Why this matters: TD 2026/D1 may narrow access to the CGT main residence exemption for deceased estates, particularly where occupancy rights are not clearly set out in the will.

Overview

The ATO has issued Tax Determination TD 2026/D1, which provides guidance on when a property in a deceased estate will qualify for the CGT main residence exemption.

Access to the CGT main residence exemption can provide significant tax savings for the trustees or beneficiaries of a deceased estate. Where the property was the deceased’s main residence, the exemption will typically be available only if the property is sold within two years of death or alternatively, the exemption may still apply if an individual with a right to occupy the dwelling under the deceased’s will uses the property as their main residence until it is sold.

TD 2026/D1 focuses on the interpretation of the phrase “right to occupy the dwelling under the deceased’s will”. In this determination, the ATO has taken a very literal view, requiring the individual to be specifically named in the will in order to satisfy this condition.

This approach means that where a will grants the estate trustee discretionary power to allow beneficiaries to occupy the dwelling, this may no longer be sufficient, because the individual occupant is not expressly named in the will.

More contentiously, the ATO has taken the view that where a trustee of a testamentary trust allows a beneficiary of the trust to reside in the property, this right will be regarded as having been granted outside the will. The examples in TD 2026/D1 show even when the testamentary trust deed is annexed to the will this may not be sufficient. As a result, the full main residence exemption may not be available.

The ATO’s stricter interpretation in TD 2026/D1 could cause some taxpayers to unintentionally lose access to the exemption therefore carefully consideration is needed.

Estate Planning Recommendations

For many taxpayers, the main residence is a significant part of their estate. As a result, the ability to sell that property tax-free can have a substantial impact on the amount of wealth passed on to beneficiaries.

This tax determination is still in draft form and remains subject to comment. However, based on the current wording, there appears to be no retrospective concession. It is therefore recommended that taxpayers review the availability of the main residence exemption as part of their estate planning.

This may involve considering the following:

  • Quantifying the unrealised capital gain on the main residence and assessing the impact that access to the exemption could have on the estate.
  • If the intention is to allow a specific beneficiary to live in the house, working with legal advisers to ensure the will clearly reflects this arrangement so that future access to the main residence exemption is preserved.
  • Considering the timing of any sale of the property to maximise access to the exemption.
  • Recognising that testamentary trusts can still be an important part of estate planning, while seeking tax and legal advice to understand the potential impact of TD 2026/D1.
  • For taxpayers with existing wills and estate plans, obtaining professional advice on whether TD 2026/D1 may affect their circumstances.

The tax implications of estate planning are complex and potential loss of main residence exemption significant, with TD 2026/D1 adding a further layer of uncertainty. Taxpayers who are unsure of their position should consider contacting their HLB Mann Judd tax adviser.