Could an inheritance tax be reintroduced?

An inheritance tax is back in discussions ahead of the upcoming federal election, as a result of research from the Productivity Commission (PC).

By 2050, it’s estimated that about $224 billion would be passed down each year in inheritances. That’s the reckoning of a PC report into the economic effects of large wealth transfers and would represent a four-fold increase on the average inheritance today – which is already double what it was in 2002.

Soaring house prices, combined with fewer heirs due to much lower fertility rates than in the past, mean the value of inheritances received by individuals is set to explode.

The prediction was made on assumptions about future house prices and share market returns.

The staggering increase in inheritance sizes is prompting renewed calls for the reintroduction of an inheritance tax. But the subject is politically controversial and, historically, both major parties have shied away from attempts to introduce it.

Read: Calls for inheritance tax and GST hike to fix broken tax system

It seems anathema now, but Australia did once have estate and inheritance taxes before they were abolished at state and federal levels in the 1970s and ’80s. Since then, any mention of reintroducing the tax has been met with fierce reprisal at the polls.

At the last federal election, even a false rumour that Labor was considering implementing an inheritance tax seemed to be enough to turn the tide against it, despite bookmakers’ predictions.

The absence of an inheritance tax makes Australia somewhat of an outlier among Organisation for Economic Co-operation Development (OECD) nations, with 24 of the 37 nations having some form of estate tax.

The OECD itself also advocates for developed nations to introduce inheritance taxes but says their design often means they don’t actually raise much revenue.

“While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed,” says OECD director of tax policy Pascal Saint-Amans.

“There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives.”

Read: To leave the kids an inheritance – or not?

In recent months, several academics have been calling for a review of inheritance tax and in July, the Tax Institute suggested an inheritance tax that would kick in at 5 per cent on amounts of more than $2.5 million.

The Australian reports that the average inheritance in Australia is worth about $125,000, but that the median inheritance, which is statistically more reliable, is closer to $45,000.

Rising economic inequality in Australia has meant talk of an inheritance tax has never completely gone away. A rapidly ageing population means more time to accumulate wealth, and with fewer heirs, inequality could be expected to get worse.

But what the PC report found didn’t quite match that. It found that because people are living longer, they aren’t receiving an inheritance until they are well into their 50s when they are already established in life.

“Conventional wisdom suggests that wealth transfers make the richest Australians even better off,” the report says.

“And in fact, wealthier Australians do receive larger transfers on average. But by the time people receive an inheritance, they will be well into middle age.

“So while inheritances weigh on economic mobility – by increasing the likelihood that wealthy parents have wealthy children – the effect is moderated by the lateness in life at which they are received.”

Read: Inheritance and the Age Pension

The report found that inheritances can actually reduce inequality. When measured as a percentage of what they already have, the less well-off get a much bigger boost from inheritance.

“Wealth transfers increase the share of wealth held by poorer Australians, reducing relative wealth inequality. And we are not an outlier. This finding is replicated in every other country studied around the world,” the report says.

Would you support the introduction of an inheritance tax? Would the issue cause you to change your vote? Let us know in the comments section below.

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Written by Brad Lockyer

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