How TD 2026/D1 and the 2026 Tax Reforms Change CGT for Inherited Property in Australia

The inherited property CGT rules Australia 2026 landscape shifted materially on 28 January 2026, when the Australian Taxation Office released Draft Taxation Determination TD 2026/D1, narrowing the circumstances in which a beneficiary’s “right to occupy” a dwelling under a deceased’s will preserves access to the main residence exemption. For estate planners, executors and trustees administering or drafting wills around the 1 July 2026 tax-change window, the determination demands an immediate review of existing will wording, testamentary trust structures and estate-administration timelines. This guide translates TD 2026/D1 into actionable drafting steps, executor checklists and comparative scenarios so practitioners can protect beneficiaries from avoidable CGT exposure.

Key Takeaways, Inherited Property CGT Rules Australia 2026

• TD 2026/D1 tightens the “right to occupy” test. The ATO now requires an express, unambiguous right to occupy the dwelling in the deceased’s will, informal or implied arrangements are unlikely to satisfy the test.
• The two-year disposal rule continues under existing ATO guidance on inherited property and CGT, but TD 2026/D1 affects who qualifies for the main residence exemption within that window.
• Testamentary trust rights are treated differently from will rights. The ATO distinguishes rights arising under a trust from those granted directly by the will, creating a compliance gap for many existing trust structures.
• Will wording is now the primary control lever. Sample clauses granting express occupation rights and trustee sale powers (see below) can preserve the exemption if drafted correctly.
• Executors must document occupancy and valuation at date of death to support any future main residence claim, delay or poor record-keeping creates CGT risk.
• TD 2026/D1 remains in draft. Practitioners should monitor the ATO for the final determination and verify whether subsequent legislative changes alter its application from 1 July 2026.

What Is TD 2026/D1? The ATO Draft Determination on Inherited Property

Draft Taxation Determination TD 2026/D1 addresses a specific question: what constitutes a “right to occupy the dwelling” under the deceased’s will for the purposes of the capital gains tax main residence exemption provisions. The determination is significant because access to the main residence exemption for a deceased estate often depends on whether a beneficiary held such a right at the time the property was dealt with by the estate or trustee.

Before TD 2026/D1, many practitioners operated on the understanding that a beneficiary who simply lived in the deceased’s home, with the tacit approval of the executor, could rely on the main residence exemption when the property was eventually sold. The ATO’s draft narrows that position. It signals that the right must be expressly granted in the will itself, be unambiguous, and relate specifically to the dwelling in question. General residuary gifts or discretionary powers to permit occupation are, in the ATO’s view, unlikely to meet the threshold.

The Law Council of Australia raised concerns in its submission that the draft determination could produce unfair results for beneficiaries under wills drafted before the ATO’s new interpretive position was published. CPA Australia’s submission echoed these concerns, noting that many Australian wills in circulation do not contain the express wording the ATO now expects.

Timeline and Consultation Status

Important: TD 2026/D1 is a draft at the date of publication of this article (last reviewed 2 May 2026). Practitioners should check the ATO website for the final determination before relying on its specific terms.

How TD 2026/D1 Changes Access to the Main Residence Exemption for Deceased Estates

Under the existing ATO guidance on inherited property and CGT, a CGT exemption may apply when a deceased person’s main residence is disposed of by their estate, provided the property is sold within two years of the date of death (or a longer period if the Commissioner grants an extension). A separate limb of the exemption can also apply where a beneficiary has a “right to occupy” the dwelling under the will and treats it as their main residence.

TD 2026/D1 refocuses attention on that second limb. The practical effect is that even where a beneficiary physically lives in the deceased’s home, the main residence exemption may be denied if the will does not confer an explicit right to do so.

The Legal Test for “Right to Occupy”

The draft determination draws a line between two categories:

• Express will grant. The will contains a specific clause granting a named beneficiary the right to reside in or occupy the identified dwelling. This is the category the ATO accepts as meeting the test. Example: “I grant my daughter, [Name], the right to occupy [property address] as her principal place of residence for a period of [X] years following my death, or until the property is sold, whichever occurs first.”
• Informal or implied arrangement. The beneficiary occupies the dwelling with the executor’s consent but without a corresponding clause in the will. This includes situations where the executor permits occupation pending the grant of probate or distribution. The ATO’s draft position is that this arrangement does not create a “right to occupy” under the will.

The Law Society of New South Wales raised concerns that many standard-form wills used across Australian jurisdictions contain residuary clauses and general trustee powers, not express occupation rights, potentially exposing thousands of existing estates to unexpected CGT liability.

Practical Consequences for Beneficiaries

Consider two contrasting scenarios:

• Scenario A, Express right. A will drafted in 2026 states: “My son John shall have the right to occupy the property at 12 Park St, Melbourne as his main residence.” John moves in after the testator’s death and the property is sold 18 months later. Under TD 2026/D1, John’s occupation right supports access to the main residence exemption. Industry observers expect the ATO to accept this type of clause without further enquiry.
• Scenario B, No express right. A will drafted in 2015 leaves the residuary estate to “my children in equal shares.” Sarah, one of three children, continues living in the family home after the testator’s death. The executor informally agrees to the arrangement. Under the draft determination, Sarah’s occupation may not constitute a “right to occupy” under the will, meaning the main residence exemption could be denied when the property is ultimately sold.

