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Tax exemptions for Granny Flat Agreements granted to support older Australians

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Attwood Marshall Lawyers Wills & Estates Partner, Angela Harry, joins Steve Stuttle on Radio 4CRB to discuss the roll out of new legislation that will support older Australians who choose to enter into a Granny Flat Agreement.

Introduction

In the 2020-21 Federal Budget, it was announced that the Morrison Government would introduce a capital gains tax (CGT) exemption for older Australians, or people with a disability, who choose to enter into a granny flat arrangement where a formal written agreement is in place. 

With dual living homes becoming more popular and senior Australians looking for affordable solutions to remain in their own home longer, this is welcome news.

Up until now, capital gains tax implications were proving to be a hindrance to families looking to implement granny flat arrangements. It was the government’s intention to remove these impediments, and as of 1st July 2021, this targeted CGT exemption was implemented.

Historically, people were hesitant to enter into a formal Granny Flat Agreement as they were faced with a potentially significant CGT liability for the children or loved ones receiving the benefit. In order to avoid the capital gains tax, many families would opt to put informal arrangements in place, which can be fraught with dangers.

When a formal granny flat agreement is not in place, it can leave you open to the risk of elder abuse, financial abuse, and exploitation. Although in most circumstances, families get along well and do not foresee any issues arising, people’s circumstances can change quickly, relationships can break down, and disputes can arise.

What is a granny flat?

You can have what is referred to as a “granny flat interest” in any type of property. There are certain rules that need to be followed in order to enter into a Granny Flat Agreement, however the requirements are quite flexible. You do not necessarily need to build or establish a separate residence for the property to be considered a granny flat.

A granny flat interest can be:

  • A self-contained extension of the family home that allows you to convert part of the principal dwelling;
  • A separate, self-contained building/structure on someone else’s land.

So long as there is a designated room, or area, that allows for someone’s exclusive occupancy, that can fall under the granny flat rules.

You cannot have a granny flat interest in property that you legally own.

Granny Flat Agreements can help keep seniors remain in their home for longer

Granny flat arrangements are becoming more popular because they allow people to remain in their home for longer and sustain a level of independence. By staying in their home, seniors, or people with a disability, can remain in close contact with their family and avoid or delay the need to move into an aged care or assisted living facility.

Granny flat arrangements can also save people a substantial amount of money as there are usually significant costs involved in relocating to an aged care facility and obtaining external care arrangements.

With CGT exemptions now available for granny flat arrangements where a formal, written agreement is in place, this will encourage more people to document these types of arrangements properly and reduce the risk of abuse or exploitation happening to those most vulnerable.

How a Granny Flat Agreement can affect your Centrelink benefits or pension

This issue often comes up in most granny flat arrangements. The first thing to consider before entering into a Granny Flat Agreement is to discuss your unique circumstances with an experienced financial advisor who has a thorough understanding of the Centrelink rules.

It is also important to speak with Centrelink about what you are proposing to do.

There are deeming or gifting rules that apply with people that are on Centrelink benefits as to how much can be gifted. The granny flat rules provide an opportunity to get around the gifting rules, however you must make sure that you comply with Centrelink’s requirements. If you do not comply, there is a significant risk that you may lose your pension or Centrelink benefits.

When discussing your intentions with Centrelink, they will look at the value of the asset/property you are transferring to see if you paid a ‘reasonable amount’. If Centrelink consider you have transferred more than the value of the granny flat right, they will determine you have deprived yourself of an asset. This could affect the amount of pension you are paid. You need to advise Centrelink what you transferred to the homeowner in exchange for the granny flat interest.

Centrelink needs to know this so they can:

  • See if you paid too much; and
  • Assess whether you are a homeowner or a non-homeowner, thus determining which assets test threshold applies, and whether you have any entitlements to Rent Assistance.

What a Granny Flat Agreement should include

A Granny Flat Agreement should be tailored to suit the individuals that are entering into the arrangement, and their unique circumstances.

Factors to consider when drafting a Granny Flat Agreement may include:

Entry:

  • Parties entering into a Granny Flat Agreement need to be aware that money or assets given to the adult child in exchange for a granny flat interest will no longer form part of their estate. If that parent has other children, consideration needs to be given to how the granny flat arrangement may affect the inheritance of the other children;
  • If there are other children, it is recommended that a clause be included stating that they endorse the agreement and having them execute an endorsement (this can avoid arguments later by ensuring everyone is aware and agreeable on the arrangement when it is established).

