― 442 ―

II. Proposed Reforms

24.10. After recommending the preservation of a death tax, in the particular form of an estate duty, it is incumbent upon the Committee to demonstrate that it can be rendered a more effective levy than it is at present. It is certainly at present a tax which can be avoided by well-advised persons with ease, and which might almost be said to be paid principally from the estates of those who died unexpectedly or who had failed to attend to their affairs with proper skill. The Committee believes that far-reaching reforms are required, but it also believes that they are possible and that this tax, though inevitably a complex one, can be allotted and perform a significant role in any long-term reforms.

The Tax Base

24.11. The base of an estate duty must at least include that property owned by the deceased at the time of his death which in fact becomes part of his estate administered by his personal representative. However, the objective of taxing all wealth once a generation will require that the base be wider than this actual estate. In some circumstances property should be included in respect of which the deceased had only some of the incidents of ownership and which does not in fact pass to his personal representative. And valuable rights should be included which the deceased had at the time of his death but which ceased on his death or suffered a change on death that diminished their value. The tax base for the present Commonwealth estate duty and, though to a lesser extent, for the death taxes of the States, is too narrow and should be widened.

24.12. The Committee proposes that the base of estate duty should include property the deceased had power to acquire at the time of his death. Thus it would include property the subject of a power of appointment which the deceased had at the time of his death and could have exercised in his own favour. It should also include property in which a deceased person had an interest for life. If it is not included, property in which a life interest is given, for example in favour of a son, may escape tax for a generation: it would not be subject to tax until the death of the son's children who are given the property subject to their father's life interest. It is also proposed that there should be provisions whereby property subject to discretionary trusts will be brought to tax on the death of a beneficiary.

24.13. The base should include valuable rights in the form of an option to acquire property or a right to repayment of a loan or rights attendant on shares which the deceased had at the time of his death even though those rights are, by their terms, extinguished by his death. The option may be so expressed that it lapses on death; the right to recover the loan may be conditional on a personal notice being given which cannot be given after death; the articles of association of the company may provide that the shares will cease to carry certain rights on the death of the shareholder.

24.14. In addition to extensions to the tax base, it will be necessary to ensure that property included in the base is taxed at its true value. The law will need to take account of the various techniques used in ‘estate planning’ to bring about a change in the value of an asset on death so that the value for computing tax liability is far less than its value to the deceased during his life. Associated with this loss of value is an increase in the value of assets already owned by the deceased's heirs. One of the techniques involves a valuable parcel of shares which, by virtue of a provision in the articles of association of the company in which the shares are held, suffers a considerable decrease in value on the death of the shareholder.

  ― 443 ―

24.15. No extension of the tax base can ensure that all wealth is taxed at least once a generation. The law cannot forbid a grandfather leaving his property to his grandchildren when their parents are still living. Generation-skipping of this kind could be dealt with indirectly by provisions that would make tax on the grandfather's estate depend on the difference in age between himself and his grandchildren, but such provisions would be complicated and could produce some unexpected and probably unwelcome consequences.

24.16. The Committee's detailed proposals for the base of the reformed estate duty are set out in Appendix A to this chapter. The appendix also includes the Committee's proposals in regard to the base of a reformed gift duty which, as indicated in the next paragraph, should be integrated with the estate duty.

Integration of Gift Duty with Estate Duty

24.17. An estate duty must fall short of its objectives unless the tax base is extended to include gifts made by a deceased person during his lifetime. The present Commonwealth estate duty aggregates with the estate gifts made within three years of death. Any gift duty incurred on such gifts is credited against estate duty and will have diminished the estate for estate duty purposes. Gifts made outside the three-year period are in general subject only to gift duty. No tax is payable if a donor makes a gift and the value of the gift (when aggregated with the value of all other gifts he has made in the preceding 18 months and will make in the following 18 months) does not exceed $10,000. Thus, if a donor makes one gift of $10,000 after the end of each successive period of 18 months and no other gifts in between, he can dispose of assets to the value of $120,000 in a period of little more than 18 years, without incurring any liability for gift duty. Even if the gifts are larger and duty is payable, the amount of duty is modest compared with the saving in estate duty that usually results when a deceased survives a gift by three years.

