For decades, estate planners have relied on rights to occupy and testamentary trust arrangements as flexible tools to protect vulnerable beneficiaries and preserve family homes across generations. But the ATO’s draft Tax Determination TD 2026/D1 may significantly narrow when the main residence exemption remains available after death.
We spoke with estate planning expert, Lauren Howes of Turner Freeman Lawyers, about the ATO’s new position, why it matters, and the practical implications for estate planners and succession lawyers moving forward.
Q: What is TD 2026/D1 and why has it caused such concern amongst estate planners?
A: The draft determination deals with the phrase “right to occupy the dwelling under the deceased’s will” in section 118-195 of the Income Tax Assessment Act 1997. That provision is important because it can preserve the main residence exemption after death in circumstances where someone continues living in the property.
The concern is that the Commissioner has adopted a very strict interpretation of what constitutes a qualifying right to occupy. The draft ruling says the right must arise expressly under the will itself, be granted to a specifically identifiable individual, and not depend on trustee discretion or separate arrangements.
That creates potential problems for many testamentary discretionary trust arrangements that practitioners have been using for years.
Q: Why is this such a significant issue in practice?
A: A huge number of wills use testamentary discretionary trusts to hold the family home for asset protection and tax planning purposes. Often, the primary beneficiary is intended to live in the property while the trustee retains flexibility over the structure.
Historically, many practitioners assumed these arrangements would still support access to the main residence exemption. The ATO is now signalling that may not be the case.
If the draft view is ultimately adopted in its current form, we could see situations where a property that everyone assumed would remain CGT exempt instead gives rise to a very substantial taxable capital gain years later.
Q: What are the key requirements the ATO says must be satisfied?
A: The draft ruling effectively imposes three cumulative requirements.
First, the right must arise expressly under the will itself. The ATO says a testamentary trust deed does not qualify, even if it specifically grants occupation rights.
Second, the right must be granted to an identifiable individual. Broad trustee discretions are unlikely to be sufficient.
Third, the right cannot depend upon separate agreements or post-death arrangements such as deeds of family arrangement.
The Commissioner is essentially requiring a very direct and clearly drafted right of occupation contained within the will itself.
Q: Why are testamentary discretionary trusts particularly exposed?
A: Because many testamentary discretionary trusts are intentionally drafted with broad flexibility. The trustee may have discretion to permit occupation, replace properties, or determine how assets are used over time.
The ATO’s concern appears to be that these arrangements do not create a sufficiently certain legal right to occupy for the purposes of the exemption.
That creates a tension between traditional estate planning objectives and the tax outcome. The more flexible the structure, the greater the risk that the occupation arrangement may fall outside the exemption.
Q: Does the draft ruling distinguish between life estates and rights to reside?
A: Not explicitly, but the two are different legal terms and that distinction becomes very important.
A life estate is generally a proprietary interest. The life tenant has enforceable rights and can usually occupy the property or receive income from it. These arrangements are more likely to satisfy the exemption requirements.
A mere right to reside is potentially more vulnerable, particularly where it is subject to trustee discretion or exists within a testamentary discretionary trust structure.
Practitioners therefore need to think carefully about which structure best achieves the client’s objectives while preserving the intended tax outcome.
Q: What practical drafting changes should practitioners now consider?
A: One obvious consideration is whether the right to occupy should be expressly contained in the will itself rather than left solely to the operation of a testamentary trust deed.
Practitioners should also carefully review any existing precedents involving:
- discretionary occupation rights;
- substitute property arrangements;
- broad trustee powers relating to occupation;
- or rights arising through ancillary agreements.
It may also be necessary to revisit older wills for clients who still retain testamentary capacity.
Q: Is there concern about retrospective impact?
A: Absolutely. One of the most troubling aspects of the draft determination is the indication that it may apply to earlier income years once finalised.
That creates obvious difficulties where:
- the testator has already died;
- capacity has been lost;
- or existing estate plans can no longer be amended.
Many practitioners are understandably concerned about arrangements that were implemented in good faith based on the previously accepted understanding of the exemption.
Keen to learn more? Don’t miss Lauren’s webinar, The Main Residence After Death: Tax, Trusts and Planning Options, available live online and on demand.
