Estate Planning Lawyers Australia 2026: TD 2026/D1, Testamentary Trusts & CGT

Estate planning lawyers Australia-wide are confronting a significant compliance shift: the Australian Taxation Office’s draft Taxation Determination TD 2026/D1 proposes a stricter interpretation of the “right to occupy” test that determines whether the CGT main residence exemption survives the transfer of a family home through a deceased estate. The determination targets will clauses and testamentary trust structures that grant a beneficiary a right to reside in a dwelling after the testator’s death, potentially re-characterising those arrangements as separate trusts that forfeit the exemption entirely.

For solicitors drafting wills, executors administering estates and high-net-worth families protecting the home, the practical consequences are immediate: review existing will and testamentary trust clauses now, ensure occupancy wording aligns with the ATO’s emerging position, and complete executor CGT actions before any relevant deadlines tighten further around estate planning tax 2026 obligations.

TL;DR, Three Immediate Actions

• Review will and testamentary trust clauses. Any clause granting a “right to occupy,” life tenancy or similar interest in a dwelling must be assessed against the tests articulated in TD 2026/D1. If the ATO treats that interest as giving rise to a separate trust, the CGT main residence exemption may be lost on a later sale or distribution of the property.
• Redraft where necessary. Replace broad occupancy provisions with narrowly framed occupation licences or directions to the trustee that are consistent with keeping the property within the deceased estate (rather than a separate trust) for CGT purposes. Sample will drafting wording is provided below.
• Complete executor CGT steps now. Obtain a market valuation as at the date of death, confirm how the property passes under the will, and take legal advice on whether the estate qualifies for the main residence exemption, before the ATO draft determination is finalised. A full executor CGT checklist appears later in this article.

For background on the broader CGT framework that applies to inherited property, see our companion guide: Inherited property CGT rules Australia 2026.

What TD 2026/D1 Says and Why It Matters for Estate Planning Lawyers Australia-Wide

The ATO released draft Taxation Determination TD 2026/D1 to clarify when the grant of a “right to occupy” a dwelling under a will or testamentary trust creates a separate trust for income tax purposes, and, critically, when that separation strips the property of the CGT main residence exemption that would otherwise have been available under the deceased estate provisions of the Income Tax Assessment Act 1997.

The determination matters because an enormous number of Australian wills contain testamentary trust provisions that allow a surviving spouse, child or other beneficiary to live in the family home after the testator’s death. Under the ATO’s draft position, those provisions may now be treated as creating a trust that is separate from the deceased estate itself. Where a separate trust exists, the property is no longer held by the legal personal representative of the deceased; it is held on the terms of the new trust. The practical effect, industry observers expect, is that the property ceases to qualify for the automatic rollover and main residence exemption that protects estates from capital gains tax on the family home.

The Law Council of Australia’s submission on TD 2026/D1 raised concerns that the ATO’s proposed interpretation could inadvertently capture common, long-standing will drafting practices that were never intended to create separate trusts. The Law Society of NSW’s letter similarly flagged the risk to solicitors and executors who rely on standard precedent clauses that have been in use for decades. CPA Australia reported that accounting practitioners are already fielding questions from clients about the potential tax cost of existing wills.

Key Legal Tests: “Right to Occupy” and the Separate-Trust Threshold

TD 2026/D1 identifies two core questions that determine whether the CGT main residence exemption is at risk:

1. Does the will grant a proprietary interest, or merely a personal licence? The ATO distinguishes between a right to occupy that creates an equitable interest in the property (such as a life estate or an interest under a sub-trust) and a personal, revocable licence to reside that does not create a proprietary right. Only the former is likely to give rise to a separate trust.
2. Has a separate trust come into existence? Where the executor or trustee is directed to hold the dwelling on trust specifically for the occupying beneficiary, rather than simply administering the estate, the ATO’s draft view is that a new, separate trust has been created. That trust is not the deceased estate, and the property held by it does not qualify for the estate-specific CGT exemption.

Industry observers expect that these two tests, if finalised, will require solicitors to be far more precise in the language they use when testamentary trust drafting involves a family home. Broad phrases such as “my Trustee shall hold the Property on trust to permit [Beneficiary] to occupy the dwelling” may now cross the ATO’s threshold.

Who Is Affected, Stakeholder Map and Decision Flowchart

The ATO draft determination does not affect only one party in the estate planning chain. Its implications ripple across every stakeholder involved in creating, administering or benefiting from a will that includes a family home.

