Taxing unrealised capital gains – an inheritance tax entree?
There is a concept which seems to recently be gathering momentum in various media forums – “tax wealth, not work”.
This seemingly simplistic solution to create a more even-spread of wealth distribution conveniently fits well within the 200-character limit on platforms like X, in a tabloid column or online news content. When a society faces deeply ingrained fiscal issues, it is natural that governments will gravitate towards a quick fix. But as is often the problem with short-sighted fiscal policy, when the sugar is finished, the ants will disappear.
When the Beatles penned the lyrics for “The Taxman”, they certainly wore their inspiration from the UK tax system on their sleeves.
In the words of George Harrison, “Now my advice for those who die, declare the pennies on your eyes”. But will Australians have to do just that? Following certain recommendations by the Productivity Commission, the government may soon contemplate whether or not it has the appetite to resurrect inheritance taxes, something not seen in Australia since the late 1970’s.
While this might be considered a remote prospect, the proposed changes to superannuation, (if implemented) together with and some of the indirect costs already being imposed on deceased estates, could well be examples of precursors to more widely applied taxes on wealth, and more particularly, on inheritances.
Death Duties: A history lesson
Australians might remember the inheritance tax scheme from the late 1970’s but the history of what is colloquially known as “Death Duties” goes back much further. From around the 1880’s each Australian State had their own death duty scheme. There was also a Federal “Estate Duty”.
There were few exemptions under these schemes, all estate assets were captured by the tax, which combined, saw deceased estates being taxed at over 54%. From 1914, the funds generated were designated to the war effort, however post war the taxes became increasingly unpopular.
As an example, in 1949 in New South Wales, an estate passing to a widow and children worth £47,001 was taxed at 15% by the state and 9.98% at the federal level, reducing the estate to £11,037 which caused the working class to fear dying lest their families be left to face financial hardship. Invariably low exemption thresholds were a significant reason leading to the tax eventually being abolished.
By the mid 1960’s the NSW State rate was a flat 3% for small estates up to $2,000 increasing to 15% for estates up to $54,000, with the top rate of 32% for estates above $200,000. There was no exemption for the family home, so this meant that even modest estates were captured.
The estate was taxed once when it was left to the spouse, and again when left to the children. This meant that an estate was effectively double-taxed (or triple-taxed if you could the tax on the revenue earned to initially acquire the assets).
Flawed death duties scheme abolished in 1979
These taxes, compounded with the pressure of high inflation in the 70’s became intolerable for the working class, who, along with primary producers, pushed the government to end the tax. The reason this was particularly problematic for primary producers was because farm assets were taxed on market value and not return rate, consequentially some farms had to be sold to meet the tax liability. Once again, the primary producers who put food on the public table face adversity beyond the droughts and flooding rains.
Not only was the tax causing public distress, but the system was also technically full of loopholes such that, by the mid 70’s, accountants had become expert at circumventing the tax. In 1975, the Asprey Committee (the committee advising the government on reform at the time) called it a “voluntary tax” avoidable by the sophisticated and well informed.
Comparative law
Most countries have a death duty in the form of either an inheritance tax and/or estate tax. Australia is the stand-out as only 1 of 15 Organisation for Economic Co-operation and Development (OECD) member countries that does not have either.
The UK is going through some changes to its inheritance tax regime. Once again, primary producers look to be the ones who are set to be mostly impacted by those changes.
The UK presently imposes a standard inheritance tax rate of 40%, charged on the part of deceased estate that is above the threshold of £325,000 (roughly $620,000 AUD).
1 in 20 UK estates fall into the taxable bracket. There are limited exemptions available, such as if everything above the threshold passes to a spouse or a charity.
The UK Government also has the ability to apply the tax to a person’s worldwide assets, if they deem them to still be domiciled in the UK.
Anyone thinking they can restructure their way out should think again. Assets held in trust will often be captured as “relevant property”.
To prevent circumventing the tax, gifts given during lifetime are considered under the scheme, with an annual “gift allowance” of £3,000 exempt from the calculated value of the estate for inheritance tax purposes. Other gifts made during lifetime may qualify as “Potentially Exempt Transfers”, provided the donor lives for seven years after the gift has been given. If the donor dies within seven years, the gift becomes a “Chargeable Transfer” (there are complicated rules around this). This would certainly cause the “Bank of Mum and Dad” to rethink the significant assistance they are currently providing to their children in Australia.
