There are no inheritance or estate taxes in Australia is the bold statement appearing on the Australian Taxation Office (ATO) website page headed Deceased estates.
But is that statement true or false? Have inheritance and estate taxes returned under different names following the abolition of death taxes?
In this article we review –
- Death duties and estate duties that in the past, taxed inheritances in Australia
- Capital gains tax and super death benefits tax that can now tax inheritances in Australia
What were Death Duties and Estate Duties in Australia?
Death Duty was introduced in NSW in the Stamp Duties Act of 1880. By 1895, all Australian States had introduced death duties. It was known as Probate Duty, Succession Duty or Bequest Tax.
The Stamp Duties Act 1920 (NSW) (which replaced the Act of 1880) provided in section 101:
“In the case of every person who dies [domiciled in New South Wales] … death duty shall be assessed and paid — (a) upon the final balance of the estate of the deceased; … and (b) upon all property forming part of the dutiable estate.”
It was a tax payable on all of the deceased’s assets at date of death.
The “final balance of the estate” and “dutiable estate” included the family home, other real estate, bank accounts, bonds, shares, jewellery, artworks and personal possessions, less debts due and payable.
But that was not all. “All property forming part of the dutiable estate” included gifts made within three years before death in the final balance of the estate (the “notional estate”).
When death duty was introduced in NSW, it was assessed at a flat rate of 1% of the value of the dutiable estate for all persons dying on or after 1 July 1880.
In 1920, the rate increased to 2% for small estates of £1,000, progressively increasing to 20% for large estates above £150,000. Concessions applied when the estate was bequeathed to a widow, widower, dependent child, a public hospital or a charity for the relief of poverty or for education.
In 1965, the rate was a flat rate of 3% for an estate up to $2,000, 15% for an estate of $54,000, and 32% for an estate exceeding $200,000 in value.
As a result, in the 1960s a tax planning industry grew up to assist wealthy people to restructure their assets so as to avoid high death duties. Some set up corporations and trusts in Australia, others moved their assets and domicile to tax havens such as the Bahamas, British Virgin Islands, Cayman Islands, Monaco, Singapore and Hong Kong.
But the real driver for abolition of death duty was closer to home. With the inflation of the 1970s, modest estates with a family home and some savings were worth $54,000, attracting a flat 15% death duty. Queensland led the abolition of death duties in 1978. As a result, significant numbers of retirees were selling up their homes and moving their domicile and money from Sydney and Melbourne to the death duty ‘tax haven’ of the Gold Coast.
It was apparent to all that 100 years after it was introduced, death duty had become a political liability and abolition was a necessity to prevent the outflow of capital.
Death duty was abolished in South Australia and Western Australia in 1980, in Victoria and New South Wales in 1981 and in Tasmania in 1982. Abolition was supported by the major political parties.
Estate Duty was an inheritance tax paid in addition to death duty at the Federal level. It was introduced by the Australian Government in The Estate Duty Assessment Act 1914 (Cth) which provided in section 8(1):
“… estate duty shall be levied and paid upon the value … of the estates of persons dying after the commencement of this Act” [i.e. after 21 December 1914]
The estate comprised real and personal property in Australia.
Introduced to finance World War I, it was only appropriate that the Act provided that Estate Duty was not payable on the estates of service personnel, that is:
“the estate of any person who during the present war or within one year after its termination dies on active service or as a result of injuries received or disease contracted on active service with the military or naval forces of the Commonwealth or any part of the King’s Dominions”.
The top tax rate was initially 20%. Later it was increased to 27.9%. It was a flat tax imposed on the value of the estate remaining after State death duties were deducted. As a result, inheritance taxes could be as high as 50%, resulting in many family homes, farms and businesses needing to be sold or go into debt to pay the taxes.
Estate duty was abolished on and from 1 July 1979, sixty one years after the end of World War I.
Australia has the distinction of being the first rich country in the world (along with Canada) to abolish inheritance taxes. Israel abolished inheritance tax in 1981, New Zealand estate duty in 1992, Sweden inheritance tax in 2004, and Singapore estate tax in 2008. In all, 19 countries have abolished inheritance taxes, all for the same reason: to encourage the wealthy to keep their capital in the country.
Are Capital Gains Tax and Super Death Benefits Tax replacements for death taxes?
It is no coincidence that a new tax on assets, this time on capital gains, was introduced in September 1985, not long after the abolition of death and estate duties.