24.18. A further shortcoming of the present Commonwealth gift duty is that many transfers that are, in substance, gifts but are cast in a form falling outside the ambit of the existing tax base manage to escape duty. A simple example is the interest-free loan, repayable at call, made by a husband to a member of his family. In substance, there is a gift of the income forgone by the lender; yet no gift tax is attracted. Partnerships, companies and trusts are commonly used by taxpayers to divert income from themselves to wives and children in circumstances that do not attract duty, even though a gift of the relevant income is in effect being made. Transactions involving companies are used to diminish the property of a donor and increase the property of a donee, again in circumstances attracting no gift duty. Allowing another to use property without any payment for its use does not attract gift duty. Valuable rights such as an option may be allowed to lapse without attracting gift duty.

24.19. In paragraph 24.12 it was stated that the objective of ensuring that wealth is taxed once a generation requires that property subject to a life estate or a discretionary trust should be taxed on the death of the life tenant or of a beneficiary under a discretionary trust. If provisions including such property in the estate duty base are not to be defeated by the assignment or surrender of the life estate or interest during the lifetime of the life tenant or beneficiary, the assignment or surrender must be made to generate a liability to gift duty.

24.20. The Committee proposes a full integration of estate duty and gift duty which will have the effect of treating gifts virtually in all respects in the same way as bequests. There will be only one rate structure. Gifts over life will attract increasing rates

  ― 444 ―
of duty set by the rate structure, the rate of tax on any gift being determined by the amount of the gift and the value of gifts already made. The rate of tax on bequests will be determined by the amount of bequests and the value of all gifts made during life. Thus an estate will attract the same tax whether it is given away wholly during life, partly during life and partly on death, or wholly on death.

24.21. An effect of the proposed integration will be to take away the incentive offered by the present law to make gifts during life. There seems no compelling reason why gifts during life should be treated more generously than bequests. In other words, gift duty should fully support the estate duty. The testator ought not to be encouraged by tax considerations, or be persuaded by his heirs with tax considerations in mind, to give up the security of wealth during his lifetime.

Deductions in Determining the Estate Duty Base

24.22. The base of the estate duty should be the value of assets included in the base less the amount of all liabilities of the deceased. In the case of contingent liabilities, an estimate should be made and allowed. The Committee considers that, in addition, certain other deductions should be allowed, including funeral expenses incurred in relation to the deceased (subject to a ceiling), and the cost of valuations required in connection with the assessment of duty.

Rate Structure

24.23. The present rate structure of the Commonwealth estate duty uses a ‘slab’ system, that is to say, rates are laid down for different sizes of estates, the appropriate rate being applied to the whole of the estate. An alternative is the ‘slice’ system. Under this system, each successive slice of an estate bears a different and higher rate. Each system involves a progressive rate structure. Only the ‘slice’ system, however, is appropriate to an integrated duty. A ‘slab’ system does not enable the final determination of the amount of tax on a gift.

24.24. Later in this chapter the Committee explains its view that a national system of estate and gift duty should replace the existing sets of Commonwealth and State provisions. And it is in terms of this national system that the rate structure is considered. The Committee does not wish to recommend a particular structure in quantitative terms, but three general comments may be made:

  • (a) To minimise administration and compliance costs, and relieve some of the very real hardships of the existing provisions, it is essential that there be a substantial minimum exemption limit, in the form of a zero-rated slice. At present prices a zero-rate slice of, say, $60,000 might be suggested.
  • (b) How high the rate should go on the top slices of large estates depends upon the desired rate of progressivity in the tax system as a whole which, as already suggested in Chapter 4, is very much a matter of prevailing political and social judgments. There is also here an interrelationship with the top marginal rate of income tax. A heavier tax on capital at death could be used to offset a lower tax on income during life, and produce the same overall progressivity. In terms of incentives such a combination might be superior to high lifetime rates and low death rates, since a man might save more to enjoy more possessions in his lifetime.
  • (c) In setting the rate, regard should be paid to the effect that integration of death and gift duties will have on smaller estates. For example, a rate equal to the combined New South Wales death and Commonwealth estate duty rates could well result in more tax being imposed on smaller estates than at present,

      ― 445 ―
    due to the widened base. Regard should also be paid to the fact that the reforms to the tax base recommended in Appendix A will result in property being brought to tax more frequently than at present. And it must be borne in mind that the occasion of a gift or death will be a deemed disposal for capital gains tax purposes. The total tax liability on death may thus be considerable if the integrated tax is set at a high rate.