Contributions to a wedding may also be exempt. Conditional rules around how much can be given will depend on who is getting married, with a maximum wedding gift of £5,000 for a child of the donor. Pensions are a separate tax minefield.
The complexity involved in the UK scheme shows how deeply such a scheme can potentially complicate estate and tax-planning for families.
More fingers in the pie
Recent changes to the Victorian probate filing fees illustrate how the government can indirectly impose taxes on estates.
As of November 2024, probate fees in Victoria have seen significant increases, with estates valued at $7 million or more now face filing fees of $16,803.60, which is an extreme jump from $2,318.90. It is arguable that the work undertaken by a probate registrar is the same, regardless of whether the estate is $200,000 or $7 million.
Therefore, asset-based probate fees may be viewed by some as a ‘duty’ as opposed to a ‘fee’.
In Queensland, the State Revenue Office’s new ruling on deceased estates – which is effective from 30 June 2025 – introduces complexities in land tax assessments for estates. This can lead to an executor inadvertently incurring land tax for the estate if they do not dispose of property within certain time-limits.
Changes to superannuation
The government’s attempt in February 2025 to introduce a 30% taxation rate (up from 15%) on earnings for superannuation balances over $3 million dollars did not secure the votes it required to pass in the Senate. The proposed legislation is named the “Better Targeted Superannuation Concessions”. These changes have become known as the division 296 changes, and were taken off the agenda- Parliament prior to the election. It is important to note that this means the Bill was not officially defeated.
The Federal Budget 2025-26 papers reveal an extra $2.4 billion in superannuation fund tax receipts which include “an increase in tax from earnings on investments”.[1] This suggest that the government is still intending to collect this revenue.
The current government throughout the 2025 election campaign has confirmed that they remain committed to implementing this reform, as they consider it to just be “modest changes.”
This has wide ranging implications for small to medium enterprises, primary producers, medical professionals and anyone else who has utilised their superannuation to purchase their business premises.
By way of example, a number of years ago, many farmers took advice to buy their next block in the family group via a self-managed superannuation fund to ensure they had a secure retirement strategy.
Those same blocks have now significantly increased in value, and those super funds will incur 30% tax on the unrealised gains on that land, regardless of whether or not the fund has sufficient liquidity to pay the tax.
The other main issue is compliance with this very convoluted process. The cost of having a valuation completed on rural land each year will be significant, and one can only expect the costs to ultimately be passed onto, you guessed it, the consumers.
Other issues with the proposed tax are the fact that the $3m is not intended to be indexed ($3m might not be a high balance in 20 years’ time), as well as the retrospective nature of the changes. If a person has not met a condition of release (they were smart and invested young in say a tech start-up), they may find themselves locked into this tax until they can ultimately exit the system.
Make no mistake, the proposal to tax unrealised gains is significant tax reform and far from a “modest change”.
Dying – will it be worth it?
The Productivity Commission argues that we need to prepare for an aging Australian population, and to avoid an unfair burden being placed on a reduced work force, we need to generate revenue. The Commissioner suggests the funds raised from an inheritance tax could assist in solving these issues associated with an aging population.
With the projections that more than 22 percent of Australians will be aged over 65 by 2026, the Productivity Commissioner has in the past suggested a sensible level that an inheritance tax might apply is $1 or $2 million (with the intention to avoid pillaging smaller inheritances of sub $500,000).
Critics argue the proposed reform would discourage the incentive for taxpayers to work hard and build wealth. It may also promote elderly people to spend rather than invest in the economy, playing out like the Monty Python skit “Hell’s Grannies” as they blow it all on hair nets and cat food to bypass tax liabilities.
The introduction or increase of such taxes, through direct or indirect methods such as the Victorian probate fee hikes or nuanced Queensland land tax rulings, reflect a broader trend of governments getting creative with broadening their fiscal bases, particularly when it comes to the $3.5 trillion intergenerational wealth transfer we keep hearing about.
As the changes in tax schemes become more complex, careful estate planning is needed to navigate potential financial pitfalls. Macpherson Kelley’s Wills and Estate lawyers can provide advice that is tailored to your specific situation, that addressed the ever-changing landscape of Estate law. Get in touch with our team today.
[1] Budget 2025-2026 Budget Paper No. 1 page 98
The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.
more
insights
New Toppling Furniture Information Standards – does your compliance hold up?
Payday Super: What do employers need to know?
