Death and taxes: Why an inheritance tax would crush middle-class Australians

As Australia approaches its next federal election, whispers of an inheritance tax have begun to ripple through public discourse, reignited by recent discussions on ABC radio and a subsequent article that sparked widespread online debate.

The idea, dormant since its abolition in 1979, seems to be gaining traction amid growing conversations about wealth inequality and the ethics of intergenerational wealth transfer.

Yet, beneath the surface, there’s a palpable sense that the country is being “softened up” for a policy that could prove both ineffective and unfair – particularly for the middle class.

Financial expert Rachel Lane, in a recent chat, articulated a concern shared by many: while an inheritance tax might be framed as a way to make the rich “pay their fair share” – a slogan likely to dominate campaign rhetoric from either major political party – it risks mirroring the upcoming aged care reforms, which places the financial the burden squarely on middle-income families.

“The very wealthy won’t pay it,” Lane warned, pointing to the sophisticated financial structures – like trusts, companies and insurance bonds – that enable assets to be distributed outside an estate. Meanwhile, those with modest wealth, often tied up in the family home, could find their financial legacies eroded.

The mechanics of an inheritance tax: Who really pays?

An inheritance tax, as Lane explained, applies only to estate assets – property or wealth that can be distributed via a will. 

Jointly owned assets are not estate assets, they work on the law of survivorship, these assets whether they are the family home, investments or bank accounts don’t qualify; the surviving owner automatically retains full ownership, bypassing the estate entirely.

Similarly, assets in trusts, superannuation funds, or insurance bonds sit outside the estate. For the ultra-wealthy, who can afford expert advice, minimising the estate value is a straightforward exercise.

“Who dies last wins,” Lane quipped, highlighting how the rich can sidestep the tax with ease

Contrast this with the middle class – those with estates valued above a hypothetical threshold (say, $2 million, as floated in some media discussions) but lacking the resources for complex financial planning.

These families, often pinning their hopes on passing down the family home or a modest nest egg, would bear the brunt. Lane said that a threshold high enough to spare low-value estates would still leave middle-class beneficiaries exposed, while potentially raising too little revenue to justify the cost of implementation.

The cost-benefit conundrum

This brings us to a critical question: is an inheritance tax worth it? Lane advocates for a rigorous cost-benefit analysis, a sentiment that resonates with taxpayers wary of inefficient policy.

Legislation, administration, and enforcement would demand significant public resources—costs that could outweigh the revenue generated if the wealthy evade it and the threshold excludes smaller estates.

“How much are you actually going to raise versus the cost of doing it?” Lane asked, suggesting alternative taxes targeting entities or individuals with greater capacity to pay might yield more while spreading the burden more equitably.

The comparison to aged care reforms is telling. Changes to refundable accommodation deposits (RADs) in aged care have already forced middle-class families to sell homes to cover costs, redistributing wealth not to the disadvantaged but often to corporate providers or government coffers.

An inheritance tax layered atop this could exacerbate the pressure, particularly if RAD repayments to estates trigger additional taxation—a double hit Lane flagged as a potential disincentive for families opting into such arrangements.

A hidden sting for aged care: The RAD dilemma

One often-overlooked impact of an inheritance tax lies in its potential to disrupt aged care funding, particularly through Refundable Accommodation Deposits (RADs).

Lane highlighted a concerning scenario: “This could put pressure on people paying refundable accommodation deposits… potentially not to pay a RAD.” Beyond 1 July, aged care providers can retain up to 10% of a RAD, with the remainder refunded to the resident’s estate upon their passing.

An inheritance tax would then take a further bite from that refund, creating a double hit for families. “The aged care home doesn’t really get a choice about where they refund it,” Lane noted. “They have to refund it to the estate, and in refunding it to the estate, you then incur the inheritance tax.”

This could act as a significant disincentive for families to opt for RADs, a lump-sum payment many middle-class households rely on to secure quality care without selling the family home upfront. “That’s not really fair,” Lane argued. “People should have that choice.”

The result? More families might be pushed toward selling assets earlier or forgoing RADs entirely, further straining their finances and undermining their ability to preserve wealth for the next generation.

Public sentiment and political framing

Online chatter following the ABC discussions reveals a mix of scepticism and resignation.

Many Australians suspect the renewed interest stems from a need to address ballooning national debt – a point Lane acknowledged: “Debt has to be repaid by someone, somewhere, sometime.”

Yet, there’s little faith that an inheritance tax would deliver fairness. Commentators on platforms like X have echoed Lane’s concerns, with one user noting, “The rich will dodge it, and the middle will pay – same as always.”

Politically, the tax’s appeal lies in its simplicity as a soundbite: “Tax the rich to fund healthcare and aged care.”

It’s a message that could sway voters aligned with their chosen party, especially if distrust in government spending is overshadowed by a desire for perceived equity.

But as Lane cautioned, “People want things to be fair, but they also want bang for their buck.”

Without transparency on how funds would be spent – or evidence that the wealthy would actually contribute – resistance could mount, particularly among the 40-something taxpayers who stand to lose their future inheritances.

A threat to generational wealth?

Perhaps the deepest concern is the tax’s potential to entrench inequality rather than alleviate it.

Middle-class families often see inheritance as a financial legacy – a leg up for children or grandchildren, whether it’s the family home, a first car, or education funds. Lane noted a shift in estate planning toward supporting younger generations, as longer lifespans mean children are often established by the time they inherit.

An inheritance tax could strip mine this prospect, leaving the middle class with less to pass on while the wealthy preserve their fortunes through legal loopholes

Australia’s history offers a cautionary tale: when inheritance taxes were abolished in 1979, it was partly due to their unpopularity and administrative complexity.

Other nations, like the UK (with a 40% rate above a £325,000 threshold) and the US (with a federal estate tax above $13.61 million), show how thresholds and exemptions can skew outcomes.

In practice, few pay the US estate tax, thanks to trusts and planning – precisely the scenario Lane predicts here.

A Fairer Alternative?

Rather than a blunt inheritance tax, Lane suggested targeting those who currently pay the least – individuals and entities with the greatest capacity to contribute.

This would require sophisticated reforms, likely to face pushback from powerful interests, but could avoid punishing the middle class yet again. “Sometimes you just have to do what’s right,” she said, though I refuse to hold my breath waiting for such boldness.

As the election looms, the inheritance tax debate will intensify. If proposed, it will undoubtedly be sold as a strike against the elite. But much like impending aged care changes, the reality may be a familiar one: the middle class, already stretched by income tax and rising costs, stripped of yet more wealth – while the rich watch from the sidelines, unscathed.