Many people will love these ideas.  Many will hate them. Most people will like the ideas that help their hip pocket and/or their children’s future.

It is important to remember, that thanks to Paul Keating’s brilliant dividend imputation system, the corporate tax rate is irrelevant to Australian investors.

However, in order to attract overseas investment, we need to get it down to the rate of 10%

1. Death duties & gift taxes

People might oppose death duties. But we already have one! When a person dies, any unrealised capital gains on assets except the family home are crystallised.  Tax is then payable by the estate.

However, there any many exemptions:

1.    Transfer to surviving partner or spouse

I believe this exemption is fair and reasonable

2.    Thresholds below which no Death Duties are payable

These thresholds vary from country to country.

United Kingdom

No inheritance tax is charged is on the first £325,000 (per person) of someone's estate – which is the value of their total assets they leave behind when they die. Above the threshold, the charge is 40%.

 USA - Federal

No federal inheritance tax is charged is on the first $5.45 million (per person) of someone's estate – which is the value of their total assets they leave behind when they die. Above the threshold, the charge is 40%. Because of this high level of exemption, only the largest 0.2% of estates in the US will have to pay any federal estate tax.

USA - States

The six states that impose an inheritance tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.  These rates vary from 1% to 20% on the value of an estate in excess of a limit. A typical limit may be $2 million

Germany

Various exemptions apply equally to gifts and transfers upon death. A spouse or civil partner of the deceased or a donor has a basic exemption of EUR 500,000. Every child has a basic exemption of EUR 400,000 and every grandchild is entitled to an exemption of EUR 200,000.

Recipients are classed in three different categories:

• Category I: spouses and civil partners, children and stepchildren, grandchildren, great grandchildren and, in the case of inheritance, parents and grandparents.
• Category II: brothers, sisters, nephews, nieces, stepparents, sons-in-law, daughters-in-law, parents-in-law, divorced spouses or former civil partners and, in the case of gifts, parents and grandparents.
• Category III: other persons, including legal entities.

Every person from Category I is entitled to an exemption of EUR 100,000. Recipients in Category II are entitled to an allowance of EUR 20,000. The same applies to recipients of Category III.

There are also exemptions for certain items, such as household goods and works of art.

Other reliefs exist for business income (85 percent of the business assets may be inherited tax free under strict conditions) and for houses owned by the deceased that were used for themselves and their family as a residence before their death, which are inherited by the surviving spouse or civil partner.

Tax rates

The tax rates vary between 7 percent and 50 percent according to the relationship between the deceased and the heir, or between the donor and the recipient (see the three categories above). The inheritance and gift tax rates are as follows:

France

France is unusual, in that your spouse and children have a protected right to a share of your inheritance.

*Only freely disposable in the absence of children, as they are protected heirs.

Thus, if you die leaving a surviving spouse and two children, the spouse will receive 1/4 of your estate and the children 2/3 of your estate, with the remaining 1/12th freely disposable, e.g. to your surviving spouse.

If you die leaving no surviving spouse and two children, the children will automatically be entitled to 2/3 of your estate, and you are free to dispose as you wish of 1/3 of your estate.

Australia

Australia abolished the federal estate tax in 1979, following the abolition of state estate taxes by Queensland in 1977.  All of the other states rapidly followed suit, to avoid a flight of both people and assets to Queensland.

However, Australia has a capital gains tax that is levied on the sale of an asset or its transfer of ownership. The tax rate is 50% of normal marginal tax rates.

If this occurs upon the death of the owner it constitutes a "crystalizing action", and capital gains tax becomes assessable. Again the tax rate is 50% of the normal marginal tax rate.

SUMMARY OF DEATH TAXES      

Australians seem to get off fairly lightly compared with many of the major OECD countries. Is this fair? I will comes back to that question later.

I remember a friend of my father died in about 1966.  His estate then was $2.7 million, equivalent to about $32 million now.  However, the combined federal and state death duties amounted to $1.4 million, an AVERAGE rate of 52%

2.     COMPANY TAX AND DIVIDEND IMPUTATION

Dividend imputation was introduced in 1987, one of a number of tax reforms by the Hawke/Keating government

This had 3 major impacts on Australia:

• It stopped Australian retail investors being taxed twice on company profits.  Inter-company profits were already exempt from double taxation, due to the Section 46 Rebate in the Australian Tax Act.
• It stopped Australian companies trying to avoid tax, to ensure that their dividends were “fully franked”. If unfranked dividends were paid, the then the recipient would have had to pay tax at their marginal tax rate on any unfranked dividend. It put paid to a lot of tax minimisation schemes.
• It put overseas investors at a disadvantage, as they did not receive this benefit.