State Revenue Office of Victoria (SRO) penalty tax amnesty: Capital raisings following the Oliver Hume decision
stay up to date with our news & insights
Taxing unrealised capital gains – an inheritance tax entree?
There is a concept which seems to recently be gathering momentum in various media forums – “tax wealth, not work”.
This seemingly simplistic solution to create a more even-spread of wealth distribution conveniently fits well within the 200-character limit on platforms like X, in a tabloid column or online news content. When a society faces deeply ingrained fiscal issues, it is natural that governments will gravitate towards a quick fix. But as is often the problem with short-sighted fiscal policy, when the sugar is finished, the ants will disappear.
When the Beatles penned the lyrics for “The Taxman”, they certainly wore their inspiration from the UK tax system on their sleeves.
In the words of George Harrison, “Now my advice for those who die, declare the pennies on your eyes”. But will Australians have to do just that? Following certain recommendations by the Productivity Commission, the government may soon contemplate whether or not it has the appetite to resurrect inheritance taxes, something not seen in Australia since the late 1970’s.
While this might be considered a remote prospect, the proposed changes to superannuation, (if implemented) together with and some of the indirect costs already being imposed on deceased estates, could well be examples of precursors to more widely applied taxes on wealth, and more particularly, on inheritances.
Death Duties: A history lesson
Australians might remember the inheritance tax scheme from the late 1970’s but the history of what is colloquially known as “Death Duties” goes back much further. From around the 1880’s each Australian State had their own death duty scheme. There was also a Federal “Estate Duty”.
There were few exemptions under these schemes, all estate assets were captured by the tax, which combined, saw deceased estates being taxed at over 54%. From 1914, the funds generated were designated to the war effort, however post war the taxes became increasingly unpopular.
As an example, in 1949 in New South Wales, an estate passing to a widow and children worth £47,001 was taxed at 15% by the state and 9.98% at the federal level, reducing the estate to £11,037 which caused the working class to fear dying lest their families be left to face financial hardship. Invariably low exemption thresholds were a significant reason leading to the tax eventually being abolished.
By the mid 1960’s the NSW State rate was a flat 3% for small estates up to $2,000 increasing to 15% for estates up to $54,000, with the top rate of 32% for estates above $200,000. There was no exemption for the family home, so this meant that even modest estates were captured.
The estate was taxed once when it was left to the spouse, and again when left to the children. This meant that an estate was effectively double-taxed (or triple-taxed if you could the tax on the revenue earned to initially acquire the assets).
Flawed death duties scheme abolished in 1979
These taxes, compounded with the pressure of high inflation in the 70’s became intolerable for the working class, who, along with primary producers, pushed the government to end the tax. The reason this was particularly problematic for primary producers was because farm assets were taxed on market value and not return rate, consequentially some farms had to be sold to meet the tax liability. Once again, the primary producers who put food on the public table face adversity beyond the droughts and flooding rains.
Not only was the tax causing public distress, but the system was also technically full of loopholes such that, by the mid 70’s, accountants had become expert at circumventing the tax. In 1975, the Asprey Committee (the committee advising the government on reform at the time) called it a “voluntary tax” avoidable by the sophisticated and well informed.
Comparative law
Most countries have a death duty in the form of either an inheritance tax and/or estate tax. Australia is the stand-out as only 1 of 15 Organisation for Economic Co-operation and Development (OECD) member countries that does not have either.
The UK is going through some changes to its inheritance tax regime. Once again, primary producers look to be the ones who are set to be mostly impacted by those changes.
The UK presently imposes a standard inheritance tax rate of 40%, charged on the part of deceased estate that is above the threshold of £325,000 (roughly $620,000 AUD).
1 in 20 UK estates fall into the taxable bracket. There are limited exemptions available, such as if everything above the threshold passes to a spouse or a charity.
The UK Government also has the ability to apply the tax to a person’s worldwide assets, if they deem them to still be domiciled in the UK.
Anyone thinking they can restructure their way out should think again. Assets held in trust will often be captured as “relevant property”.
To prevent circumventing the tax, gifts given during lifetime are considered under the scheme, with an annual “gift allowance” of £3,000 exempt from the calculated value of the estate for inheritance tax purposes. Other gifts made during lifetime may qualify as “Potentially Exempt Transfers”, provided the donor lives for seven years after the gift has been given. If the donor dies within seven years, the gift becomes a “Chargeable Transfer” (there are complicated rules around this). This would certainly cause the “Bank of Mum and Dad” to rethink the significant assistance they are currently providing to their children in Australia.
