Tax reform and estate taxes

by Paul Hockridge Partner Paul is a Tax Partner with over 30 years' experience in tax, asset protection, estate and succession planning, FBT and salary packaging and property development. Paul specialises in advising high wealth families and closely held businesses as well as accounting and law firms. Contact Paul

A hot topic in the tax reform debate is the reintroduction of estate taxes. We say reintroduction because Australia had such a tax until the 1970’s. It might also be said that we still have death taxes, given some of our capital gains tax and superannuation rules.

So, perhaps we should reframe the question – should we expand or reintroduce estate taxes?

The idea of estate taxes tends to be very popular with large sections of the general public, provided that it is someone else who has to pay them.

Similarly, some charitable organisations might push for their reintroduction, in the hope that they will receive more donations, as people want to minimise the size of their dutiable estate.

This is a nice reminder that positions on tax reform are often influenced significantly by self-interest, not just the greater good.

When reflecting on the pros and cons of the reintroduction or expansion of such a tax, we might consider the following:

  • If the family “gets something for nothing” on someone’s death, maybe some tax should be paid.
  • On the other hand, why work hard for your family to see the wealth eroded by an estate tax?
  • If income is taxed at 49% and estate tax is paid at say 35% of the remaining 51%, is total tax of say 67% fair?
  • Assets are often transferred intact to family members, rather than being sold. What would be the impact of having to break up and sell some assets to pay such a tax?
  • What is the cost of professionals spending substantial amounts of time planning to avoid such imposts?
  • Don’t we already have estate taxes? What about the existing tax on superannuation paid to non-dependants, e.g. to some adult children?
  • Beneficiaries of deceased estates might inherit the cost base of the asset that the deceased had. If so, they might eventually be subject to tax on the gain that accrued to the deceased, not just the gain that accrued while the beneficiary owns the asset.
  • Passing assets to non-resident beneficiaries or to some not-for-profit organisations can result in the estate having a tax liability. So, don’t we already have some estate taxes?
  • Don’t just point to some OECD countries having an estate tax as evidence that it is a good idea. Ask whether the somewhat comparable OECD countries would prefer not to have such taxes, in light of these issues, and the tiny fraction of the overall tax revenue that they collect.
  • If we should have an estate tax simply because some other OECD countries do, shouldn’t we also fall into line with other aspects of their tax systems and increase our rate of GST to something in the 20% – 30% range? Also, should we impose GST on say food and education, etc? Clearly, the follow the leader argument isn’t always terribly attractive or intellectually robust.
  • To what extent would the reintroduction of such a tax discourage migration to Australia, a major capital importer? Similarly, to what extent would it result in people leaving Australia and taking their much needed capital with them? After all, capital is highly mobile.

Obviously, the issues are complex and there are numerous competing arguments. We have touched on only a few. We will however continue to contribute to the debate, in particular through the professional associations.

Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.
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