On 1 July 2021, a new capital gains tax (CGT) exemption was introduced for certain granny flat arrangements.
It will make it easier for older Australians to enter formal granny flat arrangements with the added protection from possible financial abuse if circumstances within the family change.
A granny flat arrangement does not refer to a granny flat structure in someone’s backyard, rather it refers to arrangements where a significant amount of money and/or assets is given in exchange for a right to occupy a dwelling for life.
The dwelling can be a room or self-contained dwelling located on someone else’s property, however there are other types of accommodation which can meet the definition for tax or social security purposes. Your financial adviser can discuss the types of accommodation in more detail, in relation to your situation.
The benefit of a granny flat arrangement
Granny flat arrangement offers an alternative housing option to retirement villages, lifestyle parks or residential aged care by allowing older Australians to live on the same property as a family member who can assist them with day to day living and personal care needs.
It may also be a financially more viable option as some aged care facilities and retirement villages have high entry or ongoing fees.
Many families like to be close to each other, and there can be a great many benefits to intergenerational living. A granny flat arrangement is ideal for this.
Understanding the new CGT exemption
The new CGT exemption (which provides that no CGT event happens) applies to the creation, variation, and termination of a granny flat interest if:
- an eligible individual (older person) is granted a granny flat interest by the grantor
- the grantor of the right owns the dwelling or agrees to acquire the dwelling in which the granny flat interest is or will be held
- the older person and the grantor of the right must both be parties to the arrangement
- the arrangement is in writing and indicates the intention of both parties to be legally bound by it
- the arrangement is not of a commercial nature.
For the CGT exemption to apply to a granny flat interest upon termination or surrender, the CGT exemption had needed to be applied when the granny flat interest was created or varied (on or after 1 July 2021).
Is the age pension affected?
Money or assets (or a combination of both) given for a granny flat interest may fall outside social security ‘gifting’ rules where certain conditions are met, which may mean the older Australian in the arrangement may retain or increase any age pension entitlements.
Tax implications
In the past, many families may have opted for informal granny flat arrangements to save time, expense and to avoid potentially significant tax consequences for the person granting the right (‘grantor’), as the capital gain tax could be significant. The new CGT exemption removes some of the anxiety around the tax implications of having a formal arrangement in place.
Right to occupy
A granny flat interest requires that the older person be granted a lifetime right to occupy a dwelling. A dwelling could be accommodation in the grantor’s family home, investment property or holiday home. A ‘right to occupy’ is distinguished from a life interest. A right to occupy provides the person with a right to live or reside in the property. A life interest may provide broader rights, for example, a right to ‘use and occupy’ a property, which may include rights to rents and profits from that property if the property was rented out. For social security purposes a granny flat interest may include a right to accommodation for life in the residence or a life interest in the residence.
The older person who holds the granny flat interest
The older person who holds the granny flat interest is eligible if they are, either:
- age pension age or older; or
- have an ongoing disability and is likely to require help with their daily activities for at least the next 12 months.
The grantor of the granny flat interest owns the dwelling or agrees to acquire the dwelling
The grantor of the right must own the dwelling (or agree to acquire the dwelling) in which the older person has or will be granted a right to occupy for life. The grantor of the right may be any person, though it is often a family member.
Involve all family members in the process
The new CGT exemption for granny flat arrangements offers protection for older Australians because it details the obligations on each of the parties in the arrangement, and it ensures the arrangement is legally binding. For this reason it is important that an open discussion with all the parties and family members who are likely to be affected takes place, along with financial planning advice from your financial adviser, and legal advice from your lawyer or solicitor. This will get everyone on the same page and gives everyone the opportunity to ask questions and educate themselves on the situation, so the agreement is entered into with a complete understanding of the terms of the arrangement.
Formal, written arrangements must be in place, usually drafted by a lawyer or solicitor, and the arrangement must not be of a commercial nature. Your solicitor can further explain the specific terms and both parties’ rights and obligations under the arrangement.
Speak to your financial adviser
If you, or someone you know, wants to consider a granny flat living arrangement, it’s sensible to have these conversations with your financial adviser and put something in place whilst all parties are of sound mind and have the capacity to sign the legal agreement.
For specific advice customised to your individual circumstances, contact Carrick Aland’s Wealth planning team on 07 4669 9800 or visit carrickaland.com.au/wealth-planning/.
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