Tax planning for deceased estates has become more complex following the release of Tax Determination TD 2026/D1 by the Australian Taxation Office (ATO). This draft guidance focuses on when a property held in a deceased estate qualifies for the Capital Gains Tax (CGT) main residence exemption.

For many Australians, the family home is the most valuable asset in their estate. Accessing the CGT main residence exemption can significantly reduce tax liabilities for beneficiaries or trustees. However, the ATO’s stricter interpretation introduces new risks that could unintentionally deny access to this important concession.

Understanding these changes is essential for effective estate planning and protecting intergenerational wealth.

What Is the CGT Main Residence Exemption for Deceased Estates?

The CGT main residence exemption allows a property to be sold tax-free in certain circumstances after the owner’s death.

When the Exemption Typically Applies

The exemption is generally available if:

• The property was the deceased’s main residence
• The property is sold within two years of the date of death

Alternatively, the exemption may still apply if:

• An individual has the right to occupy the property under the will
• That individual uses the dwelling as their main residence until it is sold

This second pathway has now come under closer scrutiny under TD 2026/D1.

Key Changes in TD 2026/D1: A Stricter ATO Interpretation

The central issue in TD 2026/D1 is how the ATO interprets the phrase:

“Right to occupy the dwelling under the deceased’s will.”

A Literal Interpretation

The ATO has adopted a strict and literal approach, stating that:

• The individual must be explicitly named in the will
• General or discretionary powers granted to trustees may not be sufficient

This means many common estate planning structures could be affected.

Impact on Testamentary Trusts and Trustee Discretion

One of the most significant implications of TD 2026/D1 relates to testamentary trusts.

Trustee Discretion May Not Qualify

Where a will allows a trustee to decide who can live in the property:

• The occupant may not qualify for the exemption
• This is because their right is not directly granted in the will

Testamentary Trust Structures Under Pressure

Even in cases where:

• A testamentary trust deed is attached to the will

The ATO may still consider the right to occupy as being granted outside the will, potentially disqualifying the estate from the full CGT exemption.

This interpretation could lead to unexpected tax outcomes for beneficiaries.

Why This Matters: Potential Loss of Tax-Free Status

The financial implications can be substantial.

If the exemption is denied:

• The estate may be liable for CGT on the property
• This reduces the overall value passed to beneficiaries
• Long-term estate planning outcomes may be compromised

Given that property often represents a large portion of wealth, even partial loss of the exemption can have a major financial impact.

Estate Planning Strategies to Protect CGT Exemption

Although TD 2026/D1 is still in draft form, proactive planning is essential.

1. Quantify Potential Capital Gains

• Assess the unrealised capital gain on the main residence
• Understand the potential tax exposure if the exemption is lost

2. Clearly Define Occupancy Rights in the Will

• If a beneficiary is intended to live in the property
• Ensure they are explicitly named in the will

This is critical under the ATO’s current interpretation.

3. Plan the Timing of Property Sale

• Selling within two years of death may preserve the exemption
• Delays could increase tax risk

4. Review Testamentary Trust Structures

• Testamentary trusts remain valuable for asset protection and tax planning
• However, their interaction with CGT rules must be carefully reviewed

5. Review Existing Wills and Estate Plans

• Existing arrangements may no longer achieve the intended tax outcome
• Professional legal and tax advice is strongly recommended

No Retrospective Relief: Why Early Action Is Critical

Based on current guidance, TD 2026/D1 does not appear to offer retrospective concessions.

This means:

• Existing estate plans could be affected
• Tax consequences may arise unexpectedly

Early review and adjustment of estate planning documents can help mitigate these risks.

The Complexity of CGT and Estate Planning

Estate planning involves a combination of:

• Tax law
• Legal structures
• Personal objectives

The introduction of TD 2026/D1 adds another layer of complexity, particularly for:

• Blended families
• Complex trust arrangements
• High-value property estates

Careful structuring is essential to ensure intended outcomes are achieved.

Conclusion: Review Your Estate Plan Before Rules Tighten

The ATO’s draft determination TD 2026/D1 signals a shift toward a stricter interpretation of CGT rules for deceased estates. While the main residence exemption remains a valuable tax concession, accessing it may now require more precise estate planning.

To protect wealth and avoid unintended tax liabilities:

• Ensure wills are clearly drafted
• Align legal structures with tax requirements
• Seek professional advice where needed

Taking action now can help preserve the full value of your estate for future generations.

How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au  or arrange a time for a meeting so we can discuss your requirements in more detail.

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General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

In Australia, administering a deceased estate involves a range of legal and taxation responsibilities that must be handled before assets can be distributed to beneficiaries.

If you’re an executor, administrator, or family member responsible for managing a deceased estate, understanding how deceased estate tax works — including tax returns, trust obligations, and beneficiary tax implications — is critical. This guide explains what a deceased estate is, how it is taxed, and what obligations apply at each stage of administration.