We need to remember that this was the time when a lot of government corporations were privatised and floated, such as:

• Commonwealth Bank,
• Qantas, and
• Telstra.

Combining these privatisations with the introduced of superannuation that was compulsory, transferrable, and had to be preserved until retirement or death, every retail “Mum and Dad” investor demanded that dividends be franked as far as was possible.

When Dr Ken Henry (now AC) was the Secretary of the Department of the Treasury, he floated the idea of abolishing dividend imputation, due to its cost to government revenue. I personally wrote to Ken, whom I had had the privilege of meeting a couple of times, saying there would be rioting in Pitt Street and Collins Street if he tried that.  The idea died quietly.

3.     COMPANY TAX RATES ON A GLOBAL BASIS

The table below shows the distribution of Company Tax Rates worldwide

Australia is obviously at the high end of the range.

This makes Australia a less attractive place for overseas investors. We have always been a net importer of capital.

Commonwealth Government Revenue (budget) 2016-17

The following table shows the projected sources of revenue for the Commonwealth.

On 16 August 2013, the Treasury and Finance departments' pre-election Economic and Fiscal Outlook forecast an increase in forecasts for the Resource Rent Tax receipts over the next four years to almost $6 billion, $16.5 billion below its original projection.

The tax also proved to be complex and expensive to operate. It cost more than $50 million to set up, with estimated running costs of $20 million a year. Advertising came to nearly $40m.

Hence Company tax is of the order of $65 billion per annum.

Residential Land Value

The above chart shows that the value of residential land in Australia is approximately $4,000 billion. According to the 2011 Census, 68% of residential homes were owner occupied.

This means that about $2,700 billion of residential land in Australia is currently exempt from land tax.

 If we were to place a FEDERAL Land Tax on this property at the rate of 1% per annum, this would raise $27 billion, allowing a cut in the corporate tax rate from 30% to 12.5%.

If people were unable to pay, it could be deferred until their death.

Combined with death duties at say 35% over $2 million, I believe we could get the corporate tax rate down to 10%.

THIS WOULD MAKE AUSTRALIA A VERY ATTRACTIVE PLACE FOR OVERSEAS INVESTORS AND WOULD RAISE EVEN MORE REVENUE.

4.    OTHER REVENUE SOURCES

In the USA, capital gains on the sale of the family home may be taxed at rates up to 20% of the nominal capital gains. 

I suggest that this would be very unpopular in Australia.

However, I am suggesting this alternative:

• When you sell the family home, and all proceeds, after costs, are invested in your next home, then the tax is deferred.
• This process is allowed ad infinitum
• At or near retirement age, you are allowed a tax exempt downsize, provided the surplus is invested in an eligible retirement product.
• At this point, the cost price of your first home is pro-rated downwards.
• On the death of the remaining spouse, then 50% of the nominal profits would be added to your estate for death duty purposes.

5.   HECS

HECs has been a total dud.

I quote from Jared Owens in “the Australian” newspaper dated 6 April 2016.

“Australian taxpayers’ exposure to university students’ loans will explode more than fivefold to $185.2 billion in 2025-26, accounting for 46.3 per cent of the nation’s public debt, according to an independent review of the Higher Education Loans Scheme.

The Parliamentary Budget Office report on the HELP scheme, commonly known as HECS, finds about 21.8 per cent of new loans taken out in that year — is unlikely to ever be repaid because the borrower either earns below the taxable income threshold or has moved overseas.

The annual cost of the HELP loans will rise from $1.7 billion in 2015-16 to $11.1 billion in 2025-26.

The report revealed the nominal value of the HELP loan portfolio, currently $42.3bn, was projected to reach $185.2bn in 2026.

The PBO analysis says the government could raise about $133bn if it were to sell the debt on the open market.

The blowout in cost is largely due to the Rudd government’s decision to uncap university places and the Coalition government’s proposal to cut funding for university subsidies and allow institutions to set their own fees.”

This proposal for selling the debt would be good for the budget.  It would pay off 27% of the current federal debt.

Proposal for replacement of HECs

Bring back the Commonwealth Government University Scholarship that was abolished from 1 January 1974 by the Whitlam Government.  This scheme allowed people with “half a brain” (from memory, about an average mark of 72% got you over the line) to get into University free. 

People who do not qualify would have to pay their way with no government help.

I also believe that bringing back “technical schools” would encourage far more people to undertake a skilled trade.  Australia is short of such people.

It would also put downwards pressure on University fees, which would be a good thing.

Peter A Worcester BA BSc FIAA

28 March 2018