Inheritance tax back in spotlight ahead of poll

A string of academics have been calling for a review of inheritance tax in recent months.

Anyone looking for a road map to revive inheritance tax – and they are out there – will be delighted to find the Productivity Commission has just produced the most important research in the area for years.

Dropped into an election environment where taxation demands are going to increase while key options such as negative gearing or franked dividend reforms are off the table, the report is set to ignite debate over inheritance tax or the lack of it. The Fraser government dropped con­troversial inheritance taxes four decades ago.

As the PC explains, we are about to see a staggering amount of money get passed between generations: over the past 20 years, the amount of money inherited by people doubled, but in the next 30 years it is set for a fourfold increase.

The new report finds that inheritance “weighs on economic mobility” – the argument used regularly in other countries to run inheritance taxes.

But the PC then also suggests that because the poorer in Australia get more bang for their buck from inheritances, wealth transfers reduce relative wealth inequality.

This point will be debated strongly in some quarters. Suffice to say, the report suggests the moderating effect is quite small and could change in the future.

A string of academics have been calling for a review of inheritance tax in recent months. In July, the Tax Institute put forward the idea of an inheritance tax that would kick in at 5 per cent on amounts of more than $2.5m.

The report finds the average inheritance in Australia is worth about $125,000, but the figure is misleading because of a significant number who can inherit very large amounts.

As the report makes clear: “The distribution of wealth transfer is highly skewed. There were a few very wealthy transfers, but most were smaller than average.”

In fact, the median inheritance – the more statistically reliable figure – is closer to $45,000.

Moreover, digging deeper into the figures, the PC found that among the poorest portion of ­society, where total wealth was about $7500, the arrival of an ­inheritance is transformative – underpinning the idea that ­inheritance can reduce wealth ­inequality.

The Productivity Commission makes as much noise about what it did not find as to what it uncovered. On the vexed issue of whether untaxed inheritances are good or bad for the wider economy, the report moves to cut criticism in advance.

Indeed, it even goes as far as to single out influential French economist Thomas Piketty.

“Academic work by Piketty and others has argued that wealth transfers and inheritances in particular might contribute to worsening wealth inequality in the future – we do not find ­compelling evidence for this,” it says.

Similarly, despite the alleged importance of parents in bankrolling their children in the housing market, the PC sternly says: “The commission could not find strong evidence of large transferred from the bank of mum and dad despite popular belief.”

In the coming weeks, the argument that inheritances are more important to those with less money will be a boost to the campaign for the provision of less expensive financial advice.

As the report points out, the number of people being left inheritances in the next two decades is going to rise by 400 per cent – without access to advice, such good fortune may never ­become as useful as the report suggests.

About 90 per cent of all Australians never receive formal financial advice, but new moves to allow advisers to offer advice on a “limited’ basis” – which could deal with a single issue such as an inheritance – are being planned at the Australian Securities & Investments Commission.