24.25. The Committee does not believe that the rate system should favour lifetime giving against bequeathing property on death. Some of the advantages of lifetime giving under the present system were explained in paragraph 24.17. Except for the effect of the annual exemption of a fairly modest amount recommended by the Committee, these advantages will no longer obtain under the proposed rate structure, provided that gifts are grossed up when duty is to be paid by the donor. The term ‘grossing up’ in this context means that duty is payable on an amount which includes the duty itself. Suppose, for example, that a person makes a gift of $1,400 and the rate of duty is 30 per cent. Under grossing up, duty (of $600) is payable on $2,000—the amount required to produce a net-of-tax figure of $1,400.

24.26. An estate duty is levied on the whole of the estate and then paid out of the estate, leaving a balance which passes to the beneficiaries. There is a want of equivalence between such a levy and a levy of gift duty which involves the application of the appropriate rate to the amount of the gift and the payment of the duty out of the other assets of the donor. To ensure an equivalence, the Committee proposes that where the gift duty is to be paid by the donor, the levy of gift duty should involve the application of the appropriate rate to the amount of the gift grossed up by the amount of the duty. For the purpose of determining tax on subsequent gifts, the gift must be treated as a gift of the grossed up amount—in the illustration given in the previous paragraph an amount of $2,000.

24.27. Even when, under the present law, there is some integration of estate and gift duties through a gift made shortly before death being brought back into the estate for the purpose of estate duty, there is still an advantage in lifetime giving, for the gift brought back is not grossed up by the amount of gift duty paid. This is illustrated in Appendix B to this chapter.

24.28. Where payment of duty is sought from the donee, equivalence with estate duty requires that gift duty, at the donor's rate, be levied on the amount of the gift. For the purpose of determining the tax on subsequent gifts by the donor, the amount of the gift should be the actual gift.

Concessions for Dependants

24.29. Two arguments suggest a case for special treatment of the surviving spouse's share of an estate. First, a husband has a moral and legal obligation to provide for his widow. Indeed, it might be said, in justice, that the support she has given him during his life has had its share in the creation of the property left to her by her husband. Secondly, if the purpose of an estate duty be to tax wealth once a generation, it is logical that property passing on death between spouses should be exempt.

24.30. The Committee agrees that there should be special treatment but would not recommend complete exemption. Complete exemption would be exceedingly generous in the case of large estates passing to a surviving spouse. In addition, it would open up avenues for abuses which would give rise to inequity. For example, a testator might leave half his property to his wife and half to his children. The half left

  ― 446 ―
to his wife would be taxed only on her death; but the result would be tax on two estates, each half the original estate, and under a progressive rate structure there could be substantial tax saving. Some planning of this kind will be available even under a partial exemption. The tax planning involved would be defeated in a degree if, notwithstanding the partial exemption, property passing to a spouse were taken into account in determining the rates of tax on property that is not exempt. This, however, could not be done under an integrated system of the kind proposed if the exemption available to a spouse is to be available in relation both to gifts and to bequests. This may be an argument for confining the exemption in favour of spouses to property passing by bequest, a matter discussed below.

24.31. The manner of any relief under an estate duty for a surviving spouse may take the form of an exemption of the bequest received by the spouse or a tax on part only of the bequest received. The initial question is whether the relief for a surviving spouse under the integrated system should be available for both gifts and bequests. If it is available for both, it follows that the exemption should be of a fixed money sum and not a fraction of the property passing to the spouse. Were it the latter, the amount of the exemption could not be determined until death. The Committee prefers, in any event, that the exemption should be of a fixed money sum.

