What Is ATO Draft Tax Determination TD 2026/D1?
On 28 January 2026, the Australian Taxation Office released Draft Tax Determination TD 2026/D1, a document that has quietly unsettled estate planning practitioners across Australia. Its subject: when does a person have a "right to occupy a dwelling under the deceased's will" — and when, critically, does that right not exist?
The answer matters because that specific phrase — right to occupy under the will — is the gateway to a significant CGT concession. Under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997), the CGT main residence exemption can extend to a property after the owner's death, but only if the right to occupy is granted under the deceased's will.
Testamentary trusts — a structure used extensively in estate planning for asset protection and tax efficiency — are at the centre of the ATO's new position.
TD 2026/D1 is a draft only. It was released for public consultation and may still be revised, modified, or withdrawn before it is made final. However, the ATO's stated position cannot be ignored — it signals the direction of the office's enforcement approach.
The ATO's Position: Trusts Are "Separate and Distinct" from the Will
The nub of the ATO's argument in TD 2026/D1 is straightforward, if stark: a testamentary trust deed is a separate and distinct legal document from the deceased's will. Rights and obligations that arise under the trust deed are therefore rights arising under the trust — not rights arising "under the deceased's will."
The consequence, in the ATO's view: if a surviving spouse or beneficiary continues to live in the family home because the testamentary trust deed grants them that right, the occupancy is not a right under the will. And if there is no right under the will, the CGT main residence exemption under section 118-195 may not apply when the property is eventually sold.
The ATO's reasoning rests on a technical distinction between:
- A right to occupy granted directly in the will — for example, "I give my surviving spouse the right to occupy the property at [address] for life" — which would satisfy s.118-195; and
- A right to occupy conferred by the trustee under a testamentary trust — where the will establishes the trust, and it is the trust deed that empowers the trustee to allow a beneficiary to reside in the property — which, in the ATO's view, may not satisfy s.118-195.
This is a distinction that many practitioners — and most Will-makers — have not previously needed to consider.
What This Means Practically for Your Estate
To understand the real-world impact, consider this scenario: a couple owns a family home in Melbourne worth $2.5 million. They have testamentary trust wills. When the first spouse dies, the property is transferred into a testamentary trust for the benefit of the surviving spouse and their children. The surviving spouse continues to live in the home for many years, then sells it.
Under the pre-TD 2026/D1 assumption: the CGT main residence exemption applies. No CGT on the sale.
Under the ATO's position in TD 2026/D1: if the surviving spouse's right to occupy derives from the trust deed rather than from a specific provision of the will, the exemption may not apply. If the property has doubled in value to $5 million at the time of sale, the estate could face a capital gain in the millions — with corresponding CGT at the trust's rate.
Right to Occupy Granted via Trust Deed
The will establishes a testamentary trust. The trust deed empowers the trustee to allow the surviving spouse to reside in the property. There is no explicit right to occupy stated in the will itself.
- ATO position: right arises "under the trust," not "under the will"
- CGT main residence exemption may not apply on sale
- Significant CGT liability risk for high-value properties
Right to Occupy Explicitly Granted in the Will
The will expressly states that the surviving spouse has the right to occupy the family home. The testamentary trust may also hold the property, but the right to occupy is anchored in the will document itself.
- ATO position: right may be characterised as arising "under the will"
- CGT main residence exemption more likely to apply on sale
- Appropriate drafting is critical — obtain legal advice
The practical drafting question: Does your will itself contain an explicit right for a named person to occupy the family home? Or does your will simply establish a trust and leave it to the trust deed to deal with occupancy? If the latter, your estate may be exposed under the ATO's position in TD 2026/D1.
Who Is Most at Risk?
TD 2026/D1 does not affect every estate or every testamentary trust. The following groups face the most direct exposure and should act now to review their estate planning documents:
Surviving Spouses in Homes Held Through Testamentary Trusts
This is the most common scenario. Many couples in Victoria use testamentary trust wills specifically to give the surviving spouse continued access to the family home while protecting the asset for children. If the right to occupy is embedded in the trust deed rather than the will, the CGT position on eventual sale is now in doubt.
