Huge problem with $3 billion inheritance tax

When it comes to introducing an inheritance tax in Australia, a massive flaw has been overlooked. So exactly who would really benefit?

COMMENT

The two certainties in life are death and taxes – and now financial consulting firm Deloitte wants to marry the two.

Its latest Budget Monitor report says that federal government spending is outstripping tax revenue, which is true.

In other words, the incomings can’t keep up with the outgoings.

If that were to happen in your household you’d probably resolve to curb your spending for a while and live within your means to get your finances back on track.

But this is the government, of course, which means there’s absolutely no need to cut spending because you can just wave a magic wand and increase your income by compulsorily taking it from us in the form of tax.

“Australia will need higher taxes over time to pay for the promises governments have made and intend to keep,” Deloitte’s report reads.

Fantastic. Most of us are already doing it tough, just trying to get by, and one of the world’s biggest economic firms says it’s no trouble – you can just tip more into the government coffers.

It also argues that the government has become too reliant on income tax, which is, again, true.

Income growth has far outstripped changes to income tax rates, meaning many workers are paying more tax in real terms than they used to.

Would an inheritance tax be a good idea? Picture: iStock

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Income and other personal tax receipts have increased by 50 per cent from $223 billion in the 2019-20 federal budget to $334.9 billion in 2024-25.

The government collected $717b in revenue last financial year, making it the largest share of the economy in nearly 25 years.

And we’re told they need more money still.

Bracket creep – whereby wages increase but tax brackets don’t move up with them – disproportionately hurts young people who are likely to experience career progression and significant pay rises in the next decade or so.

So Deloitte helpfully provides some suggestions to increase tax revenue even further – including an inheritance tax.

It estimates that a 10 per cent tax on inheritance of more than $100,000, and excluding the family home, would raise $3 billion a year.

It’s estimated that a 10 per cent tax on inheritance more than $100,000, and excluding the family home, would raise $3b a year. Picture: NewsWire/Damian Shaw

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For the pain it would cause, it is a piddling amount considering the government has lost more than double that revenue in tobacco excise by raising the tax too much and driving people into the hands of illicit cigarettes.

And the biggest problem with an inheritance tax is that it, too, would unfairly hurt younger people.

The report argues that there has been an asset value boom in the past 40 years, which “gave many Baby Boomers and Gen Xers a windfall gain that has been undertaxed and unevenly distributed”.

“Broad-based taxes on wealth – such as an inheritance tax – are a way to repair the budget, help all Australians share in the asset price windfall that has flowed to older generations over the last 40 years, and help to prevent inequality from cascading through future generations,” it reads.

The only problem is that a lot of people in Generations Y and Z are hanging on to that inheritance to have any chance of entering the property market themselves.

It is true that Boomers and Gen X have been beneficiaries of rising property values – my parents bought a modest home in the ‘90s and have likely septupled their money simply by living there and performing a few upgrades – but who do they think will eventually end up with that money?

Those who have benefited from the windfall will continue to benefit from the windfall until they die, and then their children and grandchildren will have to hand 10 per cent to the government, thus punishing them even further.

Those who have benefited from the windfall will continue to benefit from the windfall until they die. Picture: iStock

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I fail to see how that in any way evens the field and reduces inequality.

If they downsize, as the government would like them to do, a larger family can move in, and put the rest of the money in the bank, then my brother and I would likely end up paying inheritance tax on the savings, plus whatever superannuation and other assets they have left.

Surely that would encourage people to hang on to large, valuable properties so they have something to leave their kids without being taxed, further squeezing the property market.

It is simplistic to argue that an inheritance tax is just a tax on the rich. It would be a tax on those likely to receive only modest wealth, especially if it’s set at such a low threshold as $100,000.

Generations Y and Z just want to get ahead, and their greatest chance of doing so is inheriting some money from mum and dad when they die.

But who cares? The government needs more money, and younger generations must, again, be the ones to pay for it.