstar’ French economist Thomas Piketty, Mark Carnegie, and Australian economist Frank Stilwell, who note the benefits in principle. However, they all concede that implementing an inheritance tax in Australia is next to impossible due to the political barriers.

National inheritance taxes exist in many other developed countries, such as the UK, USA, Germany, Belgium, the Republic of Ireland, France, and Japan (see next chart via Fairfax).

ScreenHunter_11460 Feb. 11 08.15

Australia also used to have inheritance taxes. But in 1978, Queensland Premier Joh Bjelke-Petersen abolished the state’s inheritance tax, which was followed by the governments of other states. Prime Minister Malcolm Fraser then followed suit and eliminated the federal inheritance tax

The Henry Tax Review also gave in-principle support for an inheritance tax (called a “bequest tax” in the report), noting that it would be economically efficient and equitable. Still, it shied away from outright recommending re-introducing a bequest tax because of its controversial history:

A bequest tax would be a relatively efficient means of taxing savings. Decisions to save taken solely to fund consumption later in life would be unaffected. But decisions to save motivated by the desire to leave a bequest would be affected and this would impose some efficiency costs. In aggregate, though, bequest taxes are not likely to introduce large biases into donor behaviour. A bequest tax could increase labour supply and savings by recipients and prospective recipients, though the effects would be limited.

Such a tax could also be a progressive element of the tax and transfer system. Because the distribution of wealth in Australia is so uneven, most of the revenue available from a bequest tax could be raised from the top 10 per cent of households by wealth.

A tax on bequests would fit well with Australia’s demographic circumstances over the coming decades. Over the next 20 years, the proportion of all household wealth held by older Australians is projected to increase substantially. Large asset accumulations will be passed on to a relatively small number of recipients. On the other hand, a bequest tax would be complex. There would be a need for anti-avoidance provisions, including a tax on gifts. There would, inevitably, be significant administration and compliance costs.

A tax on bequests should not be levied at very high rates. People should not be unduly deterred from saving to leave bequests. A substantial tax-free threshold combined with a low flat rate beyond that point would be an appropriate structure for a bequest tax. Bequests to spouses should be concessionally treated.

Another design issue is whether to tax the whole of the donor’s estate or the inheritances received by individual recipients. There are arguments on either side, but on balance, they probably favour taxing each estate as a whole. A large number of other design issues would need to be considered. The more concessions and exemptions in the bequest tax, the greater its complexity and the greater the risk to efficiency and equity goals.

The Review has not sought to recommend the introduction of a bequest tax at this time, but believes that there should be full community discussion and consultation on the options.

Given the extreme pressures on the Budget as the population ages, along with the growing tax burden being placed on the diminishing pool of workers, it would seem appropriate to at least place an inheritance tax on the Budget reform agenda.

OECD countries raise on average 0.41% of total taxation revenue from inheritance taxes. Even if this low rate was replicated in Australia, it could raise around $1.6 billion of additional Budget revenue each year.

But again, the political barriers are formidable. This leaves closing Australia’s inequitable and fast growing tax expenditures (concessions), as well as adequate taxation of land and resources, as worthwhile alternatives to help broaden the tax base and remove the burden from productive effort – especially labour income – to raise Australia’s growth potential.

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Comments

    • Doesn’t affect boomers/Gen X at all. By the time this gets to be implemented, they have already inheritied. Add to this they will spend even more to their hearts content. Once again this is another policy that shafts youths.

      • Oh look, the budgets in deficit. Sorry guys we’re gunna steal all your wealth coz…. well you have it and its easier if we steal it from you when your dead than for us to admit that eventually socialist countries run out of OTHER peoples money.

        The very concept is deplorable! Hey Leith, I think you make too much money insinuating that the government is entitled to steal my money when I die, just coz….. how bout you hand over 30% of all your income because I think its better I decide what to do with YOUR money

      • GOD NO
        and look there is Thomas (the mad) Picketty an economist (red flag) whose country(France) has been on the verge of bankruptcy for years according to the media , where top tax rate is 75% and where the rich packed up their money assets and businesses and FLED … has got himself on the ABC.
        Meanwhile the french people have a President with 4% support…

      • Leith, I think you make too much money insinuating that the government is entitled to steal my money
        Warning moron detected.
        It is government that defines money and government that defines private property and what is theft. In a democracy govt is entitled to do whatever it likes. Vote wisely if you can.

