ATO flags tougher “right to occupy” test for deceased estates

The article is relevant to members in Australia and was current at the time of publication.

The Australian Taxation Office (ATO) published Draft Taxation Determination TD 2026/D1 in late January. The determination, if enacted in its current form, would effectively introduce a quasi-inheritance tax for the many Australians who inherit a home from a deceased parent and choose to live there afterwards.

It would also overwrite existing state and territory legislation relating to the use of discretionary trusts that cover inherited property assets.

The right to occupy

In essence, TD 2026/D1 aims to amend the existing meaning of the “right to occupy” a dwelling inherited via the will of a deceased estate for the purposes of determining whether a beneficiary or trustee is entitled to the existing CGT main residence exemption that is detailed in section 118-195 (Income Tax Assessment Act 1997).

Properties acquired before 20 September 1985, and those acquired after that date and sold by beneficiaries within two years of a person’s death (or within a longer period allowed by the ATO), will remain CGT exempt.

Specific naming needed: Under the ATO’s proposed changes, a CGT main residence exemption would not apply unless a will expressly granted a right to occupy the dwelling and specifically named the individual holding that right to occupy the dwelling.

Trustee discretion: A clause giving a trustee, rather than the will itself, the power to decide who occupies a dwelling would also likely fail the CGT exemption test because a specific individual has not been named in the will.

Testamentary trusts: The ATO has stated in its determination that rights to occupy a dwelling granted via a testamentary discretionary trust (even if granted in a will) would not be classed as being “under the will”. This may result in the loss of the CGT main residence exemption.

Limited period: If a will gives a beneficiary a right to occupy a dwelling for a specific time, that period is covered. However, if a person stays on by informal agreement, that extra time would not extend the will based right and the CGT main residence exemption may be reduced under s118 200.

Court orders: A right to occupy arising from a family provision order would be treated as being under the will.

When the ATO’s final determination is issued, it is proposed to apply to years of income commencing both before and after its date of issue.

The draft determination is crucial for preparers and executors of wills (including accountants) to ensure a will clearly defines occupancy rights to protect the estate from an unexpected CGT liability.

A clash of legislation

CPA Australia lodged a submission with the ATO in March 2026 noting that legislation enshrined in Trustee Acts across Australia gives a beneficiary a right to occupy a dwelling that is their main residence derived under the terms of a will.

“There’s nothing in the wills legislation in Victoria, New South Wales, or other states and territories that requires a beneficiary to be individually named,” says CPA Australia Tax Technical Advisor, Bill Leung.

“In addition, excluding testamentary trusts is wrong in principle, because a testamentary trust is created by the will and forms part of the will’s operation,” Leung says. 

“Once the will takes effect, the trust is governed by the relevant Trustee Act, and the right to occupy is legally inseparable from the will.

“The ATO can’t simply carve it out by saying that, because it goes through a testamentary trust, you’re out — there’s no legal basis to exclude a beneficiary under a testamentary trust in that way.”

Leung says that if a will sets up a testamentary trust, it should still work so long as the trust deed identifies either an individual or a class (such as children or grandchildren) who may occupy the home.

“What concerns me is that the ATO’s draft determination effectively peels back long-standing state trust and property laws,” Leung says. 

“The Trustee Acts specifically empower trustees to provide for beneficiaries, including by allowing a beneficiary to live in a home. The draft view appears to disregard that legal framework.”

In a separate submission to the ATO, Ian Raspin FCPA, Managing Director of estate and trust taxation specialists BNR Partners, adds that under probate law “it follows that the source of any right to occupy referred to in the terms of the testamentary trust is the deceased’s will.

“Further, while it is possible for the terms of a testamentary trust to be included in a schedule to the will, in our experience, this is not common. Most often, a trust is established in the main body of a will.”

Raspin says, “there is a lot of (misguided) analysis” in TD 2026/D1 seeking to limit the right of occupancy to the period of administration.

“If this is the intended policy outcome, then it should rest on the meaning of the expression ‘trustee of a deceased estate’ not ‘right to occupy’.”