ATO Draft TD 2026/D1: What the "Right to Occupy" Test Means for Inherited Property
Capital gains tax on inherited property has never been simple. A draft ATO determination, TD 2026/D1, released in January 2026, takes a narrow view of one part of the main residence exemption for deceased estates. For accountants, solicitors and financial planners acting for executors and beneficiaries, it is worth understanding before the next client conversation about an inherited home.
This article explains what the draft addresses, what it may mean in practice, and how timing affects the sale of an inherited property. It is general information only, not tax or legal advice.
Background: the main residence exemption and deceased estates
Under Division 118 of the Income Tax Assessment Act 1997, a capital gain on a deceased person's main residence can be disregarded in certain circumstances. Broadly, where the deceased used the home as their main residence and did not use it to produce income, the exemption can apply if the property is sold within two years of death. It may also apply beyond two years if, from the date of death until sale, the home is the main residence of a qualifying person, such as a surviving spouse or an individual who had a right to occupy the home under the deceased's will. Other conditions apply.
What TD 2026/D1 addresses
The draft does not change the two-year position. It deals with one question: what counts as "a right to occupy the dwelling under the deceased's will".
The ATO's draft view is that the phrase takes its ordinary meaning, and commentators read that view as a narrow one.
The right needs to come from the will itself
Commentary on the draft indicates that the will should expressly grant the right to occupy and name the individual who holds it.
Discretion and informal arrangements may not be enough
Under the draft, a right granted by an executor or trustee using a broad discretion in the will is not a right "under the will". The same applies to rights arising from a pre-death agreement or a deed of family arrangement. Allowing a family member to stay on informally may not preserve the exemption.
Testamentary trusts
The draft also takes the view that a right granted through a testamentary trust is not a right "under the will". This is one of the most contested points, and professional bodies including CPA Australia and the Law Council of Australia have raised concerns in their submissions.
Draft status
TD 2026/D1 is a draft. Submissions have been made, and finalisation is expected in late 2026. The final determination may differ from the draft, and commentators have noted it may apply to earlier income years once finalised. Confirm the current status with the ATO before acting.
What this means for executors and beneficiaries
The two-year point matters
If a home is still unsold two years after death and no one holds a qualifying right to occupy, a CGT liability may arise that the family did not expect.
Timing is part of the tax conversation
Probate delays, family disagreements and property preparation all use up time. Each one can push a sale past the two-year point.
Wills may need a second look
For solicitors and estate planners, the draft may prompt a review of how occupation rights are expressed in wills, including whether the occupant is named.
Records from day one
Executors should be able to evidence the deceased's use of the home as their main residence and hold a market valuation as at the date of death. These are far easier to gather early than at settlement.
Beneficiary disputes
Where the tax outcome affects what each beneficiary receives, disagreements about timing and sale become more likely, particularly if one beneficiary was living in the home.
Why moving efficiently matters
The longer an inherited property sits unsold, the more risk builds: the two-year point passes, holding costs accumulate (council rates, insurance, utilities, maintenance), and the property can deteriorate. Early intervention, ideally before the property is listed, gives executors the most options.
How a specialist property realisation partner supports advisers
Scout Corp works alongside accountants, solicitors and financial planners to manage inherited property sales to a defined timeframe. Our role is property realisation. Yours is the legal and tax advice. We work within the framework you and your client establish.
In practice, that means independent appraisal of the property and its market position; pre-sale preparation including clearance, cleaning and minor works; vendor advocacy and agent appointment; active campaign management; and coordination with legal representatives throughout. We operate nationally, wherever the property is located.
If you have a client with an inherited property, contact Scout Corp to discuss the timeframe and how we can help.
This article is general information only and does not constitute tax or legal advice. TD 2026/D1 is a draft determination. Advisers should confirm its current status with the ATO and obtain independent advice before acting.