    • Like bonuses paid overseas to avoid local income tax, you mean?
      Anyone who gets a significant bonus this Chrissy will have to pay local tax on it. View an Inheritance as a Bonus if you like. But bonuses paid overseas, to avoid prying ATO eyes, are left to the discretion of the beneficiary to declare at next year’s accounting. Do they declare their foreign income or not, hoping not to get caught at some stage in the next decade or two?

  1. Jeezus, we have a principal of taxing… based on economic activity.

    For some reason, we think we should tax physical extertion that provides an income.

    I agree it is fair, but it’s also a disincentive.

    We tax companies, they are a beneficial group of entitities, but they are the most privilged and should pay for that privilege…

    We understand many levies, etc.

    What is the economic raitonal behind taxing death?

    The only thing I can see it is a way to claim.. to claw back, people who’ve acquired a lot up to the point of death, and to prevent inter generational hoarding.

    Let people compete for it, not gifted shit.

  2. If you want a meritocracy and social mobility you increase inheritance taxes and make all education opportunities equal from pre school until degree or trade completion, including granting living allowances to those who need them.
    You also ensure there is virtually no youth unemployment and no dole for the under 25’s and replace it with a jobs guarantee and training.
    It is better to encourage earlier retirement/unemployment for seniors than to have youth unemployed for any length of time.
    Keep youth employed and adjust seniors participation rates through unemployment benefits and pensions eligibility to balance unemployment/workforce shortages

  3. I agree with the concept of an inheritance tax, but in reality it will only catch the honest – those like me who pay taxes as a matter of principle – or the naïve, while the less honest in our community will have little trouble avoiding it.
    Before we add new taxes, how about the ATO enforcing payment of existing taxes.

  4. Look let’s just get on with it!!!! Just confiscate all the wealth from any small productive enterprise? We don’t need them! Bastards who work and save are anti the good of society. Send them to re-education camps or just simply get rid of them. We need more BIG business and consumption…and more consumption…and more…..Geez – why has everything gone all grey? What’s this damned rash?

    • proofreadersMEMBER

      As in many other things, Straya punches well above its weight in lauding incompetence, cluelessness, corruption etc etc.

  5. Why the hell is Ken henry quoted as a damned expert on anything? Can there have been a more ignorant egotist? He still thinks he ‘saved’ us from teh GFC it had nothing to do with the odd $100 Billion that flooded in from overseas buying up anything and everything and setting the whole damned housing bubble to newer gigantic proportions.
    He is clueless!

  6. Why not have a birth tax as well? As soon as you’re born you owe the govt 200k so it can pay for important things like joe hockey’s babysitting, helping get kids with crushed up asprins out of Bali and ferrying dogs in a taxi to your second residence if you’re too busy at dinner to get them home.

    • oh you shouldn’t have……Leith had a trouser accident just thinking about it. Why wait to enslave the populace until they earn an income. Just make them serfs as soon as they leave the womb.
      Submit Poors !

      • Perhaps we should get China to create one new little island for each person when they are born. That way they could be their own govt and never suffer theft. Parachute drop the newborns on each island. Breast feeding is theft of milk.

  7. Would a new death tax result in people blowing their savings before dying to avoid paying it, possibly impacting their kids or whoever is inheriting it? I’m not opposed to the concept (and I’ll be one who will be impacted the most thanks to my family’s savings) but if it results in people completely losing their assets it could cause more problems than it creates

  8. Tassie TomMEMBER

    I’ve said similar before, but I’ll say it again.

    Inheritance tax – very fair (you have done nothing to earn your inheritance except to choose the right parents), but difficult to administer, easy to avoid, and causes problems.

    Examples:

    – Old Man Farmer dies, his children can’t afford to pay the tax for inheriting the farm and so sell up and move into town to a life they’ve never known.

    – Some regions get through a generation every 20 years, others take 30 years. Those that average having children aged 30 pay 50% less inheritance tax.

    – Man meets woman, moves into her house, 20 years later she dies – man has to pay tax on the house he inherited.

    – A trust never dies (not for 80 years anyway) – it only elects new directors for its corporate trustees.

