Granny flats are increasingly being seen as a quick and affordable solution to the housing crisis, with many state governments easing planning restrictions to facilitate their construction. These units offer a myriad of benefits, transforming the once humble granny flat into a valuable asset. They provide secure and comfortable homes purpose-built for aging, reduce social isolation, and allow multiple generations to pool their financial resources while providing mutual care and support. But what is the definition of a granny flat? And what are the benefits and pitfalls of this arrangement?
Many people traditionally think of granny flats as a second, self-contained dwelling on someone else’s property, fitting the real estate definition. However, granny flat arrangements are actually broader, encompassing a whole home or part of a home that you don’t own but have the right to live in. This can include your current home or one that you buy or build in your children’s name. The key point is that you don’t have legal ownership; if you do, it’s not considered a granny flat arrangement. Common scenarios include parents transferring their home to their children for a granny flat right, parents funding the construction of a granny flat on their children’s property, or parents and children pooling funds to purchase a new property in the children’s names.
In July 2021, the Federal Government removed the Capital Gains Tax (CGT) liability associated with certain granny flat arrangements. Previously, the Australian Tax Office (ATO) considered these arrangements as a D1 capital gains tax event, which often resulted in unpleasant surprises for children when they discovered a CGT liability of hundreds of thousands of dollars upon lodging their tax return. To qualify for the CGT exemption, several criteria must be met, including the parents being over the age of 67 or disabled for at least the next 12 months, the property being owned by an individual (not a company or trust), no rent being charged, the right to occupy intended for life, and a written agreement being in place.
Beyond tax considerations, granny flat arrangements can significantly impact pension entitlements and aged care costs. It’s crucial to understand these implications both now and in the future. The amount paid for the granny flat determines whether one is classified as a homeowner for pension purposes. If the payment is $252,000 or less, Centrelink classifies you as a non-homeowner, including the granny flat in your pension assets and making you eligible for rent assistance. Payments exceeding $252,000 categorize you as a homeowner, exempting the granny flat’s value from the pension asset test but disqualifying you from rent assistance.
The amount paid for a granny flat is typically considered the market price, though family arrangements can complicate value determination. If the payment exceeds the purchase price, construction cost, or if Centrelink suspects a social security advantage, they will apply a reasonableness test. This test multiplies the annual couple rate of pension ($43,753) by a factor based on age, determining a reasonable amount. For example, if you are 73 the reasonableness test factor is 14.25, meaning the reasonable amount would be just over $623,477. If you are 83 the reasonableness factor is 7.65 making the reasonable amount $334,709. Payments exceeding this amount are considered a gift.
If considering a granny flat arrangement as an alternative to aged care, it’s important to know that if you leave within five years and the move was foreseeable, the granny flat can be treated as a gift, affecting both pension calculations and aged care fees.
Among downsizing options, granny flats are the most complex due to their unique legal and financial intricacies, compounded by family dynamics. Good intentions and hopes for harmonious intergenerational living often drive these arrangements, but tough conversations are essential to ensure harmony. Discuss household expenses, domestic chores, and plan for events like divorce, illness, or mortgage default. Most importantly, discuss when the arrangement might end, particularly if aged care becomes necessary.
Seeking legal and financial advice is crucial to avoid costly mistakes in setting up a granny flat arrangement.
