Granny flats are being seen as a quick and affordable way to help the housing crisis, with many state governments easing planning restrictions to enable construction. or signup to continue reading There can be a myriad of benefits to the once humble granny flat. They can offer secure and comfortable homes that are purpose-built for ageing, ease social isolation and enable multiple generations to pool their financial resources and provide care and support to each other.
While many people think of granny flats as a second, self-contained, dwelling built on someone else's property (the real estate definition of a granny flat) granny flat arrangements are actually far broader and can include a whole home or part of a home you don't own but have a right to live in. This can include your current home or one you buy or build in your children's name. The key point is you don't have legal ownership: if you do it is not considered a granny flat arrangement.
Common ways granny flat arrangements are created are: the parents transfer their home to their children for a granny flat right; parents pay for a granny flat to be built on the children's property; or the parents and children pool their funds and purchase a new property in the children's names. In July 2021, the federal government removed the capital gains tax liability associated with some granny flat arrangements. Prior to this the Australian Tax Office considered granny flat arrangements as a D1 capital gains tax event, with the establishment of a granny flat arrangement subject to capital gains tax.
It often meant a nasty surprise for children when they lodged their tax return and found out they had a CGT liability of hundreds of thousands of dollars. To qualify for the CGT exemption there are a number of criteria you need to meet, including: the parents are over pension age (67) or disabled for at least the next 12 months; the property is owned by an individual (not a company or trust); rent is not charged; the right to occupy is intended to be for life and the agreement is in writing. Beyond tax, granny flat arrangements can have significant implications when it comes to your pension entitlement and cost of aged care.
If you are thinking about creating a granny flat arrangement, it is crucial you consider the consequences now and in the future. The amount you pay for your granny flat determines whether you are classified as a home owner for pension purposes. If the amount you pay is $252,000 or less, Centrelink will categorise you as a non-home owner, the granny flat will be included in your pension assets and you can qualify for rent assistance.
If the amount you pay exceeds $252,000, Centrelink will classify you as a home owner, the value of the granny flat will be exempt from the pension asset test but you won't be eligible for rent assistance. The amount you pay for a granny flat is normally taken to be the market price. As they are family arrangements it can be hard to determine a different value.
However, if the amount you pay exceeds the purchase price (where a home is being bought or transferred), the cost of construction (where you are building a granny flat) or if Centrelink suspects you are trying to gain a social security advantage then it will apply a reasonableness test to the amount you have paid. The reasonableness test multiplies the annual couple rate of pension ($43,753) by a factor based on your age. 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.
If you pay more than the reasonable amount then the amount above will be considered a gift. If you are thinking about a granny flat arrangement as an alternative to moving into an aged care home, it's important to know if you leave within five years of creating a granny flat, and the move was reasonably foreseeable, the granny flat can be treated as a gift. The gift can affect both the calculation of your pension and your aged care fees.
Of all the downsizing options, granny flats, with their unique legal and financial intricacies, are the most complex. Adding to the complexity is they are family arrangements. Most people move into these arrangements with good intentions and high hopes for harmonious intergenerational living.
Having tough conversations before you create a granny flat can help ensure harmony. Discussing the day-to-day responsibilities of household expenses such as food, utilities and insurances and how domestic chores will be shared can help avoid disputes due to different expectations. Dealing with the more thorny issues like what happens if the children divorce, become sick (or die) or default on their mortgage can ensure there is a plan for such events.
Of course, the toughest topic is when will the arrangement end, which may be because the parents need to move into aged care. Seeking legal and financial advice is crucial. The cost of getting a granny flat arrangement wrong can be much more than money.
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