Imagine losing a significant portion of your loved one’s inheritance to taxes—a scenario that’s becoming increasingly likely for Australian families. But here’s where it gets controversial: a proposed change by the Australian Taxation Office (ATO) could effectively introduce a ‘death tax’ by targeting testamentary trusts, a tool many families rely on to protect assets and minimize tax after a loved one passes away. And this is the part most people miss: it’s not just about the tax itself, but the emotional and financial burden it places on grieving families.
Testamentary trusts have grown in popularity as a legal way to safeguard assets and reduce tax liabilities when someone dies. However, a subtle yet impactful change buried in a recent ATO draft ruling (https://www.ato.gov.au/about-ato/ato-advice-and-guidance/advice-under-development-program/advice-under-development-capital-gains-tax-issues) threatens to upend this strategy. Currently, families can sell an inherited home within two years without living in it and still avoid capital gains tax (CGT) under the main-residence exemption. If they hold the property longer, simply placing it in a testamentary trust has typically been enough to maintain this benefit.
Here’s the kicker: under the proposed changes, families holding an inherited home beyond two years would only retain the CGT exemption if a beneficiary actually lives in the property—and only if the will explicitly grants them the right to do so. This shift has sparked fierce criticism from experts, who argue it could saddle families with massive tax bills after inheriting a loved one’s home.
‘The ATO has essentially said, ‘If you don’t live in the main residence, we’re going to hit you with capital gains tax, even if it’s held in a testamentary trust,’ explains Tax Invest Accounting Director Belinda Raso. ‘This effectively turns it into a death tax for beneficiaries who can’t or don’t immediately occupy the property.’
The ATO’s final ruling on this change is still pending, but it comes amid growing concerns that the federal government is eyeing similar measures as part of new superannuation tax rules. In the original super tax proposal, the timing of an investor’s death was irrelevant, and the estate wasn’t liable. However, the revised version now before parliament makes the timing of death a critical factor, potentially forcing estates to pay tax on a full year’s earnings even if the investor dies early. This delays payouts to grieving families and increases their tax burden.
Ms. Raso believes the testamentary trust changes are ‘the bigger part of the story,’ affecting more people than the super tax. ‘Think about baby boomers passing away and the skyrocketing property values in cities like Sydney and Melbourne,’ she says. ‘A house bought 30 years ago for $300,000 could now be worth over $1 million—imagine the capital gains tax on that!’ Even with the 50% CGT discount, losing the main-residence exemption could result in a staggering tax bill that eats into the estate.
Here’s the real question: Is it fair to force adult children to move into their deceased parents’ home just to avoid taxes? Ms. Raso argues it’s often impractical and adds unnecessary stress during an already difficult time. ‘This puts so much more burden on grieving families,’ she says. ‘It feels like the government is just trying to squeeze more money out of people when they’re at their most vulnerable.’
Historically, testamentary trusts have been a safety net Australian families ‘took for granted,’ according to Ms. Raso. But with an aging population and trillions in wealth set to transfer in the coming years, the federal government seems determined to claim its share. ‘We need more clarity, because people are panicking,’ she adds. ‘This is scary—and it’s all part of a broader push by the government to increase revenue.’
Australia has never had a formal federal ‘death tax’ or inheritance tax, which is why these measures are so politically charged. While some states previously had estate duties, they were abolished decades ago. In contrast, countries like the US, UK, and Canada impose inheritance or estate taxes on estates above certain thresholds, though New Zealand scrapped its inheritance tax in the early 1990s.
So, what do you think? Is this a fair way for the government to raise revenue, or is it an unnecessary burden on grieving families? Let us know in the comments—this is a conversation that’s just getting started.
