Granny flats are an attractive option, costing around $100,000 each, especially for older people who find themselves single and whose adult children have a house of their own.
The theory is great. You move in close to a family member while still retaining your independence. But it’s not as simple as that.
If you don’t get it right your pension can be affected, the home owner may face a hefty unexpected capital gains tax bill, it can affect the inheritance of other family members, and your living arrangements may not be as secure as you think.
Let’s look at the simplest case. You sell your house and use the proceeds to build a granny flat on the property owned and lived in by your daughter (or son).
Centrelink will reduce your pension under the assets test if proceeds from the sale of your house exceed the cost of the granny flat because you now have more assessable assets. The customer’s payment may not necessarily be reduced. This will depend on their overall situation after the sale of the home. Their income and assets will be assessed and both the income and asset tests applied. If their income and or assets exceed the threshold amounts, their payment will be reduced.
However, you can move up to $300,000 (per person) into your superfund, which protects it from income tax but not from Centrelink’s asset test. If the superannuation is in accumulation and the customer is over Age Pension age, their superannuation will be assessed under both the income and the asset test.
Centrelink does not count the money you pay towards the granny flat as an assessable asset if you are able to establish a granny flat interest. That is you pay money for the right to live in someone else’s property for as long as you live. Where a customer’s Entry Contribution (the amount paid for the granny flat right) is not more than the Extra Allowable Amount (the difference between the pension homeowners’ and non-homeowners’ asset value limits) at the time the right is established, the Entry Contribution will be included in the customers assessable assets and they will be considered to be a non-homeowner.
Your granny flat interest cannot be revoked if the owner wishes to sell the property. However they may sell the property with your arrangement as a condition of sale, transfer your life tenancy or interest to another property, or compensate you financially for losing your granny flat life interest. We recommend that customers seek financial and legal advice before entering into a granny flat arrangement.
Centrelink may still consider you to be a home owner for assessment purposes even though you do not own the property in which you have your granny flat interest. As per above, this will depend on the amount paid to establish the granny flat right. However, if your offspring pays for the granny flat Centrelink will not consider you a home owner. You may be entitled to rent assistance provided your rent is high enough.
If the amount you paid is more than the cost of the granny flat interest, the excess amount is considered to be a gift. Where the amount paid is more than the cost of the granny flat, a reasonableness test is applied to determine whether there is any gifting to be assessed. If the amount paid exceeds the reasonableness test amount, the customer will be considered to have made a gift. This could affect your pension under the assets and income test.
Centrelink’s gifting rules will also apply if you permanently leave within five years, although you may be temporarily absent for up to 12 months. There is no deprivation where the reason the granny flat is vacated could not have been anticipated at the time the granny flat interest was established.
Capital gains tax
If you build a granny flat in the backyard for occupation by your elderly parents and do not charge them any rent. You will not lose your capital gains exemption for the family home on subsequent sale of the whole property, even if you (living in the granny flat) were paying outgoings such as electricity, rates and repairs.
However if you are paying rent, for example if your daughter paid for the granny flat, then the part of the property consisting of the granny flat will attract capital gains tax when the property is sold.
The intergenerational pooling of assets by family members of disparate ages make the best intentioned of granny flat arrangements fragile.
A granny flat interest only exists during your lifetime and is not part of your estate. When you die or leave the granny flat you are effectively giving the added value of the flat to your son or daughter. The siblings may not consider this a fair distribution of their inheritance.
Other problems arise if your child splits from her partner and wants to sell the family home as part of a divorce settlement or if you and your partner split and want to share assets.
This is only a brief summary of the situation. There can be complications. Consult a Centrelink financial information service officer or a solicitor specialising in elder law before you invest in a granny flat however close you feel you are to your son or daughter.