ATO urged to reconsider draft tax determination on deceased states

The Tax Institute has urged the ATO to reconsider its draft Tax determination TD 2026/D1 due to concerns with the ATO's proposed interpretation.

TD 2026/D1, which the Tax Office released in late January, concerns individual beneficiaries and trustees of a deceased estate who have an ownership interest in a dwelling acquired from a deceased estate.

The draft tax determination clarifies when an individual has a 'right to occupy a dwelling under the deceased's will', which is relevant in determining whether the beneficiary or trustee of the deceased estate is entitled to the capital gains tax (CGT) main residence exemption when a CGT event happens to their ownership interest in the dwelling.

In its submission on TD 2026/D1, The Tax Institute said it was concerned the draft determination adopts an unduly restrictive view of what constitutes a "right to occupy a dwelling under the deceased's will" for the purposes of section 18-195 of the Income Tax Assessment Act 1997.

The submission said the draft determination places disproportionate emphasis on technical drafting form, rather than the substantive rights created by a will, particularly where those rights are affected through testamentary trust mechanisms.

Head of tax and legal at The Tax Institute, Julie Abdalla, said the draft interpretation risks elevating form over substance.

“Where a will clearly provides for a person to live in the family home, the tax outcome should not depend on whether that right is expressed directly or arises through a testamentary trust structure," she said.

"A distinction of that kind is not supported by a coherent reading of the legislative framework.”

Abdalla noted that advisers and trustees have long administered deceased estates on a settled understanding of section 118-195.

“A significant narrowing of that understanding, particularly without appropriate transitional safeguards, risks unsettling existing arrangements and exposing families to unexpected capital gains tax consequences," she said.

The Institute’s submission also warned that the proposed approach may produce inconsistent outcomes between estates with substantively identical facts, depending solely on drafting differences.

Certainty and coherence were essential to tax administration, Abdalla said.

“The main residence exemption in deceased estate contexts exists to provide continuity and ensure sensible outcomes at a vulnerable time for families."

"An interpretation that elevates drafting nuance above evident intent risks undermining confidence in the integrity and stability of the tax system.”

The Tax Institute said it has urged the ATO to adopt a principled, substance-based interpretation that appropriately recognises occupancy rights created under a will, including those arising through testamentary trust structures, and to ensure that final guidance is administrable, equitable and aligned with legislative intent.