Draft Taxation Determination TD 2026/D1
Submission Date: 12 March 2026
The Law Council of Australia provided a submission on the Draft Taxation Determination TD 2026/D1 (Draft TD), about the meaning of the phrase “right to occupy the dwelling under the deceased’s will” in item 2(b) of column 3 of the table in subsection 118-195(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA).
The Law Council broadly accepts the Commissioner’s approach to the operation of subsection 118-195(1) of the ITAA and acknowledge the importance of clarity and consistency in the administration of the main residence exemption in the context of deceased estates. The Draft TD usefully articulates the Commissioner’s views on the interaction between estate administration and rights of occupation, and will assist practitioners in understanding the ATO’s intended compliance approach.
However, the Law Council has concerns with the position adopted in the Draft TD insofar as it purports to draw a strict distinction between rights arising under a deceased’s will and rights arising under a testamentary trust established by that will. This distinction is not supported by orthodox trust law principles, does not reflect the proper legal character of testamentary trusts, and gives rise to arbitrary and unintended outcomes.
The operative question under item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA is whether the relevant right of occupation derives from the terms of the deceased’s will. Debates about the sequencing of estate administration and the trustee’s subsequent fiduciary obligations are conceptually distinct and do not change the legal source of that right. Further, rights under a testamentary trust do not arise from a separate testamentary trust deed. Rather, these rights are all rights arising under the will.
If the concerns the Law Council has identified in relation to the Draft TD are not addressed, the result is likely to be the exclusion of commonplace and orthodox testamentary arrangements from the operation of subsection 118-195(1), producing outcomes that turn on drafting form rather than substantive testamentary intention. Estates in which a dwelling continues to be occupied consistently as provided for in the deceased’s will may nonetheless be denied access to the main residence exemption, exposing beneficiaries to unexpected capital gains tax liabilities and increasing pressure to dispose of dwellings earlier than intended. This would introduce uncertainty into estate planning and administration, encourage defensive drafting to guard against technical risk, and generate avoidable disputes at the margins of what constitutes a qualifying right. More broadly, it would narrow the practical operation of the provision in a manner that may not reflect its underlying purpose, while diminishing predictability for executors and trustees administering deceased estates.
The Law Council would welcome further engagement in the development of the Draft TD.
Last Updated on 16/03/2026
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