Most people do not know it, but there are death taxes on stealth in Australia.
While not an inheritance tax in itself, millions of Australians’ pension savings may be taxable on death.
It all depends on your marital status and whether you have relatives (that is, children or someone else who lives with you and financially depends on you).
If you are single and childless and no one else is dependent on you, your super money will be taxed before it is handed over to the person you appoint to receive it – provided you have nominated someone before your death to get the money.
If you have hundreds of thousands of dollars in your retirement savings and die, that money will be taxed up to 32 percent before the remainder is transferred to your designated beneficiaries.
Conversely, married people, those in a de facto scheme and those with dependent children do not face the same tax consequences in the event of their death.
Many people choose to raise their pension tax free at retirement age to avoid any tax payable by it if they die.
But for those who do not have the opportunity to retire, it raises the question: Is having a large tax on some and not others a reasonable result in a society where more Australians are making life choices to remain single and not have children?
The tax rate for super payments on death is different
The amount of tax charged before funds are transferred to a designated, non-dependent recipient depends on various factors.
If you have not designated a recipient, the Super Fund’s administrator will follow the relevant laws to determine who receives your balance.
However, provided you have designated one or more beneficiaries, they are not dependent and they are to be given to your super as a lump sum on your death, it may include both a taxed and / or an untaxed item.
The taxed item will be subject to a maximum tax rate of 17 percent – 15 percent plus the Medicare tax.
In the meantime, the untaxed item will be subject to a maximum tax rate of 32 percent – 30 percent plus the Medicare tax.
You can contact your super fund to designate recipients and check what tax rate would apply at your death.
The Australian Tax Office (ATO) website also has information about it.
Single households are becoming more common around the world
So back to the issue of justice.
While single households used to be an anomaly, they are becoming more common.
According to ABS data, around a quarter of Australian households now consist of people living alone.
This number is expected to increase over time.
In 2016, ABS registered 2 million single households, and it is expected to increase to between 3 million and 3.5 million in 2041.
On Wednesday, ABS reported that only 78,989 marriages were registered in Australia in 2020, a drop of 30.6 percent compared to 2019, with COVID-19 lockdowns playing a major role in people not being able to tie the knot.
ABS Director of Health and Vital Statistics, James Eynstone-Hinkins, said 2020 was the largest annual decline in registered marriages ever reported by ABS and the lowest number of registrations reported since 1961.
While the number of marriages locally is likely to return when lockdowns end, divorce rates are rising globally as well, and there is also a trend towards more single households.
According to market research firm Euromonitor International, individual households were the fastest growing type of household globally in 2010-2019, growing by 31 percent, with almost half of this growth in absolute numbers attributable to the Asia-Pacific region.
It also released a report in 2019 on how the traditional definition of the family is changing.
Its Future of Family report predicted that one-man households would record growth of 128 percent between 2000 and 2030, while the total number of household leaders aged 60 and over will reach 807 million by 2030.
It also noted that divorce rates have risen globally and populations with a divorced marital status will be by far the fastest growing in 2000 to 2030, at 78.5 percent.
During the same period, the number of single parents will grow three times as much as couple-with-children households.
It predicted that almost all countries would see a decline in children per capita. household between 2000 and 2030.
The decline will be greater in developing countries (-33.8 per cent) than in developed markets (-26.5 per cent), as the number of children is higher on average in developing households.
As fewer couples have children, the report suggested, the number of households with childless couples will increase worldwide, far exceeding the growth of couples-with-children households.
It argued that in order to deal with this, urban design needs to shift to smaller housing, and that workplaces will increasingly have to rely on robot technology as the workforce ages.
But what about our tax system? Can it be changed to suit the new type of household?
Singles without children receive less welfare
Retirement is not the only area where singles can lose.
Australia’s tax and transfer system is designed with families in mind.
As the graph below shows, single people receive far less in social assistance.
Singles do not receive as much welfare support, such as family tax benefits.
This, many argue, is a measure of reasonableness as they do not have the extra financial pressure that comes with having a family.
Singles face higher Medicare tax surcharges. Again, this may be a built-in justice measure, as the same income for families is used to support both the employee and dependents.
And singles tend to pay more for private health insurance, rent and some other living expenses.
This may mean that the impact of voltage gaps – where wage inflation places you in higher tax brackets – also bites singles harder.
‘Family trusts’ are a tax advantage for some
While both singles and married couples can structure their affairs to reduce their overall tax bill, some tax benefits are only available to those who are married with children.
Family trust is one of them.
Instead of being taxed at the rate of the highest income recipient in the family, income from any assets in the trust is distributed to family members – beneficiaries – at low tax rates.
This allows the higher incomes in the family to pay less tax.
By the 2019 election, Labor had proposed introducing a minimum tax rate of 30 percent on distributions from a family fund. It is not clear whether it will now take the same policy for next year’s elections.
Consecutive governments have long ignored issues affecting singles in policy design and in federal budget announcements.
But they are becoming a larger and more important voice demographic.
It may be worth considering whether our tax and super system should change in line with societal changes.
Is it currently fair to those who manage on their own?
Ask your single friends what they think.
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