Children and Heirs Continuing to Occupy Inherited Properties
Adult children who continue to live in a property inherited through a testamentary trust — perhaps a family home that has been in the family for generations — may face CGT on sale if the occupancy right is not anchored in the will itself.
Blended Families
Blended family estate plans often use testamentary trusts to balance competing interests — providing the surviving spouse with a home during their lifetime while preserving the capital for children from a prior relationship. These arrangements are particularly exposed if the occupancy right is not explicitly stated in the will. We recommend a review of your blended family estate plan as a priority.
High-Value Property Estates
For estates where the family home is a significant asset — common among WealthShield Legal's Melbourne clientele — even a partial denial of the CGT main residence exemption can create a substantial tax liability. The higher the property value, the more important it is to address this now.
The 2-Year Exemption: Important but Limited
Before the implications of TD 2026/D1 feel overwhelming, it is worth noting an important safe harbour that continues to apply regardless of the trust structure.
Under section 118-195 of the ITAA 1997, if a dwelling that was the deceased's main residence is sold within two years of the date of death, the capital gain or loss is generally disregarded — the CGT main residence exemption applies in full. This two-year window applies even where the property is held in a testamentary trust.
| Sale Timing | CGT Position (Family Home) | TD 2026/D1 Impact |
|---|---|---|
| Within 2 years of death | Generally fully exempt from CGT | No impact — exemption applies regardless |
| After 2 years of death | Exemption depends on right to occupy meeting s.118-195 requirements | Significant exposure if right to occupy is via trust deed only |
The two-year exemption is valuable, but it is cold comfort for the many estates where the surviving spouse continues to live in the family home for decades after the first death — which is, of course, exactly what testamentary trusts are designed to facilitate.
It is also worth noting that the ATO has a discretion to extend the two-year period in certain circumstances, but this is not automatic and should not be relied upon.
Industry Response: "Form Over Substance"
TD 2026/D1 has not gone unchallenged. The estate planning profession has responded with considerable force, and the public consultation period attracted significant submissions from peak bodies.
The Tax Institute and the Law Society of New South Wales are among the bodies that have pushed back against the ATO's position. The central argument of critics is that the ATO's interpretation elevates form over substance: a testamentary trust is created by and flows directly from the will — it has no independent legal existence apart from the will. Rights conferred by a testamentary trust are therefore, in substance, rights conferred by the will.
Critics further argue that the ATO's reading creates an arbitrary and unjust distinction between two wills that achieve functionally identical outcomes:
- A will that says "my surviving spouse may occupy the home for life" — exempt; and
- A will that says "the trustee of the testamentary trust may permit my surviving spouse to occupy the home for life" — potentially not exempt, under TD 2026/D1.
The practical effect, critics note, would be to impose a substantial tax penalty on estates that used testamentary trusts for perfectly legitimate asset protection and estate planning purposes — purposes encouraged by the legislature itself.
Important context: The professional submissions opposing TD 2026/D1 carry real weight. The determination is not yet finalised, and the ATO may revise its position following consultation. However, the prudent approach is to plan as if the ATO's position will be maintained — and to take steps now to ensure your will does not rely solely on the trust deed to confer occupancy rights.
What to Do Now: A Practical Checklist
If you have a testamentary trust will that includes the family home, the following steps are appropriate to consider now — before TD 2026/D1 is finalised:
1. Review Your Will with an Estate Planning Lawyer
The critical question is whether your will contains an explicit right for named individuals to occupy the family home — independent of the trust deed. This is a technical drafting question that requires careful legal analysis. Do not attempt to assess this yourself — the language matters significantly.
2. Consider Amending Your Will if Necessary
If the right to occupy is currently conferred only through the trust deed, you may wish to consider amending your will to include an explicit provision granting the occupancy right directly in the will document. WealthShield Legal drafts testamentary trust wills that address these requirements and can review existing documents for compliance with the ATO's stated position.
3. Consider the Timing of Property Sales
For estates where a property sale is being contemplated, the two-year exemption period should be considered carefully. This is a tax and legal question — consult your accountant or tax adviser for advice on the CGT implications of timing.
