Australia officially states it doesn’t have a death tax. However, recent tax developments are signalling a significant shift, potentially transforming death taxes into a lucrative source of government revenue. These changes, though seemingly minor technical adjustments to existing frameworks, collectively point towards a clear trend.
The Superannuation Squeeze: A New Taxing Reality
One of the most contentious of these evolving tax landscapes is the new superannuation tax. Initially, the timing of an investor’s death within the financial year had no bearing on their estate’s liability for this new tax. However, an updated version of the legislation, currently before Parliament, fundamentally alters this.
Financial advisor Liam Shorte highlights the precedent-setting nature of this development. “The death tax development introduced by the new super tax doesn’t impact a vast segment of the population, but the precedent it sets is the crucial point. Steadily, the principle of a death tax is becoming more acceptable within our tax system,” Shorte explains.
Shorte elaborated on the mechanics of this new super tax on a recent episode of The Australian’s The Money Puzzle podcast. Once operational, the tax will be calculated based on the higher of an individual’s superannuation balance at the beginning of the financial year and their balance at the end of the financial year.
“This means if a person passes away, for instance, in January, their estate will effectively be liable for six months of tax,” Shorte noted. This creates a significant administrative hurdle for those managing deceased estates. “For someone trying to handle a deceased estate, the natural inclination is to get the funds to the grieving family as quickly as possible. But now, they’ll have to wait until June 30th to assess the full year’s earnings before finalising the tax liability.”
Consequently, beyond the potential for increased tax obligations, there’s a very real prospect of considerable delays in distributing assets from deceased estates.
The Family Home and the Capital Gains Tax Conundrum
Adding to this evolving tax landscape, the Australian Taxation Office (ATO) surprised many in the financial and legal sectors in late January with a fresh ruling concerning what Matthew Burgess of View Legal terms “the family home death tax.” This, too, is a technical adjustment, yet it effectively reintroduces a form of death tax into the mainstream, despite such taxes supposedly being abolished decades ago.
“If a family home is transferred into a testamentary trust, the ATO is now asserting that capital gains tax will be triggered upon its eventual sale – effectively creating a death tax,” Burgess stated.
Testamentary trusts are a common and sophisticated element of modern estate planning, widely utilised by families to manage and safeguard their wealth.
What is a Testamentary Trust?
A testamentary trust is established through a person’s will and only comes into effect following their death.Testamentary trusts are particularly valuable in complex family structures, such as blended families. They are also crucial when individuals wish to provide for grandchildren or support beneficiaries who may be considered “at-risk” due to factors like mental or physical incapacity, substance abuse issues, or gambling addictions.
The Looming Intergenerational Wealth Transfer
These continuous adjustments to the tax system, where seemingly minor changes have implications for death or inheritance taxes, signal a growing potential for substantial increases in future tax revenue. The significant transfer of intergenerational wealth, estimated to be a staggering $3.5 trillion across Australia in the coming decades, presents a prime target for such revenue generation.
Industry data reveals a growing expectation of inheritance among younger generations. Approximately 70 per cent of individuals born in the 1960s anticipate receiving an inheritance, a figure that climbs to an impressive 80 per cent for those born in the 1980s.
Millions of Australians are already indirectly facing a form of death tax through their superannuation. With superannuation often being the largest asset for individuals outside of their primary residence, the effective 17 per cent tax applied to most superannuation inherited by adult children has become a significant concern. In response, an increasing number of superannuation investors are actively engaging in “recontribution strategies” to mitigate this tax liability.
The emergence of two distinct tax changes, both being characterised as death taxes within a short span of months, sends a clear message: death taxes are firmly back on the government’s agenda. These quiet shifts in policy are reshaping how Australians plan for their estates and what their loved ones can expect to inherit.
