If the Bank of Mum and Dad could issue shares, they’d be hot property — for business is projected to boom.
Last week, The Australian published analysis showing inheritances will grow significantly in the 2030s-to-40s as baby boomers pass away, with the peak occurring in 2041. Assistant governor of the Reserve Bank of Australia Luci Ellis concurred that the predominant means for young people to secure homes will soon be parental assistance.
This follows increasing coverage of the coming glut of inheritances. Much of it has been based on unreleased research by self-styled “money expert” Vanessa Stoykov, who found that almost two in three Aussies over 60 plan to leave their kids an inheritance (though the amount is uncertain), and one in four Aussies are banking on an inheritance to afford “a better future”.
Yet this growing discussion is leaving out crucial details that frame the coming “wealth tsunami” as less a self-help solution than a social problem, and less a remedy for intergenerational inequality than a driver. Folksy references to thrifty “mums and dads” looking after their kids risk normalising a patrimonial “society Jane Austen might recognise“.
Most gifts go from rich great-grandparents to rich grandparents
Firstly, many commentators failed to mention the elephant in the room — inequality. Stoykov finds that “an entire generation of Aussies is about to inherit an average $320,000 each”.
But most people won’t inherit nearly as much, given the average is boosted by the top 10% who own almost half of all wealth in Australia. The Grattan Institute finds the mean inheritance for people in the wealthiest 20% is over three times bigger than for those in the poorest 20%.
Secondly, inheritance is often pitched as benefiting “young people”. Stoykov suggests a key concern is youth squandering the money, while others suggest they might start to vote with their coming inheritances in mind.
However, the Grattan Institute finds most inheritors are themselves over 50, due to our ageing population. And most young voters seem to know this; most consistently vote for Labor and the Greens, especially in 2019, despite their redistributive tax policies.
Young people are more likely to receive gifts than inheritances. However, gifts remain substantially smaller — $1,000 on average. This may change as skyrocketing house prices puts pressure on well-off parents to cough up earlier. But as most lower-middle-class boomers’ wealth is tied up in housing and reverse mortgages remain under-utilised, life events like downsizing or death will continue to dictate a modest, sclerotic flow of assets for most.
As Grattan’s Danielle Wood writes, “the growing wealth of baby boomers is likely to end up concentrated in the hands of a select group of relatively well-off generation Xers and millennials” — the latter of which will be in their 60s by the time any inherited cash hits their bank accounts.
Inheritance taxes a political non-starter… or are they?
Australia used to tackle intergenerational inequality via state and federal estate taxes. They once accounted for around 10% of state government tax revenue.
But relentless campaigning by farmers and small businesses saw Bjelke-Petersen’s Queensland government axe theirs. The other states followed in fear of a retiree exodus, filling the revenue hole with pokie machines. Fraser joined in by abolishing the federal tax in 1979.
It’s often claimed we can’t bring them back, or make bequests subject to capital gains tax, because it would be political suicide.
Such proposals would certainly face political challenges — after a conspiracy theory that Labor would introduce a “death tax” caused alarm in 2019, one can only imagine the attack-ad director’s delight at the real thing.
But recent research from the University of South Australia shows their unpopularity may be overestimated. The majority of the study’s participants “were of the view that people should spend their money with abandon, and if there happened to be any left when they died, there was no harm done if the tax office took a cut”. A limited sample size means more research is needed. However, it corresponds with other findings that familial legacies have become less central to people’s identities, so tax debate could be less emotionally charged.
Meanwhile, a slew of establishment voices, including the OECD and the Tax Institute, have called on Australia to re-join the vast majority of developed nations in imposing an inheritance tax. The New Zealand government has commissioned research into the fortunes of high-wealth individuals, which has been interpreted by some as the first steps towards a new tax regime.
And the problem is only getting worse. Our retirement system was set up to ensure retirees had enough to live on, but many retirees are now net-savers. Overly generous superannuation tax concessions see them earn more from untaxed capital gains than they spend which, despite apparent ambivalence to bequeathing, usually flows to their kids by default.
Start at the top
What imperilled Australia’s previous estate taxes was perceived low thresholds and the ease with which families with good accountants could dodge them. They also often applied to one’s spouse, handing opponents the potent political weapon of grieving widows.
Targeting very wealthy households only, encompassing large gifts before death, and exempting spouses would help neutralise these lines of attack. The Australia Institute’s 2016 proposal is a sensible one — they’d exempt everything up to $2 million, tax fortunes between $2-10 million at 20%, and above $10 million at 30%, which would generate approximately $5 billion revenue per year.
Advancing such a proposal would be an uphill battle against entrenched interests. But it’s past time we tried to bring “death taxes” back from the grave.
This is an issue that needs addressing.
One way that might avoid all the ridiculous ‘death tax’ nonsense that appears to so terrify our politicians would be to use income tax. There is no need for any new tax on the deceased estate at all. Simply include any bequest as taxable income in each year’s tax assessment. Those on top rate income tax would pay at that rate. Those with no income would pay nothing up to the income tax threshold. And so on. It’s not a death tax because it would be paid only by living individuals based on their income. One great benefit would be encouraging people to name beneficiaries in their wills who have little or no income.