Contributions to a wedding may also be exempt. Conditional rules around how much can be given will depend on who is getting married, with a maximum wedding gift of £5,000 for a child of the donor. Pensions are a separate tax minefield.
The complexity involved in the UK scheme shows how deeply such a scheme can potentially complicate estate and tax-planning for families.
More fingers in the pie
Recent changes to the Victorian probate filing fees illustrate how the government can indirectly impose taxes on estates.
As of November 2024, probate fees in Victoria have seen significant increases, with estates valued at $7 million or more now face filing fees of $16,803.60, which is an extreme jump from $2,318.90. It is arguable that the work undertaken by a probate registrar is the same, regardless of whether the estate is $200,000 or $7 million.
Therefore, asset-based probate fees may be viewed by some as a ‘duty’ as opposed to a ‘fee’.
In Queensland, the State Revenue Office’s new ruling on deceased estates – which is effective from 30 June 2025 – introduces complexities in land tax assessments for estates. This can lead to an executor inadvertently incurring land tax for the estate if they do not dispose of property within certain time-limits.
Changes to superannuation
The government’s attempt in February 2025 to introduce a 30% taxation rate (up from 15%) on earnings for superannuation balances over $3 million dollars did not secure the votes it required to pass in the Senate. The proposed legislation is named the “Better Targeted Superannuation Concessions”. These changes have become known as the division 296 changes, and were taken off the agenda- Parliament prior to the election. It is important to note that this means the Bill was not officially defeated.
The Federal Budget 2025-26 papers reveal an extra $2.4 billion in superannuation fund tax receipts which include “an increase in tax from earnings on investments”.[1] This suggest that the government is still intending to collect this revenue.
The current government throughout the 2025 election campaign has confirmed that they remain committed to implementing this reform, as they consider it to just be “modest changes.”
This has wide ranging implications for small to medium enterprises, primary producers, medical professionals and anyone else who has utilised their superannuation to purchase their business premises.
By way of example, a number of years ago, many farmers took advice to buy their next block in the family group via a self-managed superannuation fund to ensure they had a secure retirement strategy.
Those same blocks have now significantly increased in value, and those super funds will incur 30% tax on the unrealised gains on that land, regardless of whether or not the fund has sufficient liquidity to pay the tax.
The other main issue is compliance with this very convoluted process. The cost of having a valuation completed on rural land each year will be significant, and one can only expect the costs to ultimately be passed onto, you guessed it, the consumers.
Other issues with the proposed tax are the fact that the $3m is not intended to be indexed ($3m might not be a high balance in 20 years’ time), as well as the retrospective nature of the changes. If a person has not met a condition of release (they were smart and invested young in say a tech start-up), they may find themselves locked into this tax until they can ultimately exit the system.
Make no mistake, the proposal to tax unrealised gains is significant tax reform and far from a “modest change”.
Dying – will it be worth it?
The Productivity Commission argues that we need to prepare for an aging Australian population, and to avoid an unfair burden being placed on a reduced work force, we need to generate revenue. The Commissioner suggests the funds raised from an inheritance tax could assist in solving these issues associated with an aging population.
With the projections that more than 22 percent of Australians will be aged over 65 by 2026, the Productivity Commissioner has in the past suggested a sensible level that an inheritance tax might apply is $1 or $2 million (with the intention to avoid pillaging smaller inheritances of sub $500,000).
Critics argue the proposed reform would discourage the incentive for taxpayers to work hard and build wealth. It may also promote elderly people to spend rather than invest in the economy, playing out like the Monty Python skit “Hell’s Grannies” as they blow it all on hair nets and cat food to bypass tax liabilities.
The introduction or increase of such taxes, through direct or indirect methods such as the Victorian probate fee hikes or nuanced Queensland land tax rulings, reflect a broader trend of governments getting creative with broadening their fiscal bases, particularly when it comes to the $3.5 trillion intergenerational wealth transfer we keep hearing about.
As the changes in tax schemes become more complex, careful estate planning is needed to navigate potential financial pitfalls. Macpherson Kelley’s Wills and Estate lawyers can provide advice that is tailored to your specific situation, that addressed the ever-changing landscape of Estate law. Get in touch with our team today.
[1] Budget 2025-2026 Budget Paper No. 1 page 98