FAQ’s Taxation & Tax Tips

“Where there is a Will, there is an inheritance tax” – Silvio Berlusconi.

Now that I have your attention let’s discuss the hot issue of an inheritance tax.

With the last 2+ years of Government support caused by the pandemic, there is a strong argument that it must be paid for somehow. Adding to this are the increasing demands of social welfare – age pension, family tax benefits, disability support pension, JobSeeker, sole parent payments and Aged care improvements. There is no doubt that these elements, especially the NDIS, have brought significant improvements to the quality of life of its recipients.

It appears something drastic must be done to;

  1. bring in more revenue AKA Taxes,
  2. cut costs as a share of GDP or
  3. improve efficiency,

and so the debate rages on before an election.

In the last election, one of the major parties was accused of bringing back a death tax that was killed off in 1979.

While this argument among both major parties has been strongly refuted, the issue still appears to be hotly contested by other institutions. In May 2021, the OECD released a report assessing Inheritance taxes globally, which brings an excellent opportunity for us to discuss the findings.

NOTE: A Gift tax always accompanies an Inheritance Tax as one is Inter Vivos (While Alive) the other after death.

Let’s start with the state of play worldwide. It’s not surprising from my opening statement that Italy has an Inheritance Tax and Gift Tax.

But did you know there is an unintended ‘Death Tax’ in Australia?

While we do not have an Inheritance or Gift Tax in Australia, we do have an unintended death tax!!

Super benefits paid on the death of a member are tax-free for a deceased member’s dependants. However, many members are not survived by dependants and are often survived by independent adult children who do not receive distributions tax-free. Therefore, the taxable component of the lump-sum super death payment is usually subject to 15% tax.

To minimise the chance of surviving adult children paying the ‘death tax’, members should consider using a re-contribution strategy, keeping a separate pension or even drawing down on their super before their death. This means having clear instructions in the will and for any Power of Attorney in the event of incapacity.

Now let’s look at the arguments for and against an Inheritance or Gift Tax.

Arguments For and Against

As per the OECD report of May 2021, on average, the top 10% of the population holds 52% of the total wealth of that nation and the top 1% hold 18% of the total wealth.

This wealth gap is one of the main arguments for the taxation of inheritance tax as it reduces wealth inequality by taxing and redistributing to those in need. Other arguments in favour of Inheritance and Gift Tax are:

  • Encourages the recipients to work harder and save more as they will not receive as much
  • Encourages charitable giving if the tax is associated with an exemption for charitable giving

The main argument against the taxation of inheritance is that it could lead to double taxation. However, this argument depends on each country’s taxation regime. In Australia, the broad-based tax regime would strengthen the view that an inheritance tax will result in double taxation. However, it must be noted that our GST, which is a consumption tax, currently leads to double taxation. Other arguments against double taxation are:

  • It may negatively affect family business succession.
  • It will result in significant inheritance and gift tax planning, ultimately limiting its effectiveness.
    • **According to a 2015 report from The Tax Foundation, the U.S. had the fourth-highest estate or inheritance tax rate in the OECD at 40 percent and a large exemption base. As a result, it raised very little revenue and applied to very few households. U.S. estate tax receipts declined from $38 billion (2015 dollars) in 2001 to an estimated $20 billion in 2015. As estate taxes become narrow-based revenue sources with high administrative costs, repeal is a strong option.

As of 2015, thirteen countries or jurisdictions had repealed their estate or inheritance taxes.

The Tax Foundation goes on to say that the US Inheritance and Gift Tax fails at effectively achieving its desired purpose, and eliminating it is the most serious option for reform.

On the flip side, the OECD conclusion is that there is a “good case for a well-designed inheritance and gift tax with an exemption for low-value inheritances.”

So we have some conflicting messages from 2 significant institutions. However, in the conclusion from the Tax Foundation, I wondered.

“The ultimate purpose of tax collection is revenue generation.”

I don’t think this is understood very well. I certainly had not considered it in this light, but it makes complete sense.

Taxes exist to ultimately distribute wealth to areas of use and for the common good. But that redistribution must result in an economic benefit greater than the taxes raised. Let’s look at an investment. For example, if we invest in a term deposit or shares, we expect the return to be greater than 0%, or we will not invest. Likewise, if we use Taxes for the greater good, the payback should be greater than the money we use. Let’s consider the spending from the government, and while I do not provide statistics to support my reflection, it is evident:

  • Infrastructure – The return is clear we get a significant increase in efficiency and earning potential from the nation
  • Education – Again, the payback is irrefutably high per $1 spent
  • Health – When we lose it, we will pay anything to get it back so we can remain productive
  • Security – When we are secure, we feel more productive.
  • Environment – An extension of our bodies and priceless to keep healthy and
  • Social welfare – A more difficult one to see clearly, other than if we as a society are supported, we are all healthy. Notwithstanding that the spending effect from social welfare provides a multiplier effect in revenue generation.

In all the above scenarios, the payback from the taxes used to support that spending creates revenue back into the community greater than the taxes raised.

So this brings me back to the debate around Inheritance or Gift Tax. The OECD concludes that a well-designed inheritance with an exemption for low-value inheritances would be beneficial. The key here is the words “well designed”. This depends on the complete tax environment. Ideally, all Taxes that are well designed are beneficial if they are revenue-generating (directly or indirectly). SO HERE COMES MY conclusion.

The issue around which tax to use to create the most “bang for your buck” centres around which one will create the least pain, disruption and conflict within the community. The Inheritance and Gift Tax does not appear to have that level of community support if both parties are at pains to distance themselves from it.

Back to the drawing board.

References:
**The Tax Foundation is a 501(c)(3) non-partisan, non-profit research institution founded in 1937 to educate the public on tax policy. Based in Washington, D.C., the economic and policy analysis is guided by the principles of sound tax policy: simplicity, neutrality, transparency, and stability.
https://www.oecd-ilibrary.org/sites/6315055c-en/index.html?itemId=/content/component/6315055c-en

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