It is common for Wills to include arrangements that allow a family member to remain living in the family home for a period after the will-maker’s death. In circumstances where the home continues to be occupied as a residence prior to sale by the estate, the main residence Capital Gains Tax exemption has generally been expected to apply.
The Australian Taxation Office’s draft determination TD 2026/D1 narrows that assumption by taking a much stricter view of when the exemption is available, based on how a right to occupy arises.
What is Capital Gains Tax?
Capital Gains Tax (CGT) applies when a person or entity disposes of an asset and makes a capital gain. In the context of property, the most common CGT event is the sale of land or a dwelling.
CGT is not a separate tax; it forms part of income tax and is assessed in the year the CGT event occurs. Subject to the main residence exemption, if the property is sold by the executor or administrator before the property is transferred to a beneficiary, any capital gain or loss is made by the deceased estate, and in that case the estate is the taxpayer. If the property is transferred to a beneficiary and then sold, the beneficiary will be the taxpayer.
The main residence exemption
Australian tax law provides a significant concession for homes used as a person’s main residence. In broad terms, a capital gain or loss on the sale of a main residence is disregarded.
This exemption can continue after death, in certain circumstances.
For deceased estates, section 118-195 of the Income Tax Assessment Act 1997 allows the capital gain on the sale of a former main residence to be disregarded if, from the date of death until sale, the home was the main residence of:
- the deceased’s spouse; or
- an individual who had a right to occupy the dwelling under the deceased’s Will.
How rights to occupy are commonly dealt with
In practice, rights to occupy the family home after death are often handled flexibly, including:
- giving the executor power to allow a family member to remain in the home;
- allowing beneficiaries to reach a family agreement after death;
- deferring sale by informal consensus; or
- granting the trustee of a testamentary trust discretion to permit occupation.
While these approaches often work well in practice, the ATO’s view is that, except for a spouse, if an individual’s right to occupy results from family agreement or executor or trustee decision rather than a direct command in the Will, the exemption is broken.
To access the exemption, the right must be granted “without the aid or intervention of any subsequent or intermediate transaction”.
By way of exception, court orders (specifically family provisions orders) preserve CGT main residence exemption by being legally treated as if they were a codicil to the deceased’s Will.
Not sure if your Will’s occupation arrangements would hold up under this new guidance? If your Will gives an executor or trustee discretion over who can live in the family home, it’s worth finding out where you stand before the ATO’s position is finalised. Call us on 1300 654 590 or email us for a review of your current arrangements.
The ATO’s position in TD 2026/D1
The draft determination makes clear that the CGT exemption depends not on who lives in the property, but on the legal source of their right to do so.
The ATO’s view is that:
- a right to occupy must be expressly granted by the Will;
- the right must arise directly and automatically, without the need for any later decision or agreement; and
- if the right depends on executor or trustee discretion, it does not arise “under the Will”.
Executor discretion
Therefore, where a Will gives the executor the discretion to decide who may live in the home, the ATO considers that the right arises from that later decision rather than from the Will itself. As a result, estates with identical practical outcomes may be treated differently for tax purposes depending solely on drafting structure.
Testamentary trusts
Under the current draft guidance, the ATO draws a “hard line” regarding testamentary trusts.
The ATO treats the deceased estate, and a testamentary trust established under the Will as separate and distinct. Thus, an individual will not have a right to occupy the dwelling under the deceased’s Will in situations where:
- an individual is specifically named in a testamentary trust deed as having a right to occupy the dwelling; or
- the testamentary trust deed provides the trustee of the deceased estate with a discretion to grant a right to occupy the dwelling to any individual.
The ATO considers these to be rights granted under the trust deed, not the Will . In such cases, the individual is not considered to have a right to occupy under the deceased’s Will, which can disqualify the estate from disregarding the capital gain upon the home’s eventual sale.
We note strong disagreement on the ATO’s stance on this issue. Since a testamentary trust is a legal structure created solely by the Will, any power exercised by a trustee – including discretionary ones – is legally sourced from the Will. However, if TD 2026/D1 remains the ATO’s guiding view, relying on trustee discretion remains a major tax risk.
What this means in practice
TD 2026/D1 does not prevent families from allowing a member to remain in the home. It does, however, narrow the circumstances in which the CGT exemption is preserved.
The exemption is now more likely to apply where the Will:
- identifies the occupant;
- confers the right directly; and
- defines its duration.
Why existing Wills should be reviewed
The draft determination is proposed to apply retrospectively. If you wish family members to have a right of occupancy after your death in the family home and preserve the primary residence exemption, you may wish to include a specific right of occupancy in your Will, rather than leaving it to executor or trustee discretion.
How we can help
If you intend to allow a family member to remain living in the family home after your death, the right of occupancy must be carefully structured to preserve family wealth.
We advise on:
- whether existing occupation arrangements rely on executor or trustee discretion and the associated CGT exposure;
- drafting rights of occupancy that arise directly under the Will, rather than through later agreements or decisions;
- managing time-limited occupation rights to minimise the risk of partial CGT exemptions; and
- aligning estate planning documents with current ATO administrative positions.
This advice is particularly important for Wills prepared before the release of TD 2026/D1.
If you have any concerns about your estate planning, call us on 1300 654 590 or email us to discuss how we can help you fulfil your objectives.
The information contained in this post is current at the date of editing – 2 September 2026.
