Well, whether to move a child up to lower elementary or leave them in the primary another year should be based on what plane of development she is in.
Montessori describes development in terms of "planes." The ages for each plane are just guidelines, each child is different.
0 - 6: first plane. A time of rapid growth and development. During this plane the child absorbs the culture of the people around them - she called this period the "absorbent mind" because children didn't just "learn," but their experiences became a part of them. The most obvious example is language acquisition. A small child does not learn their native language the same way that an older child or an adult would learn a second language - The learning of the native language during the first years of life forms the way the child thinks and organizes information. This is the time when the child creates her/himself.
6 - 12: second plane. A time of consolidation. The age of justice. The child works to become part of the greater group/culture (friends, clubs, extended family, etc.) The child is interested in collaboration with peers. This is a time of great physical stamina and intellectual work.
This is a very barebones explanation of the first two planes. Some physical signs of the emerging second plane: losing milk teeth, lengthening of the body (trimmer looking), very interested in social situations and true collaboration (not just working next to someone, but actually working together to solve a problem).
Whether or not to move to elementary depends on what plane of development your child is in, not on how they are doing academically. The primary class (the way I was trained through AMI) has academics suitable for about grade 2+. We learned how to do grammar, fractions, etc. in the event that we had children ready for these things, yet still in the first plane of development.
If a child is in the second plane of development, regardless of their academic ability, they should be in the elementary where the social situation is more suitable for their plane of development.
Some schools use academics to determine placement. I think that this is tragedy and is not in keeping with Montessori philosophy. A child who cannot read, but is truly in the second plane of development is not served in the primary class. A child who can do advanced work, yet is still in the first plane of development struggles in the elementary class. Primary is the place for them.
I'm sorry to go on so much. Basically, if you feel that your child is best served in the primary class another year, you are probably right. I have found few children under six who were really ready for the more lively elementary class. Does your school offer mid-year transfers? Perhaps your child could spend the first part of the year in primary and then move up. I have had children stay in primary until they were seven. It is unusual to find a parent like you - willing to let the child stay in primary. Unfortunately, many parents will pressure the school to move a very young child to the elementary class once they have achieved a notable level of academic ability. It is good that you are concerned about your child as a person, not as an academic entity!
I don't know if this answers your question - if not please feel free to inquire more.
Oh, about the challenge question - will she be challenged if she stays another year? I touched on it above, but there is so much work that she could do in primary! If you don't get satisfactory information from her teacher, let me know. I can give you a list of wonderful advanced academic things that were in my primary training. I'm sure, though, that her teacher can do these things with your dd. Music, geography, math, grammar, sentence analysis, advanced practical life (cooking, etc.).
edited for clarity