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,

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    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.