Will the ATO Draft Capital Gains Tax Ruling Affect Your Estate Plan?

There's a lot of chatter in the media around a new Draft Taxation Determination from the Australian Taxation Office (ATO) that clarifies how the main residence capital gains tax (CGT) exemption applies to inherited properties.

Yes, the ATO has changed how it reads your will, but will it affect you? Maybe. Maybe not.

On the surface, there's no new tax and no new legislation. Just a draft ruling that quietly reinterprets a rule. In practice, the way the ATO expects those rules to work has shifted significantly. If your will was drafted before this clarification was drafted, your family may potentially be exposed to an unexpected tax bill.

THE CGT EXEMPTION AND HOW IT IS ASSESSED

When someone inherits a family home in Australia, the estate or beneficiary can potentially sell the property without paying CGT. For properties held long-term in high-growth markets (many areas across Adelaide fit firmly in that category), the unrealised gains can be substantial. Access to the CGT exemption can make the difference between a clean inheritance and a tax bill your family wasn't expecting.

There are two main ways to access the full CGT exemption:

1. Sell the property within two years of the date of death (the two-year window is unchanged by this ruling).
2. If a qualifying person has occupied the home as their main residence from the date of death until the property is eventually sold (for example, a surviving spouse, the beneficiary who receives the property, or someone who has a right to occupy the home under the terms of the deceased's will).

It's the second category where TD 2026/D1 changes everything.

IF THE PROPERTY IS HELD WITHIN A TESTAMENTARY TRUST

As an experienced wills and estate lawyer, I use Testamentary Trusts as a fundamental and genuinely useful estate planning tool. The benefits include asset protection, tax efficiency, income distribution capacity, and effective management of estate assets for minor or vulnerable beneficiaries. Many will makers direct their assets into a testamentary trust on their death (including their family home).

Here's the problem TD 2026/D1 creates.

The ATO's draft position is that a beneficiary's right to occupy a property must arise directly and explicitly from the will itself, not from a trustee's decision to allow occupation. If a beneficiary's ability to live in the home depends on the trustee's discretion under the trust, the ATO's view is that this does not constitute a "right to occupy under the deceased's will" for CGT exemption purposes.

In plain English, that means if your will says your daughter can live in the family home through a trust, and the trustee decides to let her do so, that arrangement may not be enough to protect the estate from CGT when the property is eventually sold.

WHAT THE RULING DOES NOT AFFECT

It's important to be clear: not every estate plan is caught by this ruling, and not every testamentary trust creates a problem.

If a beneficiary has the option under your will to take the property in their own personal name, they're not compelled to receive it through a trust. The flexibility of a discretionary trust enables the beneficiary to consider both tax and asset protection implications before making a choice. That decision becomes on the beneficiary can make with advice, based on their personal circumstances, rather than being locked in by the will's structure.

Equally, if a will contains a specific, named right or resident clause (one that grants a clearly identified individual the explicit right to occupy the property directly under the terms of the will), the exemption pathway remains open. The ATO's concern is with vague, discretionary arrangements.

The two-year sale window remains for all estates. Where a property is sold within two years of death, the main residence exemption can generally still apply in full.

IS THIS RELEVANT TO YOU?

If your will directs a family home into a non-discretionary testamentary trust.

If your will gives an executor or trustee the discretion to allow a family member to remain living in the property.

If you have beneficiaries who may want (or need) to live in the inherited home for more than two years before it's eventually sold.

This draft bill is a potential issue for:

🔎 Parents whose adult children may want to remain in a family home after the parents' death, longer than the two-year sale window.

🔎 Blended families where a surviving partner's right of residence needs to be carefully structured

It's important to note this ruling is still in draft form, which means the ATO's final position may yet evolve. But waiting to review your estate plan is a risk that may have financial consequences. Let's assess your exposure and make any required changes before it becomes a problem to solve.

#avoidingavoidableproblems