CGT and rights to occupy a main residence - what’s in a name?

Tax Law: 15 June 2026

Author: Marco Saccotelli - Our People

Marco Saccotelli examines the ATO’s draft TD 2026/D1 and its interpretation of “right to occupy” for CGT main residence exemptions in deceased estates. Originally published in the LexisNexis Retirement & Estate Planning Bulletin.

The Australian Taxation Office (ATO) issued draft Tax Determination TD2026/D1 on 28 January 2026. This draft Tax Determination deals specifically with one element of the capital gains tax (CGT) main residence exemption rules which apply when a former main residence of a deceased becomes an asset of a deceased estate or a beneficiary under the deceased estate - the meaning of the words “an individual who had a right to occupy the dwelling under the deceased’s Will”.¹

Practitioners would be aware that for a trustee of a deceased estate or a beneficiary to obtain a full exemption from CGT on the sale of a deceased’s main residence, a series of conditions contained in s 118‑195(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) must be satisfied.

Full exemption case

Section 118‑195 of the ITAA 1997 sets out the conditions that must be satisfied to ignore any capital gain or capital loss on the sale of a former main residence of the deceased. If these conditions are not satisfied then a partial exemption may apply under s 118‑200 of the ITAA 1997 such that only a proportion of a capital gain may be included in assessable income.

For a main residence acquired by the deceased on or after 20 September 1985 (a “post‑CGT asset”), the dwelling must have been the deceased’s main residence just before death and not then being used for the purposes of deriving rental income.² Then, if either item 1 of column 3 or item 2 of column 3 in s 118‑195(1) is satisfied, a full exemption will apply.

Item 1 is the 2‑year sale rule in that a contract of sale must be entered into within 2 years from date of death or under such further period as the Commissioner allows.

Item 2, column 3 contains the condition that from the date of death of the deceased through to a sale occurring, the dwelling was the main residence of one or more of:

• the spouse of the deceased immediately before the death (excluding a separated spouse who lived permanently separately and apart from the deceased) or
• an individual who had a right to occupy the dwelling under the deceased’s will or
• the beneficiary who sells the house.

Commissioner’s view

The Commissioner in TD2026/1 states that the meaning of the words “an individual who had a right to occupy the dwelling under the deceased’s will” is not defined and must take its ordinary meaning in the statutory context in which it is found. Most of the arguments put forward by the Commissioner in TD2026/D1 are entirely reasonable. For example, the author takes no issue with the following positions put forward by the Commissioner:

• a pre‑death agreement or a deed of family arrangement are clearly not rights to occupy which are bestowed by the deceased “under the deceased’s will”
• a right to occupy granted under the terms of a testamentary trust which only commences when due administration has been completed, are also not rights to occupy bestowed “under the deceased’s will” but technically a right which arises under the exercise of a power contained in an annexed trust deed and
• a time‑limited right of occupation which is extended by agreement once the period expires

The Australian Taxation Office (ATO)’s position, which is perplexing and this author disagrees with, is that where the legal personal representative has a power under the will proper to grant a right of occupation to a person who falls within a range of beneficiaries (typically a spouse or surviving children) and exercises that power, then the requirement in item 2(b) of column 3, s 118‑195(1) will not be satisfied.

The Commissioner refers to a Western Australian land tax case³ to support his argument that an individual who is granted a right to reside post death must be named in the will for the full exemption to apply. However, s 22(b)(ii) of the Land Tax Assessment Act 2002 (WA), which was considered in this case, is worded “given to an individual identified in the Will”. This provision provided an annual land tax exemption where an individual named in the will resided there under the terms of the will.

There is no such requirement in s 118‑195(1) that the individual must be identified (named) in the will. As an exercise in statutory construction, the only conclusion that can arise is that the Commissioner is not acting in good faith. In this author’s view, if the legal personal representative has a power under the will to grant a right of occupation to any person who falls within the beneficiary class and following the exercise of that power an individual occupies the residence and continues to do so until the residence is sold — the requirement has been met. The legislature could easily have included a “named” or “identified” requirement in the legislation.

Impact

We will await to see the ATO’s final position given that feedback closes on 27 February 2026. The Commissioner’s position will affect the beneficiaries of willmakers who have received inadequate estate planning advice. Where a right to occupy clause is warranted (asset protection for an at‑risk spouse for example) it is best practice to include in the will a detailed right to occupy clause which does name a specific person (typically a surviving spouse).

Such rights are useful where either the deceased solely owned the property or it was owned as tenants in common by the deceased and their spouse. A well‑drafted right to occupy clause also sets out clear parameters around the cessation of that right and any obligation on the resident to maintain and insure the property and pay council rates. Typically, where a right to occupy clause is used, the property may end up being gifted over and fall into the residue of one or more testamentary trusts.

Tax Rulings and Determinations represent the Commissioner’s considered view of the law, but the ultimate decision maker is of course a member of the Administrative Review Tribunal or a judge of a court. If this issue were litigated it is hard to see how the ATO would succeed given the clear words employed in item 2(b) of column 3, s 118‑195(1) and the well‑understood approaches to statutory interpretation that these decision makers utilise.

Marco Saccotelli, Special Counsel, Aitken Partners

Email: msaccotelli@aitken.com.au

Phone: +61 3 8600 6098

This article was first published in the LexisNexis Retirement & Estate Planning Bulletin, Edition 25.6. Copyright © 2026 LexisNexis. All rights reserved.

Footnotes

1. Found in column 3, Item 2(b) of the table contained in s.118‑195(1), ITAA 1997.
2. Item 1, column 2, s.118‑195(1), ITAA 1997.
3. Caratti v Commissioner of State Revenue [2017] WASCA 128; BC201705569

Please note: The information in this article is provided for general information purposes only and does not constitute legal advice. It is not intended to be comprehensive or to apply to any specific circumstances. You should seek independent legal advice before acting on any information contained in this article.