24.32. If the exemption is made available in relation to gifts as well as bequests, there will be a measure of complexity, especially if the exemption in respect of a gift is made optional and any bequest on death is not sufficient to absorb the exemption. There are problems also in the operation of the exemption where the spouse who has received a gift dies or the marriage is dissolved and the donor remarries. There would need to be a separate exemption for each successive legal spouse.

24.33. The Committee is inclined to favour the availability of the spouse exemption in relation to both gifts and bequests. It does not propose that it be available to a de facto wife since, if the spouse exemption is available in relation to gifts during life, it will be impossible to define a de facto spouse in a manner that can be administered.

24.34. The size of the additional exemption for property passing to a spouse needs careful consideration. An amount of the order of $60,000 might be contemplated at today's level of prices, additional to the amount subject to zero rate referred to in paragraph 24.24. If the general exemption and the spouse exemption were each to be $60,000, the total exemption available to a surviving spouse would be $120,000.

24.35. The principal exemption proposed is that in favour of a surviving spouse, but other dependants of the deceased ought to attract some relief as well. The relief in the Committee's view should be based on dependency, not consanguinity. Also, it should be available only in respect of property passing on death: an exemption of a gift made to a dependent young person would provide a tax incentive for lifetime giving of a kind that would be difficult to justify. At present prices an exemption of $1,000 for each full year that a child is below the age of 18 years might be appropriate. The exemption should be available to the widow, to the extent that it is not absorbed on property passing to the child, if the child will be dependent on the widow.

24.36. There is no entirely satisfactory way of defining dependency. Dependency determined by age will fail to deal with many cases—the dependent parent of the deceased, for example. It would probably be best that relief be available where the Commissioner is satisfied, having regard to specified tests, that a beneficiary was dependent on the deceased.

  ― 447 ―

Other Concessions

24.37. In the Committee's view it is the size of the estate, not its composition, that matters. An estate should not attract special treatment merely because it includes assets of a particular class, such as a house, a farm or superannuation benefits. Such treatment directed towards particular assest distorts resource allocation and discriminates between estates by reference to what may be the fortuitous composition of the estate at the time of death.

24.38. The 1974 amendment to Commonwealth estate duty legislation providing for a limited exemption for an interest in a matrimonial home passing to a surviving spouse runs counter to these principles. Under the new law an interest in a matrimonial home is wholly exempt from tax where the value does not exceed $35,000; and there are shading-out provisions affording some exemption up to a value of $85,000. Curious consequences arise: where, for example, the matrimonial home is valued at $50,000 in an estate of $100,000, the duty concession is worth $4,300; but where the matrimonial home is valued at $35,000 in an estate of $200,000, the concession is worth $16,500. The Committee recommends that the concession in respect of a matrimonial home be withdrawn.

24.39. A claim for special treatment is often made on behalf of the illiquid estate, for example a grazing property or family business. Problems arise where an estate contains a high proportion of assets that cannot be realised easily and cash has to be found to meet the tax liability. These problems will tend to be accentuated in those cases where a liability for payment of capital gains tax also arises on death under the Committee's proposals in relation to capital gains tax. As some protection against forced realisation, provision should be made in the law giving executors a right, where illiquid assets form a significant part of the estate, to spread the payment of at least that portion of duty relating to such assets. The spreading of payment of duty in this way, permitted in a number of overseas countries, would be subject to interest and be limited to a specific period, say up to five years. Alternatively, the law could provide that the Commissioner shall extend the time of payment in circumstances specifically defined. However, the Committee favours the former alternative.

24.40. A person ought not to be obliged to account for the minor gifts he makes. Nor should he be charged duty in respect of moneys paid for the maintenance, education or support of persons dependent on him. Hence there should be an annual exemption, possibly of the order of $3,000, and an exemption in respect of gifts made by a person for the maintenance, education or support of dependants. The application of gift and estate duties to gifts and bequests to charities is dealt with in Chapter 25.

