A granny flat is a self-contained home on a family property, and a granny flat agreement sets out who pays, who lives there and what happens if things change. Done well, it can bring families closer and ease housing costs. Done on a handshake, it can leave an older parent without a home.
Key takeaways
- If an older person leaves within 5 years of creating a granny flat interest, Services Australia may apply gifting rules.
- Services Australia applies a reasonableness test, and any excess paid may be treated as a gift for 5 years.
- A written agreement isn't always legally required, but it's strongly recommended and should cover 4 areas: occupancy, money, maintenance and exit.
- Since 1 July 2021, a CGT exemption may apply to eligible granny flat arrangements, subject to conditions.
What is a granny flat agreement?
A granny flat agreement records the terms of the arrangement, including payments, maintenance and what happens if it ends. A "granny flat interest" is the lifetime right to live there that Centrelink assesses.
The interest doesn't have to involve a separate unit, and the people involved don't have to be family. Most arrangements are between parents and children, so that's the example used here.
The rules cut across the Age Pension, aged care costs, tax and estate planning, which is why the paperwork matters so much.
What are the benefits of a granny flat interest?
Declining housing affordability can make it hard for children to buy, while parents' wealth is often tied up in the family home. A granny flat interest can ease both pressures.
For children
- Earlier access to owner-occupied housing.
- Funds to upgrade or extend the family home.
- Help with household chores and childcare.
For older parents
- Regular time with children and grandchildren.
- Staying independent at home for longer.
- Practical support if frailty becomes an issue.
- Financial flexibility from home equity.
- Security of accommodation for life.
What are the risks of granny flat arrangements?
Arrangements usually start when relationships are good, so risks are easy to wave away. They include:
- Family dynamics: relationships can sour, and elder abuse can arise.
- Unforeseen events: a child's illness, financial trouble, divorce or relocation can disrupt things.
- Changes for parents: a move to aged care, or marital or financial problems.
- Different expectations: daily life can look nothing like what everyone imagined.
Parents who've handed over title on an informal basis can struggle to enforce their right to stay.
What should a written granny flat agreement cover?
There's no prescribed format. Agreements often include:
- Purpose and background of the arrangement.
- Occupancy rights, meaning what the parent may use.
- Payments and who covers which expenses.
- Maintenance responsibilities, from small repairs to structural work.
- Household duties and any care promised.
- A way to resolve disputes.
- Termination terms, including how any payment is settled.
Services Australia recommends a legal document so there's proof of the arrangement, even though an interest can exist without one.
Who should be part of the conversation?
Everyone affected should have a say before anything is signed:
- The parents and the children.
- Any partners of the children, whose circumstances can change.