Granny Flat Arrangements
It’s becoming increasingly common for older Australians to enter into arrangements to live with their family - adult children help their parents with household and living tasks, whilst grandparents assist their busy children with looking after grandchildren. All helping defer entry to residential aged care for as long as possible. Additionally, the rising costs of residential property in Australia in recent times has also led to a greater desire for older Australians to assist their adult children enter the property market, by transferring assets or entering into co-occupancy arrangements. One such arrangement that can potentially provide a “social security (age pension) friendly” solution achieving family goals is a “granny flat interest”.
What is NOT a granny flat interest? If you own and live in a home jointly with your adult child – you do not have a granny flat interest, as you only have a legal ownership in part of the home.
What is a granny flat interest? The granny flat rules allow you to transfer assets (such as cash & property / land) to another person in exchange for a right of occupancy for life in a residential property.
Tip: A granny flat interest is more than just a self-contained flat in someone’s house or on their land. It can include any life interest or right to accommodation for life in a private residence in which you do not have any legal ownership.
How is a granny flat interest created?
Granny flat interests are created when you enter into any of the following arrangements:
1. You transfer the title of the home you live to someone else and retain a lifetime right to live in that home - the other person and their family may or may not also move in with you.
2. You provide funds to another person in exchange for the right to live in that person’s existing home.
3. You provide some, or all, of the purchase price of a property registered in another person’s name and retain a right to occupancy for life.
4. You pay for the construction and/or renovation of a home on another person’s property and retain a right to occupancy for life.
There are various costs that may be incurred when establishing a granny flat interest. These may include capital gains tax (CGT), land tax, stamp duty and legal fees for the drafting of agreements and transfer of property title. It is highly recommended that you obtain specialist tax advice to assess and calculate the costs involved.
Social Security considerations:
Normally a transfer of money and/or assets (such as property) would be assessed under gifting and deprivation rules … but … “special rules” apply where a legitimate granny flat interest has been established. Usually, the value of the granny flat interest for the purpose of calculating the entry contribution is the value of the home transferred, construction costs paid, or purchase price of the property. There are some other circumstances where the granny flat interest will be assessed against a “reasonableness test” amount which may impact your age pension entitlement. Special rules also apply to determine whether you are a homeowner or non-homeowner for assets test purposes because it is not as straightforward as simply looking at the ownership of the home. Granny flat arrangements will need to be reviewed if you stop living in the home within five (5) years of the granny flat interest being created. The reason for leaving the home would need to be provided and this may impact your age pension entitlement.
Legal Considerations Tip:
Tip; Although Centrelink may accept that you have a granny flat interest even if it’s not in writing, it is highly recommended that a legal document be drawn up to evidence the arrangement and protect all parties involved.
This ensures that a formal agreement is reached and all parties protect their rights. This sets the intentions of each party as well as helps to avoid problems if there are changes in someone’s situation or the arrangement breaks down and ceases to work at a future point. You need to consider the implications of signing over your home to another person. Can you rely on that person doing the right thing? What would happen if that person divorces, dies or becomes bankrupt? A solicitor, experienced in granny flat matters, can help to identify the relevant issues that should be considered before establishing a granny flat arrangement. Estate Planning considerations Your overall estate planning (Will, Power of Attorney, Guardianship) wishes should also be revisited when establishing a granny flat arrangement - given that one party will generally benefit from the asset given to them to establish the granny flat interest which may be a significant portion of your estate. This is especially important if you have other children / beneficiaries who may consider that their entitlement has been eroded and the arrangement is inequitable.
Further, by transferring the title of your home and creating a granny flat interest, you will generally lose control of the asset. The legal title of the dwelling will no longer be in your name – you only have a lifetime right to reside in the dwelling.