    – Dad lent his son David $500,000 to buy a house with his new wife Suzie, they have a car crash on their honeymoon, David dies instantly and Suzie dies 2 days later in hospital. Suzie’s parents inherit their house after paying inheritance tax on it.

    All of this can be solved, but would take an infinitely complex set of exemptions and bylaws to solve. And exemptions & bylaws = loopholes and avoidance.

    Much simpler would be to charge an inheritance tax over the course of one’s lifetime – a 1%pa wealth tax on all wealth (land, improvements, trusts, companies, shares etc). They are both capital taxes after all. It would need to be accompanied by a government reverse mortgage scheme for retirees whose millions are “locked up” in their PPOR.

    • Trusts are great for avoiding pretty much everything.
      I’m surprised that the radfem movement hasn’t picked up on as champions of the old tax dodging trust as their initial justification? Inheritance laws only allowed assets to be passed to men – so that’s right – the trust was created as an instrument to circumvent this issue for those richlings who were only endowed with daughters or whose sons had been killed serving bank and state in war. In theory – all trusts should have been stamped out as soon as females were able to inherit property and other assets. This stuff doesn’t just happen.

      Trusts are completely unregulated – they are required to submit tax returns – however – once you start looking at trusts of trusts of offshore trusts and other such vehicles, a few strokes of a pen can disappear an Aladdin’s cave.

    • What is this crap about inheriting a farm? Why should inheritance be the only way to obtain a farm or a house? Surely the opportunity should be available to all?

      • Claw, I totally agree.

        The problem at the moment is that the return on capital is greater than wages growth, hence those who start with the capital grow it faster than those who have no capital but are earning money can save up to buy it.

        Heck, even the after-tax yield on capital is greater than wages growth, before you even take into account its inflation (house/ land price growth).

        Capital is hardly taxed at all. Its yield is taxed at the marginal rate, but this is often easily circumvented, for example by making capital improvements and calling them repairs or annual expenses, or by applying a depreciation schedule which is more generous than the actual decline in value. Capital gains are (as you know) taxed at a heavily discounted rate, and not until a transfer occurs. In the mean time income for work done, or income from earnings from savings when one is saving up to acquire capital, are heavily taxed. (Yes, I know that savings ARE capital too).

        I think that the aim should be to make all assets cheaper and to reduce income tax, so that money earned from work actually done is of relatively more value compared to money acquired as one’s lucky birthright. Part of this multi-pronged attack would be to tax capital. I’d suggest a flat tax of 1%pa applied to all wealth. This would still be highly progressive (the wealthiest 10% own something like 70% of the nation’s wealth), and would be difficult to distort and avoid (eg, me, my wife, and my 3 children, and my two trusts all happen to own exactly $900,000 each hence have a lower wealth tax bracket).

        Other prongs of this multi-pronged attack would be macroprudential policies on lending (eg. total loan-to-income maximum of 5 times), policies on foreign debt (eg. bond coupons paid by banks to overseas entities are not tax-deductible for the banks whereas bond coupons paid to Australian individuals or companies as well as deposit interest are), policies to increase interest rates for both deposits and lending (eg. limiting full-recourse loans, so that banks actually have to price in risk rather than assuming they can take ownership of their customer for the next 7 years in the case of bankruptcy), quarantining negative gearing and reducing the CGT discount to CPI excluding the quarterly CPI from the quarter in which you buy and the quarter in which you sell the asset.

  9. Personally I have no problem with inheritance taxes, for me it always seemed like a daft tax aimed specifically at the aspirational class.
    The rich will avoid this tax through proper tax planning
    the poor have no need to fear an inheritance tax
    it’s the middle class and those that would aspire to a middle class existence they’re the ones that should fear this tax.

    Think how easy it will be to avoid this tax IF your estate is easily divisible, now think about how hard it will be to avoid this tax if your estate consists of just one asset and it’s an asset that intend to hang on to until your dying day (don’t need to think hard to figure out which asset this tax is targeted at taxing)

  10. An inheritance is about the only thing a natural born Australian can hope for from this fucked out system! Tax a few white people to pay for the retirement of some chinamen that have taken the primary school spots of our children. Go to hell

    • reusachtigeMEMBER

      That’s severely racialist! It’s not just the chinks, it’s curry munchers and sand monkeys too!

      • I needed to brush up on my racialist language after living in the homeland of one of those groups for way too long. The urban dictionary has told me what a sand monkey is. REUSA is the best teacher ever! You should have your own little red book that the ugly losers of Australia should read daily in group study sessions.

  11. reusachtigeMEMBER

    The wealthy pay enough tax already! The poor have mostly freeloaded their whole lives and it is them that should pay more in the death. Maybe we could sell the scum poor’s parts?

    • Are you suggesting that the state sell the still working body parts of poor people to cover their tax deficit.
      Hmmm certainly an interesting idea however the implementation thereof would suggest that we create a state which harvests the body parts while they’re still valuable….I know some poor people that might have a problem with the implementation side of this tax, especially those that are still using them at the time the tax falls due.

      • how bout the state stops spending money they don’t have !!!

        Theres a novel concept. But no, lets just steal some more money from people who have actually been productive. If a business spends more money than they receive in revenue they go broke. They don’t run next door steal money off another business do they?

        Why is it ok for government to do so? Oh, I remember. Thats how socialism works. Stealing money from one person to give to another person who ALSO didn’t earn it!

      • @sven ah yeah…red pills in the morning…green pills in the evening …@#$% I hope you’re not color blind.
        Don’t you understand that our real economic problem is with the lack of Government debt creation, especially debt in support of public infrastructure.
        Imagine for one minute that Australia had an efficient public infrastructure development industry in effect it’d have a machine that turns excess labor and capital into roads, bridges, airports, hospitals, schools….Instead we have a highly inefficient Infrastructure development machine which we starve and in so doing force the necessary debt onto the private sector where it takes the form of debt chasing existing assets (aka Ponzi housing).
        In the long run I’d much rather deal with a bankrupt government that built over built than bankrupt workers that can no longer afford the interest payments on a house that their parents built.

    • Well, once the last rhinoceros is dead there are going to be some poachers out there looking for a new line of work, perhaps they could go and work for the ATO.

  12. Should be 100%*, with gifting and financial instruments prevented from transferring wealth intergenerationally without actually working for it.

    On a philosophical level the only wealth you’re entitled to is that which you’ve worked for.

    *Borrowed from libertarianism, not the dumb “evil government” american kind of McLibertarianism

    • Yeah! Anything to stop these bastards saving. We gotta use up the world ever faster so that it is unliveable for anything larger than cockroaches!

  13. How about a 100% inheritance tax for those on the pension (spouse exempted)? Children of the elderly must therefore look after their parent or get nothing.

  14. So, I sell my house for $1 to a trust in which I am not a beneficiary. When I kark it a week later the trust generously sells the house to my children for 50c each. So, that’s 5c or so in taxes + a couple of grand to set the trust up with a suitable “non-interested” party as trustee……Oh, I forgot to mention, a trust based (through a series of intermediate entities) in a suitably understanding country where they aint never heard of the ATO.

  15. What the F$%# is the matter with MB writing articles floating BS about an inheritance tax —
    While Staying Mute about Taxing Multi Nationals ! fuck wits.

  16. A better society is more Meritocratic, in which wealth is earned through talent and hard work rather than being born into it. In an ideal Meritocracy:

    1: each person would start life from the same foundation, with the same opportunities open to them and the same amount of resources invested in their development (education, etc).

    2: after childhood, each independent adult would be free to set their own path through life, living with the consequences of their life choices. Anything they built for themselves during this time would be theirs to keep.

    3: after death, whatever wealth had been accumulated would be divested and recycled back into society to support equal opportunity beginnings.

    Minimal (ideally 0%) taxes during life then a 100% tax on death to be immediately cycled into the youth. The recently born being supported by the recently deceased.

    The same would be true for businesses. A business “lifespan” would be declared of, say 70 years and upon death, the assets of the deceased business would be cycled back to support fresh startups, helping to prevent the formation of super-powerful too-big-to-fail corporate dynasties.

    But this isn’t a perfect world.

    In reality, we have a genetic predisposition to prefer that resources be allocated to our own progeny than to others, no matter how incompetent and useless our progeny may be. There are many historical examples of Meritocracies springing into being, before degrading into Oligarchies due to this natural bias.

    https://www.thenation.com/article/why-elites-fail/#

    An inheritance tax may be sensible from a Meritocracy point of view, but it runs against our innate biology. We can and will find ways to dodge it so that our incompetent Princelings can fuck everything up after we’re gone.