Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 46

Epilogue: Death duties, where angels fear to tread

Not unexpectedly, my November 2013 Cuffelinks article suggesting that death duties be considered as a public finance tool attracted some strong criticism. I am grateful for all the comments. In retrospect, I concede the label ‘death duties’ would repel many. A more accurate description would be ‘inheritance tax’. I had meant the terms interchangeably.

My responses to the comments are in italics below:

  • They complicate asset-rich family business succession through forced sales. Multiple deaths during a short period are even worse.

As pointed out in the comments, insurance is the obvious solution. Accrual accounting will treat the related cost as an ongoing business expense, amortised as net worth is built up.  This is no different really from the way family needs would be financed pursuant to the breadwinner’s death: insurance or asset sales. With prudent planning, fire sales can be avoided through holding a proportion of liquid assets. 

  • It is an appalling tax, as elders will worry about it in their twilight years. Pre-empting it during one’s lifetime by gifts risks leaving the donor without money, or dependent on recipients. A harrowing example of the commentator’s great grandmother was cited.

As I had explained, the dead cannot be taxed, only those left living. Individual examples are always painful. Those who accumulate wealth would be accustomed to taxes on income, and most cope by only considering the post tax component for meeting their commitments (e.g., a worker focusing not on gross but net cash flow). The taxation of capital gains is similar, when an investor would take into consideration the net-of-tax gain.

  • Superannuation imposes inheritance tax indirectly, by levying 15% (plus medicare) on benefits paid to non-dependents such as adult children. The tax can be avoided by paying the benefits during the member’s lifetime.

I am unsure if this is an argument for (‘we already have it, so why the fuss?’) or against (‘shock horror, the dreaded tax lurks in unlikely corners’). Regardless, for inheritance tax to be effective and fair, it should be accompanied by suitable anti-avoidance measures. Circumvention through prior gifting would be obvious. Centrelink already claws back certain gifts in calculating age pension. 

  • The dichotomy inherent in taxing earned income in full, capital gains in part but exempting gambling and inheritance is inequitable.

To encourage a strong work ethic, as a principle, unearned income (inheritance, gambling and capital gains) should be in principle taxed in preference to earned income from personal exertion. The current attitude towards inheritance tax offends the principle. The worsening dependency ratio (workers to total population) demands a review, to transmit appropriate behavioural signals.

To sum up, a strong case against considering the tax has not been made as the economy balances the many competing factors on the demand and supply side. Any introduction has to be tested against real income, capacity to pay, progressiveness and the inevitable challenges of transition. I adored the suggestion that death duties give an extra incentive for living longer. Researchers, take note. The economies of the world struggling with improving longevity have now stumbled upon the ‘killer’ rationale – literally speaking - for introducing an inheritance tax.

Ramani Venkatramani is an actuary and Principal of Ramani Consulting Pty Ltd. Between 1996 and 2011, he was a senior executive at ISC /APRA, supervising pension funds.

3 Comments
Carol
January 24, 2014

I support inheritance tax. I live in a middle class neighbourhood and some of my children's contemporaries will inherit two sizable generational nest eggs of property and other assetts before they reach retirement age. Less 'well born' people will have to work and budget for thirty or fourty years to provide for themselves the sort of retirement income the 'well born' will simply have land in their laps - tax free. So the less lucky members of society will have all their earnings taxed, while the 'well born' will not be asked to pay tax on money they inherit.

This money also ends up resting largely in the already large bank accounts of the over fifties. Most will inherit when they are at this age and already have large bank accounts. The over fifties tend to save their money ( so it is not working productively in the economy), or many now are spending it on endless overseas holidays - so that it is not circulating through the economy here. So the money itself contributes less than it might to the economy. It would benefit the economy to have at least 15 - 20 % circulating through it if it was taxed and recirculated here.

I say this as someone who will inherit about half a million dollars when the eighty plus year old parents pass. I pay tax on my salary, I pay tax on my superannuation, so why is the free money of an inheritance treated so favourably?

Richard
January 26, 2014

Simple answer is - because the tax has already been paid. This is really a much more complicated debate than can be handled here, for instance what about the many Australians that build a family business - and in the event of the death of a family member tax must be paid - how to value the business - sell it or value it, then where does the tax come from to - sell it? What about farmers, sitting on productive land that mostly makes little profit (Why is a another long story), again they would likely have to sell (part of) it - sometimes to less productive hobby farmers - having a double whammy on our economy - taxing just because of the death of a person and contributing to reduced productivity by forcing breakup of assets.
Due to the over inflated price of Sydney housing these days, unless I leave some form of legacy for my children - to buy in Sydney, they will start life with so much debt I am concerned we will drive too much risk aversion into our economy and people will not take a chance to build their own businesses and innovate.
I have had the pleasure of working with rich and poor and I have come to the conclusion it is not the size of the inheritance that makes a person. I am proud of the fact that my father left me something, I have invested it (sometimes spent some and sometimes topped it up) and I plan to pass it to my children. I do not see this as a waste and hence tax should be paid on it.
One could say it is more productive than sending my children out in their 20's or is it 30's! to secure a huge debt to banks to pay off huge mortgages for next 30 or more years.
Some people do waste money, some have businesses and some have properties. Inheritance tax does not drive productivity - it just shifts wealth to the government - to do what?
They got rid of Wealth Tax years ago - I am one that would suggest for the majority of Australians it is not the answer to our many problems.

Ramani
February 07, 2014

There could be a logical defence against inheritance tax. But 'because tax is already paid' is not one.

When I receive my wage, I pay tax. This net amount is spent on consumables (which in turn levy tax), and the traders then pay tax on profits. Cascade is a tax reality. The puristic distaste of double tax does not work in practice.

The purported troubles of business, agriculture etc in coping with the tax by having to sell are problems of plenty, being trivial relative to the poor wage earner subject to PAYG tax at source. If pain of payment is a valid reason to eschew taxation, then all taxes will have to go.

As the dead taxpayer is free from all materialistic obligation such as tax, and it is the progeny / inheritors who pay inheritance tax, the presumed identity between the previous and subsequent payers is an illusion.

The final assertion 'it goes to the government' works the other way, by denying the substantial fiscal identity between the Government and citizenry. It emphatically settles the issue. Strip away the agency risk and pipeline wastage, the government is us!

Inheritance (or wealth / gift) tax may be blasphemous to some. But historically, blasphemy has been a useful step towards innovation and unsettling the status quo. Thankfully, burning at stake is so Joan of Arc!

 

Leave a Comment:

     

RELATED ARTICLES

Anti-detriment abolition: death duty on the sly

Living within one’s means

Death duties, where angels fear to tread

banner

Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

2021 was a standout year for stockmarket listings

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.