Tax Institute raises idea of inheritance tax of 5pc on amounts over $2.5m

The Tax Institute has raised an inheritance tax that would kick in at 5 per cent on amounts over $2.5m. Picture: Brendon Thorne/Getty Images

The reintroduction of inheritance tax remains an agenda item which is not going to go away merely because it may be unpopular.

A new political reality is emerging where the possibilities for new sources of tax revenue are narrowing fast.

This week’s announcement from the Labor Party ruling out negative gearing or capital gains tax changes effectively closes off those avenues.

Meanwhile income tax reductions are now guaranteed as they are both legislated by the Coalition and approved in advance by the Albanese-led opposition.

As the Budget deficit mushrooms and the growth outlook deteriorates, it is fertile ground for proposals on wealth transfer tax.

A new paper just published from the Tax Institute puts forth the idea of an inheritance tax that would kick in at 5 per cent on amounts over $2.5m.

“The history (of inheritance tax) and the state of the economy post-Covid necessitating new sources of revenue is the basis for a healthy discussion as to the merit of introducing a wealth transfer tax in Australia,” says the report.

Interestingly, inheritance tax reappeared on the national agenda some weeks ago with an academic survey which suggested two thirds of respondents thought Australia should consider reintroducing taxes on estates worth more than $3m.

Inheritance taxes overseas remain in place in key jurisdictions.

In the UK inheritance tax is 40 per cent above $325,000 sterling, in France inheritance tax rates can scale up to 45 per cent.

The US also has an inheritance tax of up to 40 per cent but it kicks in at a very high level with roughly the first US$11m exempt.

In this context, the Tax Institute (the professional association for tax practitioners) has added heat to the debate around the controversial issue.

“Other equivalent jurisdictions have this form of tax and we don’t...yet managed properly it is a progressive tax policy,” says Tax Institute policy director Andrew Mills.

Inheritance tax was scrapped 40 years ago under the Liberal Fraser government though it lingered on among state taxes until the final scraps of legislation rules were removed in 1984.

However, the Tax Institute points out that by the time inheritance taxes were abolished the revenue from the tax had already faded due to random reductions “despite various reviews recommending refinements to improve the equity of the tax”.

The “options for deceased estates and wealth taxes’ is contained in a wider report on the tax system titled ‘The case for change’.

Australians over 60 are set to transfer $3.5 trillion in wealth over the next two decades, an unprecedented amount reflecting extended strong conditions for wealth accumulation through residential property, shares and superannuation.

Industry analysis suggests that around 78 per cent of this wealth will go to roughly 20 per cent of recipients.

The report says the argument in favour of inheritance tax would be to minimise wealth inequality and simultaneously boost government revenue.

“Any rate set should be relatively low as compared to other taxes, for example 5 per cent above a given threshold of say $2.5m or another reasonable amount,” it notes.

Recent research put forward the notion that the Australian public has a knee jerk resistance to inheritance tax but such positions soften once the issue is fully considered, though this is likely to be severely tested as the debate evolves.