The 'double death tax' trap: Navigating Estate Delays and Their Financial Impact
By Julia Hartman
February 24, 2026
The Surprising Tax Consequence of Estate Delays
The Australian Taxation Office (ATO) has recently introduced a draft ruling that could significantly impact the taxation of estates, potentially resulting in a 'double death tax' for some families. This ruling highlights a complex interplay between the timing of a second parent's death and the administration of the first parent's estate, which could lead to substantial tax liabilities.
When the Capital Gains Tax (CGT) was introduced in 1985, the public was still mindful of the financial strain caused by death taxes in the past. As a result, the term 'death tax' was often met with skepticism. Paul Keating, however, was clear that CGT was not a death tax by another name. He emphasized that the tax applied to the gain made on the sale of an asset, not the asset itself.
Section 128 of the Income Tax Assessment Act allows for the transfer of a deceased's assets to a beneficiary without CGT consequences. The beneficiary is treated as if they have owned the asset in the same way as the deceased, inheriting the deceased's cost base. This section also permits the transfer of the deceased's home with a cost base equal to its market value at the date of death.
However, the catch lies in the Act's reference to 'a CGT asset you owned just before dying'. If the beneficiary dies before actually owning the asset, their estate, when distributing to heirs, does not benefit from the rollover advantage. Consequently, there is no reset to market value, even if the beneficiary is living in the home when they die.
This means that none of the main residence concessions will apply in the beneficiary's estate case, such as the two-year selling period or the longer period if the spouse is living there. Worse still, when the beneficiary's estate is dealt with by passing the property to their heirs, there will be a CGT event.
The beneficiary's estate will have to pay CGT on the difference between the current market value and the original deceased's cost base, if it was not the original deceased's home. If it was the original deceased's home, then CGT will be payable on the difference between the market value when the beneficiary died and the market value when the original deceased died, plus holding costs etc.
The Impact of Estate Delays
All that can be done is to ensure that estates are wound up as quickly as possible. This tax will be payable by the beneficiary's estate, leaving less for the residual beneficiaries or forcing the family home to be sold to pay the tax. None of the concessions intended to protect the family home passing through to children will apply, simply because there was not enough time between deaths to administer the estate.
In the past, when there was just one beneficiary, there was no rush to wind up the estate, as it could take years. Consider older couples who are not likely to outlive each other by much, or in the case of a couple, being killed in the same accident. Or when the will covers children who have not come of age to receive their distribution. This will disproportionately hurt young families.
Beyond the Family Home
This issue is not limited to the family home. If Mom dies, Dad might receive her wedding ring. But if he dies before Mom's estate is administered, the ring may pass down to the children, and CGT will be payable as if Dad's estate had sold it at market value.
A Retroactive Ruling
It's important to note that this is not new legislation or the result of a test case. The ATO is merely 'confirming their interpretation of section 128'. Therefore, the ruling is likely to apply retrospectively, despite a different interpretation appearing in private rulings for the last 40 years.
The Role of Common Sense
Very different tax outcomes depend on nothing more than the timing of events. Let's hope common sense prevails. In the meantime, all that can be done is to ensure that estates are wound up as quickly as possible.
Avoiding the Tax Trap
Not having a will means more delays and a higher chance of falling into this tax trap. Holding the family home as joint tenants may avoid this problem, but it's essential to seek professional advice. If the home already has some CGT exposure, tenants in common might be a better option.
Julia Hartman, the founder of BAN TACS Accountants, remains passionate about all things tax, even after more than 30 years in the field. Her expertise is invaluable for those seeking to navigate the complexities of estate planning and taxation.
The advice provided in this article is general in nature and is not intended to influence readers' decisions about investing or financial products. It is essential to seek personalized professional advice that takes into account your unique circumstances before making any financial decisions.
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