The proposal to reintroduce an inheritance tax in Australia is reigniting an old debate one that is often clouded by political fearmongering and ideological divisions. While Great Britain and the United States have long-standing inheritance taxes, Australia abolished them around 1979, largely due to concerns about double taxation, and the disproportionate burden on asset-rich but income-poor families. However, with a record $3.5 trillion in wealth set to be passed down over the coming decades, calls for taxation on large inheritances are growing louder.
The case for an inheritance tax
Supporters of an inheritance tax argue it would reduce wealth inequality, and create a fairer society. Anglicare Australia, in its latest report, emphasises the fact that Australia is one of the few OECD nations without an inheritance tax which makes us an outlier.
The report contends that large, untaxed inheritances concentrate wealth in fewer hands, making it harder for younger Australians, particularly those without family assets, to achieve financial security.
Economically, inheritance taxes are often seen as one of the least distortionary taxes. Inheritance taxes are not a disincentive to work, nor investment, in the same way that high-income taxes are. Former Treasury Secretary Dr Ken Henry’s 2010 tax review noted that under the Rudd Government as it was then, a bequest tax could replace less efficient taxes, such as those on wages, potentially easing the tax burden on working Australians.
The problems with inheritance tax
First and foremost arguing for an inheritance tax is a political poison pill. History has shown that inheritance taxes are easy to demonise and difficult to implement. The term “death tax” has been weaponised in political campaigns, making it an uphill battle to gain public support.
Previous election cycles have demonstrated that even a hint of such a tax is enough to spark voter backlash, as seen in scare campaigns against Labor despite the party having no formal policy on the issue.
Then there is the issue of double taxation and complexity. One of the biggest criticisms of inheritance taxes is that they tax wealth that has already been taxed either through for example income tax, capital gains tax, or company tax.
Many Australians no doubt may feel that taxing an estate again upon death is unjust. Inheritance taxes can also be complex, leading to costly estate planning strategies designed to minimise tax liabilities, which often favour the wealthy anyway.
Also, the issue of being asset-rich, but cash-poor impacts on many Australians. While Anglicare proposes an exemption for the family home, estates are often tied up in illiquid assets, such as farms, small businesses, or investment properties.
An inheritance tax might force beneficiaries to sell these assets to cover tax liabilities, which may not be in their long-term financial interests.
Middle ground: Policy alternatives
If the goal is to address inequality and improve tax fairness, there are alternative approaches that might be more politically palatable and economically effective:
Targeted estate tax on very large inheritances
Rather than a broad inheritance tax, a high-threshold estate tax could be introduced on inheritances above, say for example $6m, with exemptions for principal place of residence, small businesses and farms. This would ensure that only the wealthiest estates contribute, reducing the likelihood of middle-class Australians being caught in the crossfire.
Strengthening capital gains tax on inherited assets
Australia already has a de facto inheritance tax in the form of Capital Gains Tax (CGT) on inherited assets which is riddled with loopholes that allow substantial wealth transfers to occur tax-free. Unlike many other tax events, CGT can potentially defer upon death, meaning that some inherited assets escape taxation until they are eventually sold. This effectively postpones rather than eliminates the tax, creating an inequitable system where generational wealth accumulation remains largely untaxed while wages continue to bear the heaviest tax burden.
Australia already has a de facto inheritance tax in the form of Capital Gains Tax (CGT) on inherited assets which is riddled with loopholes that allow substantial wealth transfers to occur tax-free.
Critics argue that tightening CGT rules on inherited assets amounts to a “stealth death tax”, disproportionately affecting middle-income Australians who may inherit a modest property or portfolio. However, the reality is that without reform, the tax burden continues to fall on working Australians while intergenerational wealth transfers remain largely untaxed.
While no one wants a return of “death taxes”, ignoring the current inequities in CGT only entrenches wealth disparities and forces the government to seek revenue from more distortionary taxes. The real question is not whether inherited wealth should be taxed, but how to do so fairly without stoking fear campaigns and political backlash.
Superannuation tax reform
Unintended consequences of the $3 million superannuation cap: Unrealised gains dilemma
One of the most contentious aspects of the government’s proposed 30 per cent tax rate on earnings for superannuation balances exceeding $3 million (which is at a standstill at the moment until after the Federal Election) is the potential taxation of unrealised capital gains.
This contradicts a fundamental principle of Australia’s capital gains tax (CGT) system—which operates on the premise that a taxable event is only triggered when an asset is disposed of. Under the reforms a revaluation of assets within a Self-Managed Superannuation fund (SMSF) could artificially inflate the fund’s balance, potentially pushing it over the $3 million cap and subjecting unrealised gains to the higher tax rate.
This raises serious policy and equity concerns:
Taxing Phantom Gains – Unlike traditional CGT, where tax is levied only upon disposal of an asset, these reforms could result in a tax on paper profits that have not been realised. This could create liquidity issues, particularly for SMSFs holding illiquid assets such as property, private equity, or infrastructure investments.
Distortionary Effects on Investment Decisions – SMSF trustees may be forced to restructure their portfolios to avoid exceeding the cap, leading to suboptimal investment decisions and unnecessary asset sales that may crystallise CGT liabilities earlier than necessary.
Unfair Treatment Compared to Other Investment Structures – This approach differs from how capital gains are treated in other investment vehicles, such as individuals, trusts, or companies, where CGT is not imposed until an asset is sold. This creates an inconsistent tax treatment that disadvantages SMSFs relative to other wealth structures.
Potential for Bracket Creep Over Time – The $3 million cap is not indexed to inflation, meaning more superannuation balances will gradually exceed the threshold over time as assets appreciate. What is currently a policy targeted at high-net-worth individuals could soon capture middle-income Australians with long-term investments in superannuation.
Pragmatism over rhetoric
The debate over inheritance tax is both an economic and political issue. While there are strong arguments for taxing large inheritances, any attempt to reintroduce such a tax would require careful structuring to avoid the pitfalls of past attempts. Given the history of scare campaigns in Australia, a gradual, targeted approach focusing on large estates and closing tax loopholes may be a more viable solution than an outright return to inheritance taxes.
The reality is that Australia’s tax system is disproportionately reliant on personal income tax, and a better balance between taxing income and wealth is needed. However, the challenge will always be overcoming political resistance and ensuring that any tax reform is seen as fair, reasonable, and free from unnecessary economic distortions.
Tony Anamourlis, Master of Laws, specialises in estate planning, multinational transactions, and tax structuring. He is a published tax expert and frequent media commentator on global tax issues.