Adjustments for Inflation

24.41. The Committee believes that a regular review of any rate structure set in the future for an integrated duty is fundamental to its proposals. When the rate of inflation is high, as at present, an annual review might not be too frequent. The effect of inflation in the past has been to cause values to rise and thereby render estates dutiable that would not, when the rate was set, have been liable for duty. In the case of larger estates, it has meant a greater fraction of the estate being taken in duty than would have been taken on the basis of earlier values. It has eroded exemptions. The effect of inflation is further considered in Chapter 6.

24.42. Under an integrated system, it is essential that gifts made at one time can be meaningfully related to gifts made at another time. A gift of $1,000 made now should have the same fiscal consequences, so far as possible, as a gift made ten years hence of

  ― 448 ―
the sum that is equivalent to $1,000 in present currency. It follows that gifts made and assessed to tax should be regarded as fractions of a slice or slices for the purposes of determining the rate of tax on each subsequent gift. It also follows that any change in the rate structure should be made in relation to existing slices. An adjustment to the rate structure to take account of inflation should widen each slice. A decision to vary the weight of the tax should be reflected in the rates applying to slices. An illustration of adjustments to take account of inflation and to vary the weight of the tax is given in Appendix B to this chapter.

Advance Provision for Payment of Tax

24.43. The prime concern of a person who seeks to provide in advance for payment of estate duty is the assurance that a fall in the value of money will not erode the value of this provision. One possibility would be a government issue of bonds whose redemption return is increased by reference to an index of general prices, the increase not being subject to income tax or capital gains tax. If bonds of this kind were more generally available, there would be no cause to introduce a special security offering protection against inflation for an investment intended to provide for payment of estate duty.

24.44. On the assumption that indexed bonds are not generally available, the Committee sees merit in a proposal that special probate bonds, indexed in an appropriate way, be issued. The method of indexation might take the form of the application of an index of general prices. Alternatively, it might be related to the rate structure of the integrated estate and gift duty, the redemption value of a probate bond being increased in conditions of inflation by reference to the change made to the rate structure. This redemption value would be available only on death and only to the extent that the redemption value does not exceed the estate duty payable. Where this redemption is available, the bonds would be included in the deceased's estate at that value. The bonds would carry interest at a lower rate than non-indexed government securities.

24.45. Probate bonds could be confined to the function envisaged for them if the special redemption value is available solely for the payment of duty in the estate of the original investor. Redemption for any other purpose would involve repayment only of the original investment.

24.46. There will be a nominal gain in the value of the bond due to the indexation applied to it. The element of nominal gain might, it is true, be obscured by the method of indexation that involves changes in the rate structure of the integrated estate and gift duty; but it would be evident if indexation by reference to general prices were used. The Committee's proposal to tax a fraction only of capital gains is intended to go some way towards excluding from tax gains that are only nominal, an objective which it is administratively impossible to achieve generally in any precise fashion. In the present context the objective can be achieved precisely by excluding from capital gains tax the nominal gain on the deemed realisation of a probate bond on death. The Committee recommends that the nominal gain be exempt from capital gains tax and from income tax.

Quick-succession Relief

24.47. Quick-succession relief is intended to lessen the impact of estate duty in circumstances involving property passing as a result of two or more deaths within a short period. Extensions of the tax base proposed by the Committee will increase the

  ― 449 ―
number of occasions where property is brought to tax. In the result there may be a need for more generous relief than is provided at present. The principle adopted by the Committee is that all property should be taxed at least once each generation, but the operation of provisions necessary to ensure this should be mitigated when the result is more frequent tax. The relief should not be so framed that it is available only against the tax on a particular item of property. It would be wrong, for example, to provide relief for the estate of a widow who inherits a house she retains, and to deny relief if the widow sells the house shortly before her death and purchases a home unit and shares with the proceeds. The relief should take the form of a credit against the tax payable on the death of the person who inherits, and it should be related to the tax that was imposed on the inherited property on the occasion of the earlier death.