4. Consult Your Accountant or Tax Adviser
The CGT implications of TD 2026/D1 — including any interaction with the 50% CGT discount, cost base calculations, and the impact on the estate's tax position — require specialist tax advice. WealthShield Legal provides legal services only; we are not tax advisers and do not hold an AFSL.
5. Monitor the Finalisation of TD 2026/D1
The draft determination remains open for review. Keep informed through your adviser network or subscribe to ATO updates. If the determination is finalised in its current form, or if it is modified in response to submissions, further review of your estate planning documents may be warranted.
If your testamentary trust will was drafted without considering the s.118-195 right-to-occupy requirement in the will itself, you should arrange a review as soon as practicable. This is particularly important for high-value properties where the CGT exposure could be significant.
WealthShield Legal offers fixed-fee estate plan reviews as part of our testamentary trust will services. Our packages are priced at $3,300, $5,500, and $8,800 + GST per person, depending on the complexity of your estate.
How WealthShield Legal Can Help
WealthShield Legal is a Melbourne estate planning law firm focused exclusively on estate planning for high-net-worth individuals and families. We do not provide financial advice or tax advice — but we understand the intersection of estate planning law and tax law, and we draft wills that are structured to withstand ATO scrutiny.
In response to TD 2026/D1, our approach to testamentary trust wills includes careful attention to the following:
- Ensuring that the right to occupy the family home is explicitly granted in the will itself — not just through the trust deed — where appropriate;
- Advising on the interaction between the will, the trust deed, and the requirements of s.118-195 ITAA 1997;
- Referring clients to specialist tax counsel or their accountant where complex CGT questions arise; and
- Reviewing existing testamentary trust wills to assess exposure and recommend amendments where necessary.
If you have an existing testamentary trust will — whether drafted by WealthShield Legal or another firm — and you are concerned about the implications of TD 2026/D1, we encourage you to arrange a review. The cost of a review is modest compared to the potential CGT exposure for a high-value estate.
For more background on testamentary trust will costs and the overall value of the structure, see our companion article: How Much Does a Testamentary Trust Cost in Victoria?
Frequently Asked Questions
TD 2026/D1 is a draft tax determination released by the ATO on 28 January 2026. It sets out the ATO's position on what constitutes a "right to occupy a dwelling under the deceased's will" for the purposes of the CGT main residence exemption under section 118-195 of the ITAA 1997. The ATO's position is that rights arising under a testamentary trust deed are separate from the will itself and may not qualify for the exemption. The determination is a draft only and has not yet been finalised.
Under the ATO's position in TD 2026/D1, the CGT main residence exemption under section 118-195 ITAA 1997 may not apply where a surviving spouse or beneficiary occupies the family home under the terms of a testamentary trust deed, rather than directly under a right granted in the will itself. This is still a draft determination and has not been finalised. Consult an estate planning lawyer and your accountant or tax adviser for advice specific to your circumstances.
No. TD 2026/D1 is a draft determination only. It was released for public consultation on 28 January 2026 and has not been finalised. Industry bodies including The Tax Institute and the Law Society of NSW have made submissions opposing the ATO's interpretation. The determination could be revised or withdrawn before it is finalised. However, estates should not assume the ATO's position will change — proactive planning is advisable now.
Under section 118-195 of the ITAA 1997, if a property that was the deceased's main residence is sold within two years of the date of death, the capital gain or loss is generally disregarded (the CGT exemption applies). This 2-year window applies regardless of whether the property is held in a testamentary trust. The ATO's position in TD 2026/D1 primarily affects properties sold more than two years after death. The ATO has a discretion to extend this period in certain circumstances, but this is not automatic.
You should review your will with an estate planning lawyer to assess whether the right to occupy the family home is explicitly granted to named individuals in the will itself — not solely through the testamentary trust deed. If the right to occupy is only conferred through the trust deed, you may wish to consider amending the will to expressly grant that right in the will document. You should also consult your accountant or tax adviser regarding the CGT implications for your specific estate.
Those most at risk include: surviving spouses who continue to live in the family home held through a testamentary trust; adult children or other beneficiaries occupying an inherited property via a testamentary trust; blended families where property is held in trust for children from a previous relationship; and estates that specifically used testamentary trust structures for asset protection over the family home.