Granny flats: How to ensure everyone’s rights are protected

Types of granny flat arrangements

There are three main types of granny flat arrangement.

• A parent buying a property in their child’s name but keeping a right to live there for the rest of their life.
• A parent transferring ownership of their existing home to a child, or another trusted person, with the right to live there for the rest of their life.
• A parent selling their own home and using some of the proceeds to build a separate dwelling or extension on a property, or paying for renovations on a child’s property, and getting the right to live there for the rest of their life.

Centrelink supports granny flat arrangements for social security and aged care purposes, subject to certain conditions. Importantly, it also exempts the financial contribution by the older person from the usual Centrelink gifting rules.

How informal agreements can turn sour

Australian Bureau of Statistics (ABS) data shows 8.2% of people aged over 65 years live with their family. The living arrangement is more likely as people age, with 12.2% of people over 85 living with family.

It’s highly likely that most of these families enter into informal agreement between themselves about how an older person would be cared for while living in a granny flat on the family property.

There might be some discussion around how bills and meals might be shared as well as ongoing care needs and then everyone just goes about their daily business.

But there are plenty of ways an arrangement can turn sour and be cause for concern including:

• The older person’s care needs increasing but they don’t get appropriate good care
• A child’s marriage breaks down and the property has to be sold
• A child dies, or divorces and leaves the family home, and the older person is left living with a son or daughter-in- law who is not in a position to provide the same level of care
• A child gets into financial trouble and the home is at risk.

Tax changes encourage formal agreements

Up until July 2021 there was a gap between what Centrelink says you can do and the tax aspects of granny flat arrangements.

However, following a review by the Board of Taxation, the government announced in 2020 that from July 2021, where a formal written granny flat arrangement is put in place to provide accommodation for older Australians or people with disabilities, there would be a Capital Gains Tax (CGT) exemption.

The thought of a tax implication was apparently enough for some families to either avoid setting up these live-in family care arrangements or keep it informal – either of which could potentially put an older person at risk of elder abuse.

What are the Age Pension rules around granny flats?

Under the Age Pension rules, a person is allowed to gift $10,000 a year or $30,000 over five years, before any assets given away are considered to be deprived assets and counted anyway.

Where the value of a granny flat interest is the same as the amount paid for the interest – for example, when a new property is bought, or the cost of the renovation is covered – there is no deprivation amount and the pension entitlements remain the same.

However, if the amount paid exceeds the accommodation the person is getting, such as a property plus cash, then the Centrelink ‘reasonableness test‘ may be applied to determine if deprivation has occurred. 

Deprivation rules may also be tested if the person making the gift later needs to move into aged care. It may fall on the family to prove that it could not have reasonably been foreseen that the person needed care.

How does Centrelink treat granny flat arrangements?

If you are a selling a property and moving in with family, then there are several Centrelink provisions that may be relevant.

One is the treatment of your home for Age Pension calculation purposes. Your home is an exempt asset for Age Pension calculations. If you were to sell your home and buy another one of a similar value, then there would be no impact on your pension entitlement.

But if you sold your home, invested the money and moved in with family, then the money from the sale proceeds could reduce your entitlements.

The alternative is to formalise the arrangement through the creation of a granny flat interest or right via a gift and put it in writing so that Centrelink is clear.

How much you pay or give matters – whether it is through the transfer of the title to your home, to build or fit out something new, or buy a new place in someone else’s name in return for a life interest.

How does Centrelink value your interest?

The amount you transferred or paid to the owner is the value of the granny flat interest that Centrelink will count.

Centrelink won’t consider you to have paid more than the granny flat interest is worth if you’re:

• Transferring the title of your home and keeping a lifetime right to live there or in another property
• Paying to build a granny flat on someone else’s property
• Paying to convert someone else’s home to suit your needs and getting a lifetime right to live there
• Buying a property in someone else’s name and getting a lifetime right to live there.

However, if you transferred extra assets or made a lump sum contribution towards existing accommodation at someone else’s property where no construction or renovations have occurred, then Centrelink will apply its ‘reasonableness test’ (see section below).

Centrelink will also use this test to see if you’ve paid more than the interest is worth and to work out whether or not you have deprived yourself of assets. A deprived asset is also known as a gift.

What is the ‘reasonableness’ test?

The reasonableness test determines the maximum value of assets that can be transferred without triggering deprivation. It is often applied where the true value of the interest is not clearly demonstrated. 

The formula multiplies an age-based conversion factor by the maximum annual rate of Age Pension payable to a couple (at the time the granny flat right is created).

This couple rate is used regardless of whether the person is single or a member of a couple.

The reasonableness formula is: Combined annual partnered pension rate x conversion factor.

The conversion factor is based on the client’s age next birthday (or age next birthday of the youngest member of a couple).

Where the reasonableness test is used, the value of the interest is the lesser of the:

• Amount calculated under the reasonableness test, or
• Total amount paid for the right (ie the value of all cash and assets transferred).

If the reasonableness test value is less than the total amount of assets transferred, the difference is a gift and deprivation rules apply to the amount exceeding gifting thresholds.

 If a deprived asset results, it is counted as a financial asset and deemed under the income test for five years from the date of transfer.

What are the Aged Care implications?

If it comes to a point where mum or dad moves out of the granny flat and into aged care, they must submit an income and assets assessment.

The five-year rule is important. If someone enters a granny flat arrangement and then moves into aged care to circumvent the Centrelink asset assessment and minimise aged care fees, it will not work.

How the five-year rule works

If a person moves out of the granny flat within the first five years of creating the interest, and a move to aged care could have been expected at the time the granny flat interest commenced, the full amount transferred for the granny flat may be treated as a gift and subject to deprivation for five years (from the commencement of the granny flat interest).

This may increase the means tested care fee payable by increasing the asset and income components.

This rule exists to prevent people manipulating the rules and artificially creating a granny flat right to reduce assessable assets.

The deprivation rules do not apply if a person is temporarily absent from the home for up to 12 months. If the temporary leave is due to loss or damage to the home, this period may be extended for up to two years.

Formal agreements

Centrelink and tax issues won’t impact everyone looking at alternative family care arrangements but that shouldn’t stop proper documentation – formal and legally enforceable family care agreements – in every case.

Setting out the rights of each party in a formal agreement puts in place some security for the older person if unexpected events do happen. 

It also helps to clarify for everyone – including extended members of a family – the arrangements that have been put in place and the expectations everyone has of each other.

For example:

• Who is going to provide care and when, who does the shopping, who does the cooking, who pays for the utilities and who is responsible for maintenance.
• Is there an expectation that you will mind the grandchildren and are you happy with this? Do you feel like you get enough privacy?
• What happens if your health deteriorates and your care needs change and you do need to go into residential care?

Any measure that encourages people to be clear about their rights and the care they are expected to provide and to formalise the arrangement is a good thing.

Whatever arrangement is put in place, it must be in the best interest of the older person and the expectations of everyone involved aired and clearly understood.

The bottom line

Granny flat arrangements can work wonderfully well for everyone involved.

But as you can see, the aged care, Age Pension and tax implications of granny flat arrangements can be complex, so independent professional advice from your legal representative, accountant and financial adviser is recommended.