A shortage of housing and the need to look after the elderly can make living together attractive

Granny flat arrangements are becoming increasingly popular as families seek affordable housing solutions and support for older relatives.

These arrangements involve various types, such as parents purchasing a property in their child’s name, transferring ownership of their existing home, or selling their home to build or renovate a separate dwelling. Informal agreements between family members are common but can lead to complications.

To mitigate risks and ensure clarity, formal written agreements are encouraged. These agreements are recognized by Centrelink, exempting financial contributions from gifting rules.

In 2021, tax changes introduced a Capital Gains Tax exemption for formal granny flat arrangements. However, it is essential to understand the Age Pension rules, Centrelink treatment, and the reasonableness test to determine if deprivation of assets has occurred. Granny flat arrangements may have implications for aged care, and the five-year rule prevents the manipulation of assets for reduced fees. It is advisable to seek independent professional advice and draft formal agreements to protect the interests of all parties involved.

 These living arrangements 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 rules changed and made it better for elderly

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 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.

The exemption only applies to creating, changing or terminating a granny flat arrangement.

Other CGT events outside a granny flat arrangement may be liable for CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.

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 a Granny Flat arrangement?

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.

The final point – make it formal

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.


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