It’s time to have a taboo conversation about death, money and taxes. Because Australia is heading into the biggest wealth transfer the country’s ever seen and it's thanks to one thing: inheritance.
In the next two decades, it’s estimated about $3.5 trillion will be passed down from boomers to younger generations. But a majority of those ‘younger generations’ will be older than 50. And right now, around who won’t pay tax on it.
There are a lot of questions about whether we are treating that income fairly compared to someone who works, according to Danielle Wood, CEO of the Grattan Institute.
If you make $75k in a year, you’ll pay more than $16,000 in tax. But if you inherit $75k you won’t pay a cent.
Danielle Wood says whenever she discusses inheritance tax, there are emotional reactions.
“It’s a really personal thing, it involves death, it involves family,” she said.
Initially, she presumed those receiving inheritances were against the idea of taxing them.
“But it was actually often the people that were planning to give one, that really saw it as a gift that they were giving with love to their children and something they didn't think the government should be getting involved with in any way,” she said.
That could help explain why taxing inheritance has been the subject of political scare campaigns like this:
Australia got rid of inheritance tax
But Australia is one of the few western countries that doesn’t tax inheritance. The tax here was removed more than 40 years ago.
And what happened when we got rid of it?
Research suggests that people receiving an inheritance in their 50s were more likely to retire early, impacting the workforce. But mainly...
The wealthy get weather, according to Dr Cameron Murray from the University of Sydney.
“You essentially concentrate wealth rather than redistributing it through the tax system,” he said.
But it’s common to tax wealth and distribute it
The OECD average inheritance tax is 15 per cent. But it varies from four per cent in Italy to up to 60 per cent in France. In the UK, if you inherit more than £325,000, 40 per cent of that will go to the government. Inherit less than that and you pay nothing.
See a tax doesn’t usually apply to all inheritances.
“Typically inheritance tax is a design so that you have a threshold where you give your inheritance for free, there's no taxes and your children get it... And above that threshold, there's usually a fairly high rate,” Dr Cameron Murray said.
A hypothetical: a 35 per cent tax on the inheritance of Australia’s richest one per cent could raise at least $5 billion in a year. Dr Cameron Murray estimates the tax could raise up to $15 billion if it were expanded further than the one per cent.
Still, people like me (and probably you), wouldn’t pay anything. So if most people aren’t facing the tax, why is it so unpopular?
“It’s unpopular because rich people pay it. That's the reality,” Dr Cameron Murry said.
What could inheritance tax money be used for?
The International Monetary Fund (IMF) recommended using inheritance taxes to help with the COVID economic recovery.
If the tax was reinstated in Australia, it could help level the playing field. Some have proposed the billions raised could go towards relief on income tax for everyone, for example. If that happened, Danielle Wood says two groups would benefit the most: young people and low-income earners.
But the money could go to anything really; childcare, education, infrastructure.
Dr Cameron Murray uses housing as an example: in 2020, 1,343 new public housing units were built. He says with $15 billion from inheritance tax, that number could be 30,000. In other words, an 22 per cent increase in public housing builds.
“The welfare state works,” he said. “There's a huge proportion of humans who can't make the money working - children, the elderly. So we need some mechanism to give people who aren't working money.
“The wealthiest dead people are a good source of revenue. Let's use that to redistribute in a fair manner.”
But Danielle Wood says inheritance tax is a notoriously difficult policy for a government to sell.
“I think if a government was going to go here…you'd have to be really clear with people about what you were going to do with that money,” she said.
It’s controversial, but not radical
It all sounds very Robin Hood and I will probably get some hate mail for this piece because the idea of taxing inheritance is still so controversial, despite it being standard, despite it being economically sound, despite it being recommended. But it's not exactly radical. Though it does rely on a specific proportion of our society agreeing to share some of their wealth for the greater good, once they’re gone.
Whether or not that’s likely, I'm not so sure.
