ATO consultation on deceased estates’ draft Determination
The Tax Institute welcomes the opportunity to make a submission to the Australian Taxation Office (ATO) in relation to the consultation on draft TD 2026/D1 Income tax: deceased estates – meaning of ‘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 (ITAA 1997) (draft Determination).
Summary of position
The Tax Institute is concerned that aspects of the draft Determination are inconsistent with existing laws and practice. In particular, the comments in paragraphs 31-33 of the draft Determination which state that a right to occupy a dwelling under a testamentary trust cannot satisfy the requirement in item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA 1997, because such a right does not arise under the deceased’s will.
The Tax Institute considers that:
- this conclusion is inconsistent with the law and cannot be maintained by the terms of the relevant statute. We recommend that the Commissioner reconsider paragraphs 31–33 and clarify that a right to occupy expressly conferred by a will, but administered through a testamentary trust established by that will, will satisfy of the relevant provisions of subsection 118-195(1) of the ITAA 1997;
- given the widespread use of testamentary trusts in Australian estate planning, the issues raised in paragraphs 31–33 are likely to cause great disruption and uncertainty, which warrants careful reconsideration to ensure that the final Determination is correct and promotes the fair administration of the tax system;
- if the current approach is maintained, it will create a differential treatment of testamentary trusts under section 118-195 of the ITAA 1977 compared to Division 128 of the ITAA 1997, for no clear policy reason or statutory basis;
- given the Commissioner’s view in the draft Determination that court ordered variations to a will do satisfy the provisions in question, this might result in taxpayers having greater recourse to the courts to rectify this issue, increasing costs, unnecessarily consuming the courts’ time, and raising issues of unfairness for those who cannot afford such an option.
Where an ATO legal interpretation is likely to be highly disruptive and represents a change or overturning of a longstanding practice, it should only proceed after an appropriate case has been tested in the courts.
At a minimum, if a revised interpretation is to be adopted, appropriate transitional or grandfathering arrangements should be implemented.
Our detailed response and recommendations to improve the draft Determination are contained in Appendix A.