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Death Taxes and Gift Tax

Talk about poisonous words, death and taxes - no one wants either. It is no wonder this is a difficult sell for politicians. However it seems to me that this is a reasonable time to tax an estate. Australia use to have death taxes. They were levied by the States. But then one State - Queensland - had a brainwave thinking they would attract retirees to the State - abolished their death taxes (or death duties as they were called). Once this happened all the other States were virtually obliged to abolish their death taxes or risk an exodus of retirees. There was no benefit to Queensland - only a loss of revenue to all States.

I would propose a tax of say 25% on the value of the estate over, say, $2.5 million. And maybe a higher rate on estates over, say, $10 million. (These figures - to be determined.) The value of the estate would include all houses, including primary residences (however the primary residence would need to be treated differently to other assets to prevent perverse outcomes from attempts at avoidance). However the $2.5 million threshold means that the majority of estates, even those with normal residential houses, will not be impacted. There has to be an associated gift tax to limit avoidance. Various details have to be worked out associated with dealing with the estates where the deceased had a spouse and the assets split - as I said these are just kernels of ideas.

The only deduction I would allow to this tax is if the estate has left a bequest to registered charitable organisation(s) or to set up a charitable organisation which would be approved by the charities commission. To encourage charitable donation from the estate I would make it charitable donation deductible at twice the rate (or some other multiple) from the value of the estate for tax purposes. This is justifiable as it encourages donation of money which goes to community uses at many times the amount that would otherwise be collected by the government from the death tax.

To illustrate this an example: An estate is valued at $5 million and the will has made charitable bequests to registered charities totaling $500,000. The amount of death tax payable would be ($5million - $2.5 million - 2 x $500,000) x 25% = $350,000. (Total payment to charities and for tax  - $850,000.) This still leaves plenty of money for the beneficiaries. And the majority of people would not have to pay death taxes at all as most estates would be valued below $2.5 million.

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