If you’ve inherited a property, or you’re an executor managing one as part of an estate,there’s a reasonable chance you’ll eventually sell it. Whether that sale triggers Capital Gains Tax (CGT) depends on a set of rules that are more specific (and less forgiving) than most people expect. Two recent developments are particularly worth understanding: an update to the ATO’s safe harbour forselling within the usual timeframe, and a new draft ATO position that could catch out a meaningful number of estates with classic Will-drafting structures.

How an inherited dwelling is treated for CGT

When a dwelling passes to you, whether as the executor (legal personal representative, or “LPR”) or as a beneficiary, you’re treated as having acquired it at the date of death. What you’re treated as having paid for it (your cost base) depends on the property’s history:

• If the deceased acquired it before 20 September 1985 (pre-CGT): your cost base is the market value at the date of death, regardless of how the property was being used.
• If acquired after that date (post-CGT) and it was the deceased’s main residence, not earning income, just before death: your cost base is also the market value at the date of death.
• If acquired post-CGT but it was not their main residence, or it was earning rental income, just before death: you inherit the deceased’s original cost base, meaning the full capital growth since they bought it is potentially taxable when you eventually sell.

There are some important exceptions: if the deceased held the property as a joint tenant, there’s no market value “step-up”, the surviving owner simply takes on the deceased’s original cost base. And if the deceased was a foreign resident for more than six continuous years before death (an “excluded foreign resident”), the market value step-up doesn’t apply either.

When can you sell with no CGT at all?

A full CGT exemption is available on the sale of an inherited dwelling where either of two tests is met:

The two-year requirement, the dwelling is sold (settled) within two years of the date of death, or within a longer period the Commissioner allows.

The specified individuals requirement, the dwelling was the main residence of oneor more “specified individuals” continuously from the date of death right through to settlement. Specified individuals include the deceased’s spouse, a beneficiary who inherited the dwelling and triggered the sale themselves, or, critically, as discussed below, someone with a right to occupy the dwelling under the deceased’s Will.

Unlike the two-year test, the specified individuals test has no time limit, a dwelling could remain exempt 10, 20, even 30 years after death, provided a specified individual has lived in it as their main residence the whole time.

Development 1: More certainty on extending the two-year deadline

Selling a deceased estate’s home within two years sounds straight forward, but in practice, probate delays, disputed Wills, complicated estates, and slow settlements regularly blow that timeframe out. The ATO has discretion to extend it, and its safe harbour guideline, has recently been updated to give executors and beneficiaries more certainty about when they can simply self-assess an extension, rather than having to formally apply.

Under the safe harbour, you can self-assess an additional 18 months (taking your effective deadline out to three-and-a-half years) if all of the following apply:

1. During the first two years, more than 12 months were spent dealing with at least one of these recognised delay factors:
   
   1. The Will or ownership of the dwelling was challenged
   2. A life tenancy or other interest granted under the Will delayed the sale;
   3. The estate’s administration was genuinely complex;
   4. Settlement was delayed or fell through for reasons outside your control; or
   5. COVID-19-related restrictions on real estate activity
2. The dwelling was listed for sale as soon as practically possible once those delays were resolved, and the sale was actively pursued.
3. Settlement occurred within 12 months of listing
4. None of the delay was attributable to factors the ATO specifically disregards, waiting for the market to improve, waiting to renovate before selling, simple inconvenience in organising the sale, or unexplained periods where the executor just didn't progress things.
5. The total extension needed doesn’t exceed 18 months.

If your situation doesn’t fit the safe harbour, for example, you need longer than three-and-a-half years, or your delay doesn't match the listed factors, you can still apply to the ATO in writing (not as a formal private ruling) for the Commissioner to exercise discretion directly.

The takeaway: if your estate has hit genuine, documented delays, a contested Will, a slow probate process, a buyer who fell through, you likely have more breathing room than the headline “two years” suggests. But the moment you’re ready to sell, move quickly and keep records showing why.

Development 2: A new and stricter ATO view on “right to occupy under the Will”

This is the more significant development, and it has implications for how Wills are drafted, not just how estates are administered after the fact.

If you can’t meet the two-year deadline, your fallback is usually the specified individuals test, commonly relying on someone having a “right to occupy the dwelling under the deceased’s Will.” In January 2026, the ATO released a draft determination, setting out a notably narrow view of what that phrase actually means, and it’s attracted significant pushback from tax and estate planning professionals.

The ATO’s position: the right to occupy must be expressly granted in the Will itself, toa specifically named individual, not arising indirectly through some other mechanism, however closely connected to the Will. Several common scenarios, according to the draft determination, will not satisfy this requirement:

• A right to occupy granted by a trustee or executor exercising a broad discretion given to them under the Will (rather than the Will itself naming the person and the right)
• An informal family understanding reached before the Will was made, where the Will doesn’t expressly grant the right;
• A post-death deed of arrangement between beneficiaries and the executor, even if everyone agrees to let someone stay in the home; and
• Most significantly: a right to occupy granted under a testamentary trust, even where the testamentary trust deed is physically annexed to the Will itself.

That last point is the real sting. Testamentary trusts are an extremely common estate planning structure, and many Wills are deliberately drafted to give the trustee broad discretion over who can live in estate assets, including the family home, without naming a specific individual in the Will document itself. Under the ATO's draft view, that kind of arrangement does not satisfy the specified individuals test, no matter how clearly everyone understood the deceased’s wishes.

Example from the ATO’s own guidance: Mia's Will has a testamentary trust deed annexed to it, bequeathing her house to her daughter Renee with no individual named as having occupation rights in the Will itself. The trustee later uses their discretion under the trust deed to let Mia’s son Jay live there as his main residence. Despite this being entirely consistent with the trust structure Mia set up, the ATO’s view is that Jay does not have a right to occupy under the Will, because the right came from the trustee's exercise of discretion under the trust deed, not from the Will’s own terms.

One useful exception: if a court order, such as a family provision order, grants someone the right to occupy a home, this is treated as if it arose under the Will, because such orders generally take legal effect as a codicil (an amendment) to the Will itself.

What this means if you’re involved in estate planning, or administering an estate

If the final version of TD 2026/D1 confirms this position, the practical implication is significant: a right to occupy a dwelling needs to be expressly written into the body of the Will itself, naming the specific individual, if you want it to support a full CGT exemption down the track. Relying on a trustee’s general discretion, even one set out clearly in an annexed testamentary trust deed, won’t be enough.

If you're currently drafting or reviewing a Will (or you administer one with a testamentary trust structure), this is worth raising directly with your solicitor and your tax adviser together, since it sits right at the intersection of succession law and tax law.

If you need help for your own estate planning, reach out to us today

If you’re an executor or beneficiary dealing with an inherited property, or you’re involved in estate planning that includes a family home, these two developments are worth raising proactively

• If a sale is taking longer than expected, document why; the specific delay factors matter for the safe harbour.
• If a testamentary trust structure is involved, and continued occupation of the family home by a particular person matters to the family’s plans, check now whether the Will itself names that person and the right, don’t rely on trustee discretion alone.

Get in touch with our office if you’d like help working through either of these issues for an estate you’re managing, or for your own estate planning.

This article is general in nature and does not constitute tax or legal advice. It isbased on PCG 2019/5 (as updated) and draft Taxation Determination TD 2026/D1, which had not been finalised at the time of writing. Speak with us, and with a qualified estate planning solicitor, about how these rules apply to yourspecific circumstances.