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Article by 

Craig Phillips

Here’s what you may need to know before considering if it’s suitable for your family.

With so many people building granny flats on their property as an option for assisting with aged care for their loved ones, the following advice from Phillips Wealth Partners is timely. Living in a multi-generational household can bring an immense amount of satisfaction and benefits to everyone involved. In some cases, it helps avoid the requirement to use third party services. Being that it has become an increasingly popular downsizing option. It’s important to know what considerations to discuss with your family before entering into a Granny Flat Arrangement.

What is a ‘granny flat arrangement’?

“Commonly, a ‘granny flat arrangement’ is a situation where an older person lives with (or in separate accommodation on the same land as) a family member. It includes the payment of monies or a transfer of assets in return for the right to live in accommodation, usually for the rest of their life”. Also referred to as ‘granny flat right’, this arrangement can be structured in a number of different ways. The fundamental concept is some property is transferred, or some monies are paid, in return for the right to reside for the balance of their life.

The term ‘granny flat arrangement’ or ‘granny flat right’ is used to describe living situations where money, assets or the title of one’s home have been transferred in exchange for a right to a lifetime accommodation in a private residence.

Granny Flat Planning

Until legislation passed in June 2021 many families were reluctant to document the changing of money. It likely meant a possible unwanted immediate capital gains tax event for the recipient of the gift. This left the older person in a vulnerable position, should the arrangement not work out. To ensure your plan to engage in a Granny Flat Right protects all stakeholders involved, we will give you the information to make the right decision by reviewing the impact to your:

  • Tax;
  • Estate planning;
  • Centrelink (specifically, the impact on age pension and home care packages); and
  • Prepare an exit strategy

Granny flat arrangements’: how to prepare a win-win situation

The number of elderly parents living with their adult child’s family is projected to increase in Australia. It is predicted that between 858,400 and 904,600 senior Australians will be living in an intergenerational arrangement in 2041 (592,600 in 2016). This trend has triggered an increased interest in ‘granny flat arrangements’. I spoke with lawyer, Jo Twible, Principal, KJB Law, and retirement village entry and exit specialist, about preparing for a win-win situation when entering into a ‘granny flat arrangement’.
In Jo’s experience, doing your homework up front will help avoid heartache down the track.

Physically, what does that granny flat look like?

Most people have a misconception that a ‘granny flat arrangement’ is limited to a small, detached house located in the backyard. There are many iterations to this arrangement. “It could be a detached unit in the backyard of a home. It might be an attached unit to the main dwelling, with just a door in between. Or it may not even be separate at all – it might simply be a room or rooms within the main family home and sharing of facilities,” says Jo. “Alternatively, in a different situation, ‘Granny’ could own a caravan or a demountable structure that she lives in and takes away, and there is otherwise no transfer of monies.”

Why enter a ‘granny flat arrangement’?

There are a number of reasons families choose this option. First and foremost, it’s driven by a desire for family members to help each other out. “In most cases we see, this is an informal arrangement created to provide support for an older adult to keep them independent and living at home longer,” says Jo.
“It usually involves loving families with a parent who is slightly more vulnerable and needs a bit of extra support. Equally, the kids might need some extra support with the grandkids.”

The intention is to create a situation which is mutually beneficial. Each is providing support to the other, rather than relying on third-party services.

What are the key considerations?

Given there is no age or family relationship rules or requirements, there are potential pitfalls. If you’re considering a ‘granny flat arrangement’, Jo advises the careful assessment of the following four key consequences:

  1. unexpected tax;
  2. estate planning;
  3. Centrelink (specifically, the impact on age pension and home care packages); and
  4. an exit strategy, if the situation does not work. According to Jo, ‘granny flat arrangements’ require a multidisciplinary approach.

It is important to get legal advice, tax advice and financial planning advice. For example, everyone needs to be thinking about inadvertent tax consequences,” says Jo. “The elder person is usually the one that needs the financial advice about the impacts on their pension. We may not be able to get a win-win situation completely, but the aim is to ensure we are not getting a big lose situation.

Case study showing common issues.

Jo gave an example of an elderly mother whose daughter, husband and their children have been living with her for over a decade. The daughter and husband have put a substantial amount into Grandma’s property (estimated increase in the value of $250,000).

