Could your super savings be taxed after you’re gone?

The two may be the only certainties in life, but the ongoing community conversation about tax reform has spurred some commentators to combine death and taxes. On offer is a solution to the nation’s revenue problem by imposing a “death tax” on certain asset holdings. Could your super savings be taxed after you’re gone?

Tim Costello is the chair of Community Council for Australia (CCA), a member-based organisation that works to support charities and other not-for-profit bodies. Costello and others have floated the idea of establishing an estate or inheritance duty, which he says would be more equitable than changes to the GST as it would only affect a smaller number of taxpayers. Proposals for an estate duty emphasise that it would only be intended for the very rich.

CCA chief executive David Crosbie quotes ATO data that suggests that around 25,000 Australian families hold assets above $10 million. He says that if just 4% of those families paid 35% in estate duties, it will equate to approximately $5 billion (see below for more on the different death tax rates).

“It is estimated that within the next 50 years there will be nine million Australians aged 65 or older,” Costello says. “There will be more wealth to hand down and fewer of us paying income tax.  This is a tax that makes total sense in a country getting older and richer.”

Not a new idea
The call to impose a death tax or inheritance duty is not out of the blue. An earlier report to Treasury, “Australia’s Future Tax System” (also known as the Henry review after its chair Ken Henry), suggested that an estate duty would be efficient and equitable, especially as it is levied only on large bequests.

The report also made the point that in many cases the accumulation of savings is done for a person’s own financial security. While longer lifespans see these savings consumed (and tax being paid), the unknown length of a person’s lifetime can result in substantial savings remaining after death.

Henry projected that bequests are likely to rise to around $85 billion, or 4% of GDP, by 2030. The Henry review showed some countries, such as Belgium, raise up to 1.4% of their total revenue from estate duties. In Australia’s case, that would translate to around $5.5 billion a year. This is a similar figure, arrived at in a different way, to that forecast by Community Council for Australia.

Rate variations
According to the US tax policy research body The Tax Foundation, 19 OECD member nations levy an estate or inheritance tax, including Britain and the US, Japan, and many European countries (see its report here). The highest rate is Japan (55%), and lowest Italy (4%), with an OECD average of 15%.

Fifteen of the 34 OECD nations do not presently impose an estate duty, including Australia, New Zealand, Canada, Sweden and Norway (although the last two used to have an estate tax, but repealed these in 2005 and 2014).

For its part, The Tax Foundation is pushing to have the US’s inheritance tax repealed as well.

Use, and misuse, of retirement savings
Treasurer Scott Morrison recently observed that the confidence of Australians in the super system could be undermined when it becomes clear that the wealthy are parking vast amounts in a tax-favoured environment for purposes other than funding retirement — that is, as “open ended savings vehicles” for estate planning.

An estate duty could even this playing field but also, as one commentator put it, can also be less painful because it is levied at a time when the one who accumulated the assets no longer needs them and the beneficiaries have not yet got used to owning them.

An estate tax could also allow the abolition of some small, inefficient taxes and replace that revenue with a duty imposed on a “life event” that will only increase as the nation’s population continues to grow — this event being the termination of the individuals that make up that population. And unlike taxing alcohol or gambling, it is also a “behaviour” that won’t change because it is taxed.

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