A STING IN THE TAIL: DOUBLE DEATH TAX TRAP AND DIV 128

A sting in the tail: double death tax trap and Div 128

According to the ATO Advice under development program, we are likely to see a new Draft Taxation Determination (Draft TD) published on the CGT rollover concession in Division 128 of the ITAA 1997 when a beneficiary of a deceased estate (Second Deceased) dies before a CGT asset of the deceased estate of another person (First Deceased) passes to them. The ATO expects consultation on the Draft TD to be completed in August 2025.

By way of background:

Div 128 sets out what happens when “you” die and a CGT asset “you” owned just before dying devolves to your legal personal representative (LPR) or passes to a beneficiary in the estate.
In circumstances that are in accordance with s 128-15 and s 128-20 of ITAA 1997, CGT rollover relief is provided.
In IT 2622, the Commissioner considers that the timing of the grant of probate is crucial when determining whether a beneficiary’s interest in an estate has crystalized.
The ATO also has an administrative practice (see PS LA 2003/12) that extends the application of Div 128 to testamentary trust assets that pass to beneficiaries (TT Concession).

While it remains to be seen what new or amended administrative concessions, if any, that the ATO may include in the Draft TD, we suspect the Draft TD is likely to document the ATO’s long held (but not always consistent) position that in some circumstances, CGT rollover relief under Div 128 may not apply when an asset passes from the LPR of the Second Deceased to the beneficiaries of the estate of the Second Deceased, because the Second Deceased died before the grant of probate of the estate of the First Deceased (Interpretation).

The Interpretation has tax implications for the LPR of the estate of the Second Deceased estate (ie disposal of a CGT asset outside of the operation of Div 128) and cost base issues for the asset inherited by the beneficiaries of the estate of the Second Deceased. Additionally, when the asset is the main residence of the First Deceased, in some circumstances, the loss of the main residence exemption can arise.

The Interpretation is not new; it was previously detailed in Treasury’s ‘Minor Amendments to CGT law’ paper in 2012 following the 2011-12 Federal Budget announcement to rewrite this area of the law with a ‘principle-based format’ and to legislate the TT Concession. However, the Budget proposal was later abandoned with a change in government.

Consider the following double death tax trap

Meghan owns a holiday home. Shortly after her passing (ie before her estate received probate), her husband Henry, the sole beneficiary under her estate, died of a broken heart.
The holiday home will eventually pass from Meghan’s LPR to Henry’s LPR, and then to the beneficiary of Henry’s estate.
The Interpretation is based on the word “owned” in s 128-15(1) of ITAA 1997, where Henry did not “own” the holiday home in Meghan’s estate just before he died (noting the timing of when probate was granted).
Therefore, Div 128 does not apply to provide CGT relief when the holiday home passes from his estate to the beneficiaries under his estate.
If we alter the facts where the holiday home was instead Meghan’s main residence, then a similar issue arises under s 118-195(1) of ITAA 1997 as Henry never had an “ownership interest” as required under that provision.

Depending on the contents of the Draft TD, we think it may generate interesting discussion within the tax community about the Interpretation and how it should be read against Div 128 being a concessionary taxation provision.

We also think the new Draft TD will assist estate practitioners when considering estate drafting techniques and how different asset ownership arrangements interact with Div 128 and Subdiv 118-B in double death circumstances.

This will be an interesting area to watch.

The team at SMAILES KRAWITZ has experience providing tax effective estate planning advice for business owners and complex private groups.

The material in this article is provided only for general information. It does not constitute legal or other advice.

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Alan Krawitz1 August 2025