What Is a Deceased Estate?

A deceased estate is created when a person dies, comprising all assets, liabilities, and income they held at the time of death. The estate is managed by a legal personal representative (LPR) — usually an executor named in the will or an administrator appointed by the court.

Before an estate can be finalised and distributed, all outstanding Australian Taxation Office (ATO) obligations must be satisfied.

Understanding Tax on a Deceased Estate

Administering a deceased estate involves more than asset distribution — it also requires compliance with tax law.

Notifying the ATO of a Death

The first step is notifying the ATO of the individual’s death. This is usually done by a family member, executor, solicitor, or registered BAS or tax agent. The ATO will require a death certificate and supporting documentation to formally record the death.

Deceased Estate Tax Returns

Date of Death Tax Return

Once the legal personal representative has access to the deceased person’s tax records, a date of death tax return may be required. This return covers income earned from 1 July up to the date of death in the income year the person passed away.

Trust Tax Return for a Deceased Estate

For tax purposes, a deceased estate is treated as a trust. As a result:

• The estate generally requires its own Tax File Number (TFN) and Australian Business Number (ABN)
• A trust tax return must be lodged to report estate income, such as:
  • Rental income
  • Dividends
  • Interest
• Any tax refunds or franking credits owed to the estate are also claimed via this return

Is There Inheritance Tax in Australia?

Australia does not have an inheritance tax. However, beneficiaries may still face tax consequences depending on how assets are received and used.

When Beneficiaries May Pay Tax

Tax may apply if a beneficiary:

• Sells an inherited asset (e.g. property or shares), triggering capital gains tax (CGT)
• Earns income from inherited assets, such as rent or dividends
• Is presently entitled to income from a deceased estate during administration

In most cases, beneficiaries are not entitled to estate income until administration is complete. However, present entitlement can arise earlier in some situations.

The trustee must inform each beneficiary of:

• Their share of trust income
• The amount to be included in their personal tax return

Superannuation Death Benefits and Tax

If a valid death benefit nomination existed at the time of death, superannuation benefits generally do not form part of the deceased estate.

A superannuation death benefit includes:

• The super account balance
• Any life insurance proceeds attached to the account

Whether tax applies depends on:

• Whether the beneficiary is a tax or superannuation dependant under the Superannuation Industry (Supervision) Act 1991
• Whether the benefit is received as a lump sum or income stream

Who Pays Tax on Deceased Estate Income?

Before Probate or Letters of Administration

If the estate earns income before probate or letters of administration are granted, the trustee is responsible for paying tax on that income.

Probate Granted, but Estate Not Finalised

Where probate has been granted but assets are not yet fully distributed, the trustee may make interim distributions. In this case:

• Beneficiaries become presently entitled
• Beneficiaries must include their share of net income in their tax return

Once the Estate Is Finalised

After all tax obligations are met:

• Remaining income is distributed
• Tax may be payable by either the trustee or beneficiary, depending on circumstances

If a beneficiary is:

• A non-resident, or
• Under a legal disability,

the trust is responsible for reporting and paying tax on their behalf.

Deceased Estate Tax Rates in Australia

Normally, trusts are taxed at the top marginal tax rate. However, deceased estates can access concessional tax rates.

Concessional Tax Treatment

For the first three income years, a deceased estate may:

• Be taxed at individual income tax rates
• Access the full tax-free threshold
• Avoid the Medicare levy

However:

• No concessional tax offsets or rebates (e.g. low-income tax offset) apply

The ATO outlines these rules in detail here:
Source: https://www.ato.gov.au/individuals/deceased-estates/doing-trust-tax-returns-for-the-deceased-estate/tax-rates—deceased-estate/

Structuring Your Estate to Minimise Tax

Estate administration occurs during an emotionally difficult time — yet tax and legal obligations continue regardless. Many Australians reduce complexity and tax exposure through testamentary discretionary trusts.

Benefits of Testamentary Trusts

• Flexible income distribution to beneficiaries
• Tax efficiency, particularly for minor beneficiaries
• Asset protection from creditors and family law claims
• Greater control for executors

Because testamentary trusts are created through a will, they require specialist legal drafting and professional advice.

Conclusion

Managing a deceased estate in Australia involves navigating complex tax, trust, and legal requirements. From date of death returns and trust tax rates to beneficiary tax obligations and superannuation treatment, errors can be costly and delay distributions.

Given the complexity, professional advice from estate lawyers, tax advisers, and financial professionals is strongly recommended. Proper estate planning — including trust structures — can significantly reduce tax exposure and administrative burden, ensuring assets are distributed efficiently and in line with your intentions.

Estate lawyers are best placed to guide executors and beneficiaries through deceased estate administration and compliance.

Source: ATO

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How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au  or arrange a time for a meeting so we can discuss your requirements in more detail.

---

General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.