24.48. Where assets have been the subject of an inheritance and the estate of the person who inherits those assets includes on his death at least an amount equivalent to the value of those assets, a fraction of the tax already paid on the assets inherited should be credited against tax payable on that amount. The credit should be determined by spreading total tax on assets subject to tax over those assets. The whole of the tax should be available for credit where the death occurs within five years of the inheritance. It should be scaled down by one-tenth for each further year elapsing, so that there would be no relief available where death occurs more than fifteen years after the inheritance. The tax for which credit is available should not exceed the tax on the amount in the estate of the deceased equivalent to the inheritance. Illustrations of the relief are to be found in Appendix B to this chapter.

24.49. Problems arise in determining whether there has been an inheritance requiring the application of the relief provisions. In paragraphs 24.64–24.66 reference is made to cases where what might be called notional estate is subject to estate duty. Quick-succession relief provisions should identify the person who may be treated as inheriting such an estate. Thus the person who becomes absolutely entitled to assets that were the subject of a life estate should be treated as having inherited those assets from the deceased life tenant. Where there is a succession of life tenants, provisions will be necesary to deem inheritances of the assets by each succeeding life tenant.

24.50. Quick-succession relief provisions have generally been thought of in terms of succession on death. The Committee's recommendations for integration of estate and gift duties raise the possibility of applying relief provisions where a gift is followed by a succession on death of the donee. (The possibility of relief provisions applying to a succession followed by a gift or to a series of gifts is excluded from consideration on the ground that the second occasion of transfer is in the discretion of the donor.) The Committee sees no reason in principle why relief should not be available where a gift is followed by a succession. The tax on the gift that may be the subject of credit would be determined by spreading the tax on all gifts in the relevant year of return over gifts made in that year.

24.51. In paragraph 24.42 proposals were made by which in conditions of continuing inflation gifts made at one time can be meaningfully related to gifts made at another. The Committee considers there should be measures to bring about an equivalence in value between tax paid on the inheritance and tax against which relief is allowable. These measures, based on the proposal in paragraph 24.42, are illustrated in Appendix B to this chapter.

  ― 450 ―

Fall in Value of Assets after Death

24.52. Estate duty may give rise to hardship when an estate includes assets, which, though worth a great deal on the death of the owner, have fallen significantly in value. Under the present law, duty is assessed on the value of assets as at the date of death. The problem does not arise where property is valued for gift duty purposes, as the donor can select the time of the making of the gift and the assets are immediately available to the donee. To permit the sale price of an asset to be substituted for the value of the asset on death raises problems, as the personal representative may be expected to realise those assets that have fallen in value after death and to retain those assets that have risen in value. There is no easy solution to the problem. Nevertheless, it has to be recognised that the present law can produce inequitable results and ought to be modified so that the estate is protected from the impact of tax resulting from the inclusion of a particular asset in the estate the value of which diminishes significantly after death.

24.53. Where the personal representative decides to retain an asset of which he is free to dispose, the operation of the law is not unfair if the asset later falls in value. Likewise, if the personal representative decides to dispose of an asset and fails to avail himself of whatever means are open to him to prove his title to the asset and to free it for realisation, the beneficiary ought not to complain if the asset, when finally realised, produces an amount less than the value on death. But for one reason or another, it may be impossible for the personal representative to realise the asset at the time most advantageous to the estate.

24.54. An alternative valuation date provides one solution, though a solution which is not always satisfactory. If the market is volatile, the value of the relevant asset on the alternative valuation date may be as arbitrary as the value on death. If the alternative date is a considerable time after death, the personal representative is likely to defer the administration of the estate to see if the value of the estate falls. The calculation of capital gains tax payable on death will be complicated where an alternative valuation date is allowed. An alternative valuation date could not be available in relation to stock or to other assets of a business which change as the business is conducted. An option to elect for valuation on an alternative valuation date would have to be limited to assets that are not subject to frequent change: these would include real estate, shares listed on a recognised stock exchange and significant holdings in companies whose shares are not so listed and whose affairs are not conducted between the date of death and the alternative valuation date so as to produce a reduction in the worth of the holding.

24.55. Another proposal considered by the Committee is a rule that the tax payable in respect of any asset in an estate of a deceased person be limited to the net amount received on realisation of the asset within three years of death or within such longer period as the Commissioner may approve. To determine the tax payable in respect of any asset, the total tax payable on the whole estate would be apportioned between the assets in the estate on the basis of the values of the assets on death. The rule would be limited to the kinds of assets described in the previous paragraph, and the realisation principles outlined in paragraph 24.58 would apply. The rule avoids the problems of recalculating capital gains tax payable on death which an alternative valuation date involves.