It is common for a new tax to fill the revenue gap caused by the abolition of an old tax.
Capital Gains Tax is a fairer tax than death or estate taxes because it taxes the capital gain, not the capital itself.
When introducing the tax, the Treasurer took care to avoid it being seen as a new inheritance tax:
“The Government has decided that the deemed realisation at death proposal, outlined in the draft White Paper, will not apply. Liability for tax in the case of death will be rolled over to successors, and will only be assessed on any subsequent disposal. Therefore the capital gains tax will not apply in the case of death. … [also] a complete exemption will apply to gains on the taxpayer's principal residence and reasonable curtilage” [Ministerial Statement by P.J. Keating on Reform of the Australian Taxation System 19 September 1985]
This is the legislation:
Capital Gains Tax (CGT) is payable when you dispose of an asset. Section 104.10 of the Income Tax Assessment Act 1997 (Cth) provides:
(2) You dispose of a CGT asset if a change of ownership occurs from you to another entity”
Section 128.10 makes clear that capital gains tax is not payable in the case of death:
“When you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded.”
Section 128.15 provides details:
“(1) … what happens if a CGT asset you owned just before dying:
(a) devolves to your legal personal representative; or
(3) Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.”
Australia is an exception in not treating death as a CGT event. In other countries where inheritance taxes have been abolished and replaced by capital gains taxes, death is treated as a capital gains taxing point.
In Australia, the taxing point comes later, when the deceased’s assets are sold.
Here another exemption comes into play, which is that the family home is completely exempt from CGT provided that the family home is sold within 2 years of death. And there is another exemption, which is that CGT does not apply as a general rule to assets acquired before 20 September 1985 (i.e. assets owned when the tax was introduced).
Illustration if the deceased purchased Commonwealth Bank shares when they first issued in September 1991, they would have paid $5.40 per share. If sold today, the sale price would be about $100. The capital gain would be $94.60. A 50% discount is applied, and so one-half, that is $47.30, is added to the taxable income of the estate (if sold by the estate) or of the beneficiary (if sold by the beneficiary who inherits the shares).
Notes: In this example, the 50% discount method is applied. Because the shares were purchased before 22 September 1999, the indexation method could be used as an alternative, but has not been used because it would result in more tax being payable.
Super death benefits tax is payable if a deceased person’s superannuation balance passes as a lump sum to a non-dependent beneficiary. This law applies from 1 July 2007.
It is not an estate tax because the deceased’s superannuation does not form part of their estate. It is an inheritance tax because it is payable by a non-dependent beneficiary on their superannuation inheritance.
Most adult children will be non-dependents and be caught by this tax when they receive a lump sum death benefit from the deceased’s a superannuation balance as an inheritance. (they are not allowed to receive an income stream). The lump sum is added to their taxable income, and they pay super death benefits tax at these rates:
- On the taxable component of their super (taxed element), tax at the beneficiary’s marginal tax rate or 17% (15% + 2% Medicare levy), whichever is the lower; and
- On the taxable component of their super (untaxed element), tax at the beneficiary’s marginal tax rate or 32% (30% + 2% Medicare levy), whichever is the lower.
There are some circumstances where this does not apply, such as when the deceased and/or the beneficiary are older than 60 years old.
As was the case with death and estate duty, concessions apply to dependents. In this case, they pay no tax on lump sums or income streams. A dependent is:
- the spouse or de facto spouse (of any sex), and any former spouse or de facto spouse
- a child of the deceased under 18 years old (and up to 25 years old if financially dependent) or without age limit if disabled
- an interdependent person, such as a person having a close personal relationship, living together, provided with financial support, or providing domestic support and personal care to the deceased.
Superannuation balances are left outside of a will. They are paid at the discretion of the trustee of the super fund, subject to a Binding Death Benefit Nomination (if one applies). Where a choice exists between paying the balance to a dependent or a non-dependent beneficiary, the super death benefits tax may be an important consideration.
In summary, if there is no spouse or dependent child to leave the super to, the balance should be withdrawn before death so that it is distributed tax free under a will, instead of passing to a non-dependent as a super death benefit who is facing a tax rate of up to 32%, a rate which has not been seen since the days death duties were payable!
Conclusion – Australia is a tax haven from inheritance taxes
The ATO statement that: “There are no inheritance or estate taxes in Australia” is true, provided that your affairs are structured to avoid Capital Gains Tax and Super Death Benefits Tax.