When a family home is passed on, it is often one of the most valuable assets in an estate. Alongside the emotional significance, there can also be substantial tax implications.
Recent draft guidance from the ATO - TD 2026/D1 - has brought renewed focus to how inherited properties are treated for capital gains tax (CGT). While some commentary has labelled this a “death tax by stealth”, the reality is more nuanced.
What this update does highlight is the importance of getting estate planning right - especially where property is involved.
Why This Update Matters
Under current rules, a deceased estate or beneficiary can sell a family home without triggering CGT. This exemption can be significant, particularly where a property has been held for many years and increased in value. To access a full exemption, one of the following conditions generally needs to be met:
- The property is sold within two years of the date of death (subject to extensions in some cases), or
- The property is treated as the main residence of a qualifying individual from the date of death until sale
These qualifying individuals may include:
- A surviving spouse
- A beneficiary
- Someone with a right to occupy the property under the will
It is this last point that the ATO’s draft guidance focuses on.
The Key Change - What Counts as a “Right to Occupy”?
The ATO is taking a stricter view on what it means for someone to have a right to occupy a property under a will. According to the draft determination:
- The right must be clearly and explicitly stated in the will
- It must be granted to a specific, named individual
- Informal arrangements or trustee discretion are not enough
This has important implications for how estates are structured. For example:
- If a will gives an executor general discretion to allow someone to live in the property, this may not qualify
- If a testamentary trust allows a beneficiary to occupy the home, this may also fall outside the exemption
In both cases, the property could lose access to the full CGT exemption on sale.
Why This Creates Risk for Families
For many families, the intention is simple - allow a loved one to remain in the home for a period of time. But under this draft view, the way that intention is documented matters. If the structure does not meet the ATO’s requirements, the outcome can be significant.
Consider a property valued at $2 million with a capital gain of $1.5 million. Depending on the circumstances, this could result in hundreds of thousands of dollars in CGT. This is where estate planning moves beyond legal structure and becomes a financial strategy.
It’s Not All or Nothing
While the draft guidance tightens one area, it does not remove all opportunities for CGT relief. There are still pathways to:
- Access a full exemption under the two-year rule
- Apply partial exemptions where relevant
- Use the CGT discount in certain cases
The key is understanding how these rules apply before decisions are made - not after. This is particularly important where property, family intentions, and long-term wealth planning intersect.
Practical Steps to Protect Your Estate
If you own property or expect to pass one on, there are some practical steps worth considering.
1. Review Your Will Carefully
If you intend for someone to live in the property after your passing, ensure this right is clearly defined and documented in the will. Vague or discretionary wording may not achieve the intended outcome.
2. Consider Timing of Sale
The two-year exemption window remains a key planning tool. If a property is likely to be sold, timing can have a direct impact on the tax outcome. Holding a property longer may make sense from a lifestyle or investment perspective, but it needs to be weighed against potential CGT exposure.
3. Understand the Structure
If your estate plan involves more complex structures, such as testamentary trusts, it is important to understand how these interact with CGT rules. What works well for asset protection or income distribution may not always align with tax outcomes.
4. Get Advice Early
Estate planning is one area where small details can have large consequences. Working with advisors who understand both the tax and strategic side of the equation can help you make informed decisions.
Looking at the Bigger Picture
Estate planning is not just about passing on assets. It is about preserving value and avoiding unintended outcomes. Decisions around property, timing, and structure all play a role in shaping what the next generation receives.
In many cases, these decisions are connected to wider financial considerations, including cash flow, investment strategy, and long-term goals. For families managing multiple assets or planning for retirement, this may also involve reviewing how property fits alongside superannuation structures such as a self-managed super fund.
The Bottom Line
The ATO’s draft guidance is a reminder that estate planning needs to be deliberate and well-structured. Assumptions can be costly - especially when it comes to CGT on property. By reviewing your arrangements early, documenting intentions clearly, and understanding how the rules apply, you can help protect your family’s wealth and reduce the risk of unexpected tax outcomes.
If you would like clarity on how these changes may affect your situation, or want to review your current structure, it is worth starting the conversation now. Contact Trekk Advisory to explore your options and ensure your plans are aligned with both your intentions and the current rules.