• Testators (will-makers). If your current will grants a right to occupy or creates a testamentary trust over the family home, you should instruct your solicitor to review the clause against TD 2026/D1 now, before the determination is finalised.
• Estate planning solicitors. Audit your precedent clause bank. Any standard right-to-occupy or testamentary trust precedent used in the last decade may need updating. Where wills have already been executed, consider whether a codicil or full redraft is warranted.
• Executors and legal personal representatives. For estates currently under administration, determine immediately whether the will creates a right to occupy that the ATO may treat as a separate trust. If so, seek legal advice on whether an alternative distribution or variation of the trust terms can preserve the exemption.
• Trustees of testamentary trusts. If you hold a dwelling subject to an occupancy right, obtain a current market valuation and legal opinion. A CGT liability may crystallise on a future sale if the main residence exemption has been lost.
• Beneficiaries. If you are living in, or expect to live in, a property held in a testamentary trust, understand that the CGT outcome on a future sale may depend entirely on the wording of the will and whether the ATO treats your right as a separate trust interest.

Quick decision prompt: Does the will grant any form of occupancy right, life tenancy, or direction to the trustee to permit a beneficiary to reside in a dwelling? If yes, the will must be reviewed against TD 2026/D1. If the property passes absolutely (outright) to the beneficiary, the risk is lower, but the beneficiary’s own CGT position on a future sale still requires analysis.

Drafting to Protect the Family Home, Practical Will and Testamentary Trust Clauses

The core challenge for estate planning lawyers Australia-wide is translating the ATO’s legal tests into safe, effective will drafting wording. The goal is to allow a beneficiary to live in the family home after the testator’s death without inadvertently creating a separate trust that strips away the CGT main residence exemption. Below are two sample clauses, one framed as a limited occupation licence, the other as a direction to the trustee, together with annotations that link each drafting choice to the ATO’s position in TD 2026/D1.

Sample Clause A, Limited Occupation Licence That Preserves the Main Residence Exemption

“I direct my Executor to permit [Beneficiary] to reside in the Property at [address] as a personal licensee (and not as a tenant or holder of any proprietary interest) for a period not exceeding [X] months from the date of my death, during which time my Executor shall continue to hold the Property as part of my Estate for all purposes including the administration of my Estate and any liability to taxation. This licence is personal to [Beneficiary], is revocable by my Executor at any time, and does not create any interest in the Property in favour of [Beneficiary].”

Sample Clause B, Life Tenancy vs Occupation Licence: Consequences and Alternatives

Many existing wills grant a life tenancy (life estate) to a surviving spouse. Under TD 2026/D1, a life tenancy is more likely than a personal licence to be treated as creating a separate trust, because the life tenant holds a recognised proprietary interest in the dwelling. The ATO’s draft position suggests that where a life estate exists, the property is held on the terms of a separate trust for the life tenant, not as part of the general estate.

Alternative direction clause: “I direct my Trustee to retain the Property at [address] as an asset of my Testamentary Trust and to exercise the Trustee’s discretion to allow [Beneficiary] to reside in the Property for such period as my Trustee determines, provided that at all times the Property remains an asset of the Trust and the Trustee retains full power to sell, mortgage or otherwise deal with the Property. For the avoidance of doubt, [Beneficiary]’s occupation does not create any equitable interest, life estate or right to occupy in [Beneficiary]’s favour.”

This alternative preserves the trustee’s discretion and explicitly prevents the beneficiary from acquiring a proprietary right. Industry observers expect the ATO to view this type of clause more favourably than a traditional life tenancy, because the beneficiary’s occupation is at the trustee’s discretion rather than as of right. However, the ATO’s position is still in draft and solicitors should monitor the final determination closely.

Drafting Pitfalls to Avoid

• Avoid: “My Trustee shall hold the Property on trust for [Beneficiary] to occupy as their residence.”, This language is likely to create a separate trust with a proprietary occupancy right.
• Avoid: Granting an indefinite or irrevocable right to occupy without express carve-outs for the executor’s continued control of the asset.
• Avoid: Using the phrase “right to occupy” without qualification, the ATO draft determination specifically targets this term. If the phrase must be used, pair it with express language negating any proprietary interest.

Testamentary Trusts and CGT, When They Help, When They Don’t

Testamentary trusts remain one of the most powerful estate planning tools in Australia, offering asset protection, income-splitting benefits for minor beneficiaries, and flexibility in managing family wealth across generations. However, TD 2026/D1 introduces a critical qualification: where a testamentary trust holds a dwelling and a beneficiary has a right to occupy that dwelling, the trust structure itself may be the mechanism that destroys the CGT main residence exemption.

The Law Council of Australia’s submission highlighted that testamentary trusts have been widely used precisely because they provide flexibility, including the ability to allow a surviving spouse to remain in the family home. The concern is that TD 2026/D1 may penalise that flexibility by treating the occupancy arrangement as evidence that a separate trust (distinct from the estate itself) has been created. The SW insights article noted that the distinction between a trust that administers the estate and a trust that holds property for a specific beneficiary’s occupation is often unclear in practice.