The practical consequence is stark: the tax on an inherited home may now depend almost entirely on how the will is worded, rather than on the beneficiary’s actual living arrangements.

Who Pays CGT, Deceased Estate, Trustee or Beneficiary?

Understanding which entity bears the CGT obligation is essential for executors making distribution and disposal decisions. The answer depends on how the property is held and when it is sold. TD 2026/D1 adds a further layer of complexity by affecting whether each entity can access the main residence exemption.

The critical point for beneficiaries is that inheriting a property does not, by itself, trigger a CGT event. The taxing point arises on subsequent disposal. However, whether an exemption reduces or eliminates the tax depends on the inherited property CGT rules Australia 2026 framework, and specifically on the new “right to occupy” test in TD 2026/D1.

Testamentary Trusts and CGT, Can They Preserve the Exemption?

Testamentary trusts remain a powerful estate planning tool in Australia for asset protection, income splitting and succession flexibility. However, TD 2026/D1 introduces a complication: the ATO draws a distinction between a right granted by the will itself and a right that arises under a trust established by the will.

This distinction matters because many Australian wills create a testamentary trust, vest property in the trust, and then confer discretionary powers on the trustee to permit a beneficiary to reside in the property. Under the ATO’s draft position, that discretionary permission may not constitute a “right to occupy the dwelling under the deceased’s will.” The likely practical effect will be that testamentary trusts relying solely on trustee discretion, without a corresponding express right in the will itself, face a heightened risk of losing the main residence exemption.

Practitioners considering testamentary trust CGT outcomes have several drafting options:

• Option A, Express occupation right in the will, property held in trust. The will grants a named beneficiary an express right to occupy the dwelling and separately directs that the property be held in a testamentary trust. This hybrid approach aims to satisfy TD 2026/D1’s requirements while retaining the trust’s asset-protection benefits.
• Option B, Trustee power to transfer property to the beneficiary. The will empowers the trustee to transfer legal title to the beneficiary who occupies the property, enabling the beneficiary to claim the exemption personally on a future sale.
• Option C, Time-limited trust with mandatory sale clause. The will directs the trustee to sell the property within two years of death, aiming to rely on the two-year disposal rule rather than the occupancy limb of the exemption.

Sample Testamentary Trust Clauses

The following clauses are illustrative only and must be adapted by a qualified estate-planning solicitor to the specific circumstances of the testator and applicable state law.

Clause T1, Express occupation right within a trust structure:

“I direct my Trustee to hold the property at [address] on the terms of the [Name] Testamentary Trust established by this Will. I grant [Beneficiary Name] the right to occupy the said property as [his/her] principal place of residence from the date of my death until the earlier of (a) the sale of the property, (b) [Beneficiary Name] ceasing to reside in the property, or (c) [X] years from the date of my death.”

Clause T2, Trustee power to transfer title:

“My Trustee may, in [his/her/their] absolute discretion, transfer legal title to the property at [address] to [Beneficiary Name] at any time within two (2) years of my death, provided that [Beneficiary Name] has been residing in the property as [his/her] principal place of residence.”

Tax Consequences of Leaving Property to a Testamentary Trust

Where property passes to a testamentary trust, a CGT rollover typically applies, the trust is treated as having acquired the asset at the deceased’s cost base (or market value at date of death, where applicable). No CGT event occurs on the transfer itself. However, when the trust later disposes of the property, the trust (or its beneficiaries, depending on distribution) will be liable for CGT on any capital gain. The main residence exemption may reduce or eliminate this liability, but only if the conditions in TD 2026/D1 are met.

Wills Drafting Checklist to Reduce CGT Risk, Inherited Property CGT Rules Australia 2026

Estate-planning solicitors reviewing or drafting wills in 2026 should treat the following as a minimum compliance checklist in light of TD 2026/D1. Wills drafting CGT Australia 2026 best practice now centres on explicit, unambiguous language.

Sample Clause A, Express right to occupy:

“I grant [Beneficiary Name] the right to occupy the dwelling at [address] as [his/her] principal place of residence from the date of my death. This right shall continue until the earlier of: (a) the sale of the property by my Executor or Trustee; (b) [Beneficiary Name] vacating the property; or (c) [specified period, e.g. ‘two years from the date of my death’].”

Sample Clause B, Trustee power to sell within two years, preserving the exemption:

“I direct my Executor to use [his/her/their] best endeavours to sell the property at [address] within two (2) years of the date of my death. My Executor shall obtain a market valuation of the property as at the date of my death within [60] days of the grant of probate and shall retain all records of the valuation, the occupation of the property by any beneficiary, and the eventual sale.”