24.56. Nevertheless, of the two proposals the Committee favours an alternative valuation date and recommends its adoption.

24.57. The alternative valuation date should be the first anniversary of the date of death. The onus of electing for valuation on the alternative valuation date should rest

  ― 451 ―
on the legal personal representative. Where the legal personal representative elects, all real estate, shares in listed companies and substantial holdings in unlisted companies of the estate should be revalued.

24.58. Where an asset is realised during the twelve months following death in an arm's length transaction, the net proceeds of the realisation should be deemed to be the value of the asset on the alternative valuation date. In determining the realised value of an asset, the cost of realisation should be deducted from the proceeds of realisation. If a realisation during the twelve months following death is not an arm's length transaction, the Commissioner should have power to substitute, for the actual proceeds, the proceeds that might have been expected on a sale conducted at arm's length. There will be problems where the asset has changed in some way between death and realisation, and account will need to be taken of improvements and changes made to property. But these problems should not be insurmountable.

24.59. The amount of a gift for purposes of duty should be determined by valuation at the date of the gift, irrespective of what happens subsequently.

Valuation of Assets

24.60. The Committee has given consideration to the methods currently used in Australia in valuing assets for estate and gift tax purposes, and in Appendix A to this chapter rules are suggested for valuing particular assets. Section 16A of the Estate Duty Assessment Act (which contains provisions relating to the valuation of shares) should be repealed. It should be replaced by a provision enabling a person valuing shares in a company to take into account, in an appropriate case, the net value of the assets of the company on the date at which the valuation is made.

Jurisdiction of Integrated Estate and Gift Duty

24.61. The base of an estate and gift duty should include the real and personal property, wherever situated, of a deceased person or donor domiciled in Australia, and such of the real and personal property of a deceased person or donor domiciled outside Australia as is situated in Australia. Domicile, in broad terms, depends on where a person intends to reside permanently. In the case of a married woman, however, it depends on the domicile of her husband and this may be thought to make it less appropriate than residence as the basis of jurisdiction. However, domicile has a number of distinct advantages over residence. In other countries domicile is generally preferred and it will therefore assist in preventing double taxation problems if Australia retains domicile. Domicile is more difficult to change than residence and the retention of domicile will protect the Revenue against a change in place of living made to avoid Australian tax. The position of the married woman could perhaps be accommodated by allowing an exemption in respect of property outside Australia if a married woman has for a period of years before gift or death been ordinarily resident outside Australia.

24.62. In the past, reliance has been placed on the commom law rules to determine the situs of property. These rules largely depend on considerations of convenience and are not always appropriate in a taxation concept and sometimes permit avoidance. The Committee recommends that detailed rules be adopted. These rules are discussed in Appendix C to this chapter.

  ― 452 ―

24.63. Where property is situated outside Australia and the law of that place has a gift or death tax, the amount of any such tax which is imposed in relation to that property on a donor or deceased estate should be allowed as a credit against any Australian gift or estate tax which is imposed in relation to that property on that same person, the credit being limited to the amount of the Australian tax.

Incidence of Integrated Estate and Gift Duty

24.64. Since the base of the estate duty will include property not actually owned by the deceased at his death, it would be unfair to require that the whole estate duty be paid out of the property actually owned by the deceased which passes to his personal representative. The appropriate general principle is that duty should be apportioned between the actual estate and each item in what might be called the notional estate; and the personal representative and the Commissioner should, in respect of the duty attributable to the notional estate, have rights of recovery such that duty will fall on the person who might be said to be the beneficiary in that estate.

