Australia's Future Tax System

Final Report: Detailed Analysis

Chapter A: Personal taxation

A3. Wealth transfer taxes

A3–2 The current system has some impact on bequests

All States and the Australian government imposed death duties until the late 1970s. At that point, they began to be phased out. Avoidance had not been tackled systematically and thresholds had not been adjusted, so that moderate-size estates became liable for the taxes, which became very unpopular. State bequest taxes also suffered from competition between the States, with most duties abolished in the ten years after Queensland abolished its duties in 1977.

Internationally, many OECD countries impose wealth transfer taxes — mostly taxes on estates or inheritances — though in no country are these taxes a major source of revenue. On average, OECD countries raise 0. 41 per cent of total tax revenue from such taxes (see Chart A3–3). If this percentage were replicated in Australia, wealth transfer taxes would have raised about $1.4 billion in 2007–08.

Chart A3–3: Estate, inheritance and gift taxes, OECD, 2007

Per cent of total tax revenue

Chart A3-3: Estate, inheritance and gift taxes, OECD, 2007 - Per cent of total tax revenue

Source: OECD (2009).

In Australia today, no taxes are charged on transfers of wealth by bequest or gift. However, some parts of the tax and transfer system impact on bequests for other policy purposes.

Superannuation benefits paid to a non-dependant are subject to a tax of 15 per cent (see Section A2–2).

Means testing of residential aged care assistance effectively operates as a tax on some estates (see Section F7 Funding aged care). For example, on average 26 per cent of the cost of high-level residential aged care services is met from fees to care recipients (DoHA 2008). By law, the size of these contributions varies with the user's income and assets, yet the service standard a user enjoys does not vary with their contributions. Where contributions are made from private savings, the imposition of means testing effectively reduces the value of their estate.

If an asset subject to capital gains tax (CGT) is transferred by bequest, CGT on the gain that has accrued in the hands of the donor is not payable at the time of transfer, but if the recipient later disposes of the asset, CGT is generally payable on the whole of the gain from the time of acquisition by the donor to the time of disposal. This is not a tax on bequests but the realisation of tax on income accrued in the person's lifetime.