Example Scenarios, Testamentary Trust Drafting and CGT Outcomes

Comparison: Testamentary Trust / Life Interest vs Passing Property Absolutely

Executor CGT Checklist and Immediate Actions Before 1 July 2026

Executors and legal personal representatives administering an estate that includes a dwelling should work through the following steps systematically. This executor CGT checklist is designed to be used alongside legal advice from an estate planning lawyer and should be completed as early as possible in the administration process, and certainly before any distribution or grant of occupancy rights.

Practical Forms, Lodgements and Valuation Guidance

Executors should ensure the following practical steps are completed alongside the checklist above:

• Market valuation. Engage an independent, licensed property valuer to provide a written valuation as at the date of death. This valuation establishes the CGT cost base for the property and is essential if the property is later sold or distributed. Retain the valuation report with the estate file.
• ATO lodgement. A final tax return must be lodged for the deceased for the period from 1 July of the relevant income year to the date of death. If the estate derives income (including any deemed capital gain), a separate estate tax return may be required.
• Probate timing. In most Australian jurisdictions, probate should be applied for promptly. Delays in obtaining a grant can complicate the CGT position, particularly where a beneficiary moves into the dwelling before the estate is formally administered.
• Record keeping. Maintain a contemporaneous record of all dates, valuations and communications relating to the property. If the ATO later queries the CGT treatment, detailed records will be critical.

Risk Mitigation for Families and Trustees, Estate Planning Tax 2026 Alternatives

Where TD 2026/D1 creates a risk that the CGT main residence exemption will be lost, families and trustees should consider the following alternatives in consultation with their estate planning lawyers:

• Sale and distribution. The executor sells the dwelling during the administration period (while it is still an estate asset) and distributes the proceeds. If the property qualified as the deceased’s main residence, the exemption may apply to the sale by the estate itself, avoiding the separate-trust issue entirely.
• Buy-out by the occupying beneficiary. The beneficiary who wishes to remain in the home purchases it from the estate at market value. This crystallises any CGT event at the estate level (where the exemption may still apply) and gives the beneficiary a fresh cost base.
• Time-limited occupation licence. As illustrated in Sample Clause A above, a carefully worded, short-term, revocable licence avoids creating a proprietary interest and keeps the property within the estate for CGT purposes.
• Trustee discretion clause. Instead of granting a right, the will directs the trustee to consider allowing occupation at the trustee’s absolute discretion, ensuring no beneficiary acquires a proprietary entitlement.
• Family equity loan. Where the beneficiary cannot afford an outright purchase, the estate or other beneficiaries may provide vendor finance, allowing the occupying beneficiary to acquire the property over time while the estate retains control of the CGT position during administration.

Each alternative has trade-offs, stamp duty, family dynamics, cash-flow constraints and legal costs must all be weighed. The likely practical effect of TD 2026/D1, once finalised, will be to make these conversations between solicitors, families and financial advisers far more common and far more urgent.

Conclusion, Recommended Next Steps for Estate Planning Lawyers Australia

TD 2026/D1 represents a material shift in the ATO’s interpretation of how occupancy rights interact with the CGT main residence exemption in deceased estates. While the determination remains in draft, the direction of travel is clear: generic right-to-occupy clauses and loosely worded testamentary trust provisions carry a growing risk of forfeiting one of the most valuable tax concessions available to Australian families.

The three immediate priorities are: audit existing wills and precedent clause banks against the tests in TD 2026/D1; redraft occupancy provisions using carefully framed licences or discretionary trustee powers; and complete the executor CGT checklist for any estate currently under administration. Estate planning lawyers Australia-wide should monitor the ATO’s progress toward a final determination and update all affected documents within seven days of any change.

To connect with a specialist estate planning lawyer who can review your will, testamentary trust or estate administration, visit the Global Law Experts lawyer directory, Australia.

Last reviewed: 9 May 2026. This article will be updated when the ATO finalises TD 2026/D1.

Sources

1. Australian Taxation Office, TD 2026/D1 PDF
2. Law Council of Australia, Submission on TD 2026/D1
3. Law Society of NSW, Letter on TD 2026/D1
4. CPA Australia, ATO Flags Tougher “Right to Occupy” Test
5. Global Law Experts, Inherited Property CGT Rules Australia 2026
6. Hudson Financial Planning, TD 2026/D1 Explainer
7. SW, Loss of Main Residence Exemption in Deceased Estates
8. DLK Advisory, Main Residence Exemption for Inherited Properties
9. Income Tax Assessment Act 1997 (Cth)