24.65. The application of the principle will be clear enough where the assets of a trust in which the deceased had a life interest are treated as part of his estate. Duty will be recoverable from the trustee. It will also be clear enough where assets over which the deceased had a general power of appointment that lapsed at his death are treated as part of his estate. Duty will be recoverable from the person who is or becomes owner in default of appointment. Where, however, shares are included in the estate at the value they would have had if rights attaching to them had not ceased on death, it may be difficult to identify the relevant property and the person who may be said to be the beneficiary. If ultimate liability to duty is to fall in any case on some person other than the personal representative, there should be a specific provision determining the incidence of duty.

24.66. Where a gift is made, the donor and the donee should have the choice as to who will pay any tax that may be attracted by the gift and an election should be made when the duty return is lodged by the donor. If the donor elects to bear the tax and the Commissioner is unable to recover the tax payable by the donor, he should have the right to assess the donee; conversely, if the donee elects and the Commissioner is unable to recover, he should be able to assess the donor. Where the tax base is extended in accordance with Appendix A to include deemed gifts, there should be a provision, wherever possible, identifying the donee.

24.67. Where the duty is assessed against the donor, then, as indicated in paragraphs 24.25–24.26, the gift must be grossed up by the amount of the duty. Where the duty is assessed against the donee, the tax should be assessed on the gift at the donor's rate. Neither a donor nor a donee who has paid tax should have any right to reimbursement from the other.

24.68. Where the legal personal representative is not resident in Australia and has no assets in Australia, it may be impossible under the present law for duty to be recovered because of the rule that the revenue laws of one country will not be enforced by another. This rule has been exploited in the past to the detriment of the Revenue, and the Committee recommends that steps be taken to prevent, as far as possible, its exploitation in the future. Where the Commissioner is otherwise unable to recover duty, each beneficiary should become personally liable for the whole of the duty up to the limit of the value of the property received by the beneficiary and interest should accrue on the unpaid tax. The legislation giving effect to this rule should be widely drawn.

  ― 453 ―

Assessment Procedures

24.69. Details of gifts made in each income tax year should form part of the annual income tax return, at least to the extent that gifts made in that year exceed the annual exemption recommended in paragraph 24.40. Gift duty assessments would be made on the basis of the details thus shown in income tax returns.

24.70. Procedures on objections and appeals from assessments for estate duty and gift duty should be the same as those for objections and appeals against income tax assessments.

A National Estate and Gift Duty

24.71. Criticism of the present death taxes on grounds of the complexity of separate Commonwealth and State taxes and the considerable costs in administration and compliance that result has force. A national estate and gift duty system, administered by one authority, is clearly desirable.

24.72. A national system could be achieved by the Commonwealth and the States each enacting uniform legislation which would be administered by the Commonwealth. The Commonwealth would also enact uniform legislation to apply, in addition to its legislation for the country as a whole, in the Commonwealth Territories. Under such a national system, there would be a set of rates for the whole country under the principal Commonwealth legislation, and there might be a different set of rates in each of the States and Territories. The jurisdiction of the legislation of the States and Territories would depend on the domicile of deceased persons and donors within the State or Territory and on property within the State or Territory of donors and deceased persons domiciled outside Australia.

24.73. The obstacles to the achievement of such a national system are the limited constitutional powers of the States and the difficulties of obtaining uniform legislative action by the Commonwealth and the States. If the constitutional powers of the States are extended, there will remain the difficulty of obtaining uniform action.

24.74. A satisfactory national system in present circumstances can only be achieved by a single piece of legislation enacted by the Commonwealth. State shares of the revenue raised by the Commonwealth would be distributed to the States, the shares being determined by reference to the domicile of deceased persons and donors within the State and property within the State of deceased persons and donors domiciled outside Australia. These shares need not be less than the revenue currently raised or which it may be proposed to raise by the State taxes displaced.

24.75. The Committee would not wish the Commonwealth to vacate the field of estate and gift taxation in favour of the States. It is true that if the powers of the States were extended it would be possible to have a national system which involves uniform legislation by the States, by the Commonwealth in relation to the Commonwealth Territories, but not by the Commonwealth for the country as a whole. The Committee however considers that taxes in this area have a necessary role to play in the overall Commonwealth tax structure.

24.76. In the event of the Committee's recommendations for a national scheme being adopted, it would be necessary to establish a system of transitional provisions for the orderly introduction of that scheme.