Grandma is currently the sole owner of the house despite the daughter and son-in-law paying for the renovations. Technically, any increase in capital value remains with Grandma. Jo highlights the following areas to consider when reviewing this example. There is “no super-easy answer that provides protection to all parties”:

Tax: Grandma does not want an arrangement which results in the daughter incurring a big tax bill.

Estate planning: Grandma wants to ensure her daughter benefits from the $250,000 she and her husband spent on the home. However, she has another two children and wants to leave equal shares in the remainder of the property once she passes. The house is the only asset she owns. Therefore, transferring the title of her home to her daughter and son-in-law to receive a lifetime right to continue living in that home, will likely cause issues if the daughter is not in a position to pay Grandma enough money to ensure she has assets to leave to the other two siblings.

Centrelink: When a person has a ‘granny flat arrangement’, special rules apply to determine whether they are a homeowner or non-homeowner for social security income payments. Prior to entering an arrangement, an assessment will need to be made. This will look at the impact to pension entitlements and co-contributions for home care packages, if any.

Deprivation/gifting rules: The market value of the house may be treated as a deprived asset. This applies to a payment, or payment in-kind, if the parent transfers the house to the child for free, if this is more than $30,000 over a rolling period of five years. The excess will be counted not only as an asset but as a financial asset attracting deemed income for five years commencing when the gift is made.

Legal arrangement:

  • Sole ownership: if the grandma keeps the property in her name, then no ‘granny flat arrangement’ is in place.
  • Co-ownership: arrangements to review are tenancy in common, joint tenancy, life estate.
  • No ownership: security of tenure needs to be taken into consideration in a form of a loan, lease or licence at will.

Capital Gains Tax event D1 (creating contractual or other rights): A CGT event does not happen when certain granny flat arrangements are entered into, varied, or terminated. On 1 July 2021, the new law states:

  • A CGT event does not happen on entering into, varying or terminating a granny flat arrangement if certain requirements are met. These requirements include that the individual having the granny flat interest has reached pension age or has a disability and that the arrangement is in writing and is not of a commercial nature.
  • The CGT event does not happen only to the extent that it relates to the creation, variation or termination (as the case may be) of a granny flat interest.
  • A granny flat interest in a dwelling under this measure is a right to occupy that dwelling for life.

Stamp duty: if the grandma transfers the title or part title of her home to the daughter or her daughter and son-in-law, they will pay Stamp Duty on the Transfer.

Reasonableness test: Under the Social Security Act 1991, if the combined amount of any assets transferred and monies paid to receive the right to reside, is more than the cost or value of that interest, the excess amount is a deprived asset.

Moving out: Any arrangement made needs to set out what will occur if grandma needs or wants to move out. By moving out within 5 years of entering the granny flat arrangement as a result of something that was reasonably foreseeable, Centrelink may change how they treat the money paid or assets transferred and suddenly start counting them as a deprived asset for the subsequent 5 years. If grandma needs 24-hour care in an aged care home, consideration needs to be made on how she can pay for this care. And if, despite best intentions, grandma and the kids realise that living that closely together isn’t working, consideration needs to be given (ahead of time) as to how to fund grandma obtaining alternate accommodation.

Informed Decision Making

Informed decisions need to be made as to whether the ‘granny flat agreement’ will confirm the elder has the security of tenure and include matters such as:

  • areas on the property, for exclusive and common use;
  • a period of notice, where either party can end the right of residence (except in the case of co-ownership);
  • how each person will contribute to domestic expenses such as utilities, insurance and rates;
  • how each person will contribute to domestic chores and the maintenance of the property;
  • payment of rent (if any);
  • exit strategy, including how the elder’s cost of residential care will be covered if required; and
  • how the elder will be compensated if the living arrangements are otherwise ended?

There is a lot of “damned if you do, dammed if you don’t” in this area. It is not straightforward. With careful thought and planning, families trying to help each other won’t end up torn apart, by their good intentions. The best practice is to begin by having a chat with a lawyer. If you don’t have your own then you can reach out to Craig at Phillips Wealth Partners – www.phillipswp.com.au.

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