Key drafting pitfalls to avoid under TD 2026/D1:

• Relying on residuary clauses alone. A general gift of the residuary estate does not, by itself, confer a right to occupy a specific dwelling.
• Discretionary occupation language. Clauses that empower (but do not direct) a trustee to “permit” a beneficiary to live in the property may fail the ATO’s express-right test.
• Failure to identify the dwelling. The right must relate to a specific property. A floating reference to “any property in my estate” is unlikely to satisfy the determination.
• Omitting valuation and record-keeping directions. Without a date-of-death valuation, establishing the cost base, and therefore the quantum of any CGT obligation, becomes significantly more difficult.

Estate Administration Checklist for Executors and Trustees

Executors and trustees administering estates that include a dwelling should follow a structured timeline to preserve the main residence exemption and comply with the inherited property CGT rules Australia 2026 framework. The ATO’s guidance on extensions to the two-year ownership period sets out the circumstances in which the Commissioner may allow a longer disposal window, but relying on an extension carries risk and should not be the primary strategy.

State Law and Other Interactions

Australia’s estate-planning and trust framework operates across both Commonwealth tax law and state-based property, succession and trust legislation. Several state-level considerations intersect with the inherited property CGT rules Australia 2026 changes:

• State trust legislation. Each state’s trust act governs the powers and duties of testamentary trustees. Where a state act confers default powers on trustees (for example, powers of sale or powers to permit occupation), those default powers may not satisfy TD 2026/D1’s requirement for an express right in the will itself. Practitioners should review applicable state trust legislation and override default provisions with explicit will clauses where necessary.
• Stamp duty and land transfer. Transferring property from an estate to a beneficiary or testamentary trust may attract stamp duty in some jurisdictions, depending on the nature of the transaction and applicable exemptions. The stamp duty outcome is separate from the CGT analysis but affects the total cost of estate administration.
• Cross-border estates. Where a deceased person owned property in more than one state, or where executors or beneficiaries are located overseas, practitioners should consider the interaction between multiple jurisdictions’ succession laws and the federal CGT provisions. Verification of will authenticity may also become relevant for cross-border estates with contested documents.

Practical Worked Examples and Numeric Scenarios

These examples are simplified illustrations for educational purposes only and do not constitute tax advice. Actual CGT calculations depend on individual circumstances, applicable indexation or discount methods, and any legislative changes effective from 1 July 2026.

Example 1, Family Home Sold Within Two Years

Maria dies on 1 March 2026, owning a family home valued at $1,200,000 at date of death. Her will grants her daughter Anna an express right to occupy the property. Anna moves in immediately. The executor sells the property on 1 December 2027 (within two years) for $1,350,000.

• Cost base: $1,200,000 (market value at date of death).
• Capital gain: $150,000.
• Main residence exemption: Available, the will contains an express right to occupy, Anna occupied the dwelling as her main residence, and the sale occurred within two years of death.
• CGT payable: Nil (exemption applies in full).

Example 2, Property Held in Testamentary Trust, Sold After Three Years

James dies on 1 June 2026, owning a dwelling valued at $900,000 at date of death. His will establishes a testamentary trust and vests the property in the trust. The will does not contain an express right for any beneficiary to occupy the dwelling, it merely empowers the trustee to “permit a beneficiary to reside in the property at the trustee’s discretion.” The trustee allows James’s son Tom to live in the dwelling. Three years later, the trustee sells for $1,050,000.

• Cost base: $900,000 (market value at date of death, via CGT rollover to trust).
• Capital gain: $150,000.
• Main residence exemption: Under TD 2026/D1, the ATO’s draft position is that the trustee’s discretionary permission does not constitute a “right to occupy the dwelling under the deceased’s will.” The two-year disposal window has also passed.
• Likely CGT payable: The trust (or Tom, if the gain is distributed to him) bears CGT on the $150,000 gain. Assuming the 50% CGT discount applies and Tom’s marginal rate is 37%, the indicative tax on the discounted gain ($75,000) is approximately $27,750.

The difference between these two outcomes is determined entirely by the wording of the will and the timing of the sale, reinforcing why wills drafting CGT Australia 2026 compliance is now a front-line concern for estate-planning solicitors.

Conclusion and Recommended Next Steps

TD 2026/D1 represents a significant tightening of the ATO’s interpretive position on the main residence exemption for deceased estates. For practitioners advising on estate planning Australia 2026, the determination creates three immediate action items: review existing wills for express “right to occupy” language, update testamentary trust drafting to include hybrid clauses that satisfy both trust-law and tax-law requirements, and ensure executors have a structured administration checklist from day one of the estate.

The inherited property CGT rules Australia 2026 framework is still evolving, TD 2026/D1 remains in draft, and further legislative changes may take effect from 1 July 2026. Practitioners should monitor the ATO for the final determination and seek specialist legal and tax advice before making disposal or distribution decisions. Those needing to find an estate planning solicitor should do so as early as possible to preserve all available exemptions.

Sources

1. Australian Taxation Office, TD 2026/D1 (Draft Determination)
2. ATO, Inherited Property and CGT (General Guidance)
3. ATO, Extensions to the 2-Year Ownership Period
4. Law Council of Australia, Draft TD 2026/D1 Commentary
5. CPA Australia, Submission on TD 2026/D1
6. Law Society of New South Wales, Letter on Draft TD 2026/D1