Calls for a death tax on Baby Boomers to pay off aged care costs

Australians are hoarding huge sums of money until they die to pass onto their kids. But a controversial death tax could change that.

Australians are hoarding huge sums in superannuation and investments until they die to pass on a big inheritance to their children sparking fresh calls for a death tax to pay for aged care.

Despite the option of using a reverse mortgage to pay for aged care costs, experts warn there is little incentive in the current system to do so, with the rich paying a fraction of the cost of aged care.

Instead, wealthy Australians are desperate to simply protect their nest eggs to pass on huge sums to their children.

Experts giving evidence at the Royal Commission into Aged Care this week urged Prime Minister Scott Morison to consider changing the incentives to encourage more Australians to actually use their superannuation and assets including the family home to pay for their care.

One option is an expanded loans scheme that would require the family home to be sold on death to repay the cost of aged care.

RELATED: Plan to slap a death tax on seniors

The former Chair of the Aged Care Financing Authority Mike Callaghan, told the inquiry that the funding model was broken given that it was woefully underfunded at a time when wealthy Australians are leaving huge estates when they die.

“We have a situation now where most people don’t spend their money that they have in retirement. When they die they haven’t dipped into them,” he said.

“And there’s very large growth in inheritances. Instead of that growth in inheritance, people should be using the assets, when they have them, they should be using more of those assets to fund the range of goods and services that they need as they age.

“To me, part of it is instead of that growth in inheritances, people should be using the assets, when they have them.”

Paul Keating at the Royal Commission into Aged Care Quality and Safety this week.

Former Prime Minister Paul Keating gave evidence on Monday that an account could be opened for every person accessing Commonwealth subsidised aged care services and for there, in effect, to be a contingent debt only collectable on the death.

Asked about this proposal, Mr Callaghan said that death taxes were “considerations to be looked at.”

“Many jurisdictions, in fact most jurisdictions have estate taxes that essentially are a tax on the estate when you die,’’ he said.

“Propositions have come out more recently about having assets tax, death taxes, for example, to be able to be part of the reform of the tax system to try and have a more efficient approach to it. These are all considerations that have had to be looked at.”

In a submission to the inquiry, Mr Callaghan noted recent findings that taxpayers continued to fund 75 per cent of all aged care funding - a situation he described as “unsustainable.”

“Currently, the government provides around three-quarters of all aged care funding, with consumers meeting less than a quarter of the cost. This is likely to be unsustainable into the future and there is a strong case to increase the proportion of the costs that are met by consumers,’’ he said.

“Whilst it is appropriate to subsidise residents who are on low-means, residents who can afford to do so, should pay the full cost of their everyday living expenses.”

Mr Callaghan said those with the capacity and the income to contribute and afford the services that they need as they age should be making a contribution.

“Similarly, when we go into aged care, those who are quite wealthy should be paying for it. This is an aspect of intergenerational equity. I think it’s part of the sustainability of it all,’’ he said.

“I think it’s totally inequitable, right across that, to think that people up there are not paying for the full range or making a bigger contribution to the services that they require as they age.”

Former Treasurer Peter Costello didn’t want to call the idea a death tax.

SCHEME WOULD FORCE SENIORS TO REPAY AGED CARE COST

Former Treasurer Peter Costello urged the Morrison Government to consider an expanded pensioner loans scheme to pay for aged care which would be repayable to the government when seniors died.

Under the proposal, seniors would be given the option of taking out a loan secured against the family home, that would then be sold when they died or other assets liquidated.

“I mean, financial products that can allow people to raise accommodation bonds against the family home, which is generally their greatest asset, I think there’s a much more scope for them and I think the Government could assist there,” Mr Costello said.

“The government has a thing called the Pension Loan Scheme which it says is available. The private sector has what is called a reversible mortgage or equity drawdown mortgages.

“But I do think, you know, this is a classic area where those people that do use residential care and do have assets should be asked to make a contribution and guaranteed a return of their deaths.”

But Mr Costello bristled at describing the proposal as a death tax.

“I mean, the point I’d make is that I think people should do it knowingly and in advance and there should be products that allow them to do that during their lifetime. If you come around and try to take their assets after they’ve died, I think you can expect to run into a lot of opposition there.”

Former Treasury secretary Ken Henry told the inquiry he still believed that a compulsory tax levy to fund aged care was necessary.

“My principal source of discomfort is that the system overall is horribly complex and it contains a very high level of uncertainty for people,” Dr Henry said.

“And they’re bewildered. This system is unsustainable.”

DEATH AND TAXES

The Inspector-General of Taxation and Taxation Ombudsman Karen Payne, recently released the report of her investigation into ATO systems and processes for dealing with deceased estates - Death and Taxes: An Investigation Into Australian Taxation Office Systems And Processes For Dealing With Deceased Estates.

She urged the ATO to make it easier to engage with the ATO, and to reduce unnecessary red tape and tax compliance.

“We recognised that the death of a loved one is a difficult time for many people, no matter how ‘organised’ we may think we are. It is especially so for those close to the deceased. Not only can it be sad but it can also be stressful and confusing – even sometimes overwhelming,” she said.

According to the report nearly half of all Australians - 45 per cent - die intestate, or without a valid will.

Thar can also create difficulties for tax agents accessing information of the deceased taxpayer or dealing with tax matters on behalf of the deceased and delay the ATO in providing granting access to unclaimed superannuation.