Thinking of moving into a granny flat? Here’s what you should know

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Article by 

Rachel Lane

This article was written by Australian Carers Guide Contributor Rachel Lane and originally published in the Sydney Morning Herald.

There’s a lot to love about the humble granny flat. They allow parents to enjoy their own space with an adult child nearby to provide help if they need it. They let grandparents spend time with the grandkids. They can also help overcome social isolation, provide a safer, more secure home purpose-built for ageing, and enable the saving of money by pooling the resources of two generations.

In the current housing crisis, governments are recognising the important role granny flats can play in freeing up homes in established suburbs, while at the same time creating new housing that is age-friendly and occupies existing parcels of land.

In 2021 the federal government removed the capital gains tax liability from the creation, variation and termination of a granny flat. More recently the Victorian government announced that granny flats less than 60 square metres in size will no longer require a planning permit.

From a pension and aged-care perspective, there are a few tips and traps to be aware of if you are thinking about a granny flat.

The first is, while many people associate the words “granny flat” with the real estate definition of a self-contained separate dwelling, when it comes to Centrelink, a granny flat arrangement can be in any home that you don’t own. For example, you could transfer the home you currently live in and remain living there under a granny flat arrangement, you could buy or build a home in your child’s name, or you could have a traditional granny flat that you build in your child’s backyard.

The amount you pay for your granny flat determines whether you are classified as a home owner for pension purposes and if you may be eligible for rent assistance. If the amount you pay is $242,000 or less then you will be a non-home owner, the amount you have paid will be included in your pension assets (but there’s no detriment as the asset test for non-home owners is higher) and you may be eligible for rent assistance (depending on how much rent you pay).

If the amount you pay is more than $242,000 then the opposite is true – you are considered a home owner, the asset is exempt and you won’t qualify for rent assistance.

As a general rule, the amount you pay for your granny flat is the market price, but if you are buying, building or transferring a home, and you pay more than its value, then you can be subject to the reasonableness test. Likewise if Centrelink thinks you are creating a granny flat arrangement for the purpose of getting a social security advantage.

The reasonableness test multiplies the couple rate of pension ($42,988) by a factor based on your age. For example, if you are aged 73, the reasonableness test amount would be just over $612,500; any amount you transfer above this would be considered a gift.

While aged care may be the furthest thing from your mind when you are entering into a granny flat arrangement, you really do need to factor in how it will impact your ability to afford care should you need it. Be aware, too, that if you move into aged care within five years of creating a granny flat, and the need for aged care was reasonably foreseeable, your granny flat can be treated as a gift for working out your cost of aged care.

Granny flats are far more complex than most other downsizing options. If things don’t work out as planned it can have catastrophic consequences. You really should seek legal and financial advice.

About Rachel Lane

Rachel Lane explains the ins and outs of retirement living and aged care like no-one else. Her ability to break down complex arrangements and explain the pros and cons is embraced by millions of readers and she frequently speaks on radio and television. As Principal of Aged Care Gurus she oversees a national network of specialist financial advisers. Rachel holds a Masters in Financial Planning and has written several books including the best seller “Aged Care, Who Cares?”

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