‘Don’t you worry about that, by golly’
Who will ever forget the late Queensland Premier, Sir Joh Bjelke-Petersen, and his ability to cut off any interview with his trademark one-liners? Whatever his foibles, Sir Joh was ever ready to tackle things head on.
Inheritance tax existed in Australia from the outbreak of World War 1 – a way of raising extra taxation funds for the war effort perhaps. We were not alone, and many countries adopted the tax in one form or another – colloquially known as death duties.
Various governments tinkered around the edges over the years, as governments do, but the tax remained until the 1970s. And then, by golly, Sir Joh stepped in and totally removed Queensland death duties.
Fearing a mass exodus of wealthy retirees to Queensland, both State and Federal Governments removed the tax, and by the early 1980s Australia was one of the few countries in the world to remove death duties. Subsequently, New Zealand, Israel, Portugal, Sweden, Hong Kong, Singapore, Austria, Norway and Estonia also removed the tax. That said, some 24 of the 37 OECD countries retain some version of inheritance tax. It seems that the justification for it is not straightforward.
Death and taxes
According to the cliché, both are unavoidable. While death duties do not exist in Australia, that is not to say that no tax is payable upon a person’s death. Unpaid taxes owed to the ATO must be paid from the estate. Depending upon the individual circumstances, some superannuation amounts may be taxed – so proper advice is essential. Transfer of inherited property may incur stamp duty. Capital gains tax may be payable upon the sale of items such as property, although there is a two-year grace period when selling the deceased’s primary residence.
The rich get richer …
One argument in favour of the tax is that it addresses wealth inequality and offers an opportunity to raise significant tax dollars from large estates – the great equaliser. In practice, it was found over the years that wealthier individuals paid much more attention to effective estate planning, and with proper and totally legal use of various trusts, managed to largely circumvent the tax. Further, without a suitably structured gift tax, funds can simply be gifted to beneficiaries prior to death. There is no gift tax in Australia.
Recent studies have also found that, contrary to any perceived wealth inequality effect, inheritances actually favour the less wealthy, in that they provide a far greater increase in wealth in percentage terms. Indeed, the 2018 Productivity Commission report indicated as much as a 50 times greater benefit to the 20% least wealthy, compared to the 20% most wealthy. This effect was noted not only in Australia, but in most advanced economies and confounded proponents of the tax.
Counter arguments favour a tax-free threshold, although this merely encourages estate planning that will keep estates under the limit. Gift taxes are likewise promoted but create very murky waters in relation to the range of possible exclusions.
Once perceived as the goose that laid the golden egg, death duties turned out to be an incredibly complex and emotive tax that raised an insignificant amount of revenue.
To quote Richard Holden, an economics professor at the University of NSW, ‘It may make some people feel good, but it doesn’t raise very much money, and it takes the focus off true tax reform.’
If you have any questions about death taxes, or estate planning in general, please don’t hesitate to get in touch with Owen Hodge Lawyers. It will be easier with sound legal advice from the experts. Owen Hodge Lawyers. We are here to help.