Thank you for interesting counter proposal.
So simple, so equitable, so easily implemented.
That’s three reasons it will not become policy.
Describe it as a ‘levy’ so as not to scare the horses? Nonetheless, many beneficiaries would be paying income tax anyway on their inheritances depending upon the form of investment e.g. share investment income is taxed, but property is not (ex. rates etc.) and if occupying, does not pay taxable income.
However, the latter, whether borrowing imported capital via a bank or an inheritance, is not a productive investment and simply leads to higher prices (nominally, generally not in real terms)?
So the honest taxpayer has paid 45 cents in the dollar in tax on their income,
Their honest taxpayer beneficiary then pays another 45 cents on what is left over.
Total tax take for the government: 70 cents in the dollar (rounded up) from – let’s assume – honestly earned money by someone’s own hand.
The dishonest tax dodger has dodged tax and has paid – let’s say – 8 cents in the dollar effective tax.
Their beneficiaries are a series of family trusts, carefully hidden in the Cayman Islands to avoid scrutiny. Effective tax rate: 6 cents in the dollar.
So the dishonest tax dodger pays the equivalent of 12 cents in the dollar.
The ultra wealthy pay no tax at all, because they don’t keep their capital reserves where it can be reached by the ATO.
Good solution in principle, in practice I’m not so sure.
Axe the 50% cgt discount. Axe the shonky tax breaks for rental property. Axe all the subsidies to fossil fuel. Then bring in deathtaxes, not before.
A benevolent government could then axe poverty. Axe fossil fuel. Build sea walls, even. Be ready.
If we all say nobody’ll ever do it, then nobody’ll ever do it. But it’s all so easy.
Excellent timely piece Ben.
Yes, a society which Austen and Balzac would recognise. The rise of which Piketty has already described in detail. Rentier family dynasties on the rise in Australia in the 2020’s – who’d have thought it!
The Australia Institute proposal is modest, but certainly a start. Perhaps a Labor/Greens/Independents government might put it on the table from 2022, with an emboldened government making it an election policy in 2025.
The addition of an annual wealth tax would redistribute more ill-gotten and/or unmerited wealth.
And a decent annual land tax would force the rentiers to re-think their calculations.
A fairer Australia- we can only dream!!!! Very, very solid research would be needed to convince the greedy masses that it was a good idea. The majority would have to be certain that that would not have enough to meet the threshold, then only the remaining 10-20% would actually pay the tax. Of course there would be all sorts of dodging attempted and imagine the scare campaign!! Great idea.
The estate has accumulated its value because it has dodged taxes while the wrinklies were still alive – to help the wrinklies, not their couch potatoes. Now that the wrinklies have carked it, the inheritance should be paying back its waived taxes before the couch potatoes jackpot.
A good start would be to categorise inheritance as unqualified income. That is, as soon as any inheritor or receives more than $18,200, they would have to pay 20% tax, just as a labourer does. Then on the same tax scale, 32%, 37% and 45% on further increments.
That would still be a long way short from repaying all the tax dodges that indulge retirees and property speculators in their lifetimes. However it is one heck of a lot better than the current inheritance tax, which is to say no tax at all on the first $11.7 million.
We can’t even discuss increasing the rate of GST yet alone do it. There is no way that an Inheritance Tax would survive any sort of election campaign.
Unfortunately, I agree.
In principle I support a tax but then am reminded how wasteful our governments can be with their revenue. $38B on handouts for unnecessary Jobkeeper claims sticks in my craw. Unspecified amounts to be spent on nuclear subs is another.
If the tax was directed solely into social housing & grass roots services for the underprivileged I would be happy to pay it.
It is hard to disagree with your recognition of that aspect of Kerry ‘the Goanna’ Packer’s justification for his legal tax avoidance.
Interesting that you use as your example a tax at the other end of the spectrum. Inheritance tax is overwhelmingly an issue for those with great wealth, though somehow those who would be hardly affected at all seem to be very frightened of it. GST affects those with little wealth far more.
Death taxes, Yes!! I have no cash currently Super pension only income, asset rich. No children or grand children, have been able to work a lot! ie first home 25yo Thankyou G whitlam re single female NO male guarantor!
Have paid my dues with nieces. All have benefited Handsomly during my lifetime.
Upshot of which They ALL, have developed only an elevated opinion of their own “value” i.e. treatment of their Parent reprehensible! only contact is request for money! to maintain the lifestyle!
All my assets personal and property will go to non profit charity of my choice, i.e No glitze, no advertising and donations not eaten by “management fees!
Nothing! at all for them that have had every advantage and done nothing.
Ah…..cruel but fair!!
Yes! The two are very different types of taxes/levies. There would be a massive outcry, full of lies and deliberate falsehoods- would it be worth it??? Perhaps something more subtle??