Residency, care, and costs:

  • If rent will be paid by the parents, or granny flat occupant. If so, how much and how frequently will it be paid? 
  • Who will bear the responsibility to pay expenses such as:
    • Utilities – including but not limited to, electricity, gas and water.
    • Insurance – including household, building and contents insurance to cover the usual risks in respect to the property.
    • Council rates and water/sewerage.
    • Maintenance – any and all expenses attributable to general wear and tear and maintenance of the property.
    • Repairs and improvements – any other improvements to the property or higher cost structural repairs.
  • Provision of care (if required) for the parents or person living in the granny flat. Although this may not be of immediate need, you need to take a long term view and consider the needs of the granny flat occupant into the future. It is important to establish if the homeowner will provide support and services in areas such as:
    • Providing meals, cleaning and helping with laundry;
    • Assistance with grooming, bathing, dressing and personal affairs;
    • Monitoring the physical and mental condition of the granny flat resident on a regular basis in consultation with relevant health care providers;
    • Arranging to transport the granny flat resident to healthcare providers and other appointments;
    • Arranging and facilitating social or community services;
    • Catering for activities such as outings in keeping with the granny flat resident’s lifestyle and health care needs.
  • Which party is responsible for the costs of preparing the Granny Flat Agreement and any transaction costs such as stamp duty (i.e. will costs be shared or will the child or parents pay?)

Exit:

  • Outlining a contingency plan in the event that the granny flat resident’s health deteriorates and they need to move into a medical facility or aged care facility or the agreement ends for another reason.

Everyone’s family situation and health requirements may be different which is why these factors and more need to be discussed and considered by all parties when entering into a Granny Flat Agreement.

It is only when you start asking these questions as part of the process that many people realise that they have different ideas on how the arrangement will work. It’s amazing how many people have not considered the specifics of the matter. The process of drafting a Granny Flat Agreement is designed to flush out what everyone wants to achieve from the arrangement, what is everyone’s intent, and determine what mechanisms should be put in place if something goes wrong so that the interests of the parties are protected.

What happens if someone enters into a Granny Flat Agreement and the child, or owner of the home, wants to sell the property or the agreement needs to end for another reason?

There can be many reasons why granny flat arrangements may come to an end. It may often be outside of the control of the parties involved in the agreement.

Some of the reasons a granny flat arrangement may no longer be suitable could include:

  • If the granny flat resident suffers an illness and they need to move to a facility that can provide them with the support they need;
  • a relationship breakdown in the family causes tension and the living arrangements are no longer suitable;
  • financial circumstances of either party may change resulting in them not being able to maintain their financial commitments;
  • If the homeowner experiences their own relationship breakdown and proceeds to a divorce, resulting in a property settlement and the house being sold;
  • A natural disaster occurs that damages the property and makes it inhabitable.

The importance of implementing a formal Granny Flat Agreement

It is imperative that you formalise a granny flat arrangement so that all parties are clear as to the terms of the agreement. Implementing a proper Granny Flat Agreement can reduce the risk of disputes arising down the track which can be extremely distressing and costly to resolve.

There is also the importance and benefits of formally documenting a Granny Flat Agreement for transparency with Centrelink and the ATO, to ensure the pension or benefits of the older person are not negatively impacted by the arrangement, and the adult child receives their CGT exemption.

A Granny Flat Agreement is designed to protect the older person who is entering into the arrangement as ultimately, they are the ones divesting themselves of one of their biggest assets. They are in a position of disadvantage if the arrangement changes and they need to try to get their investment back. The agreement needs to protect them to make sure that if circumstances change, and their right is extinguished, there is a mechanism for them to get the asset back or some form of compensation.

In the agreement, it will be outlined that the granny flat interest, or right to occupy that property, stays with that property. If the property is sold, that interest or right to occupy may transfer to a new property.

If the right to occupy is not transferred to a new property, there needs to be a mechanism in place where the money can come back to the parent who has provided the funds for the home.

Attwood Marshall Lawyers – helping you protect your interests now and in the future

As a leading estate planning law firm, we specialise in tailoring Granny Flat Agreements to ensure all parties have a comprehensive understanding of what the agreement involves and what their rights and obligations are under the agreement.

We want to help you protect your interests in property and properly plan for the future. If you are looking to establish a granny flat arrangement with someone, we will help you consider all the relevant factors and draft a professional, legally binding document to give everyone involved peace of mind and assurance, and ensure you are complying with Centrelink’s rules.

For more information on Granny Flat Agreements or estate planning, contact our Wills and Estates Department Manager, Donna Tolley, on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or free call 1800 621 071 at any time.

Read more:

Everything you need to know about a Granny Flat Agreement (Podcast & Blog))

Part 1: Transitioning to aged care – it’s important to plan for the future

Part 2: Transitioning to aged care – what to expect when entering a residential aged care facility

Five Reasons you need to have a Will and Enduring Power of Attorney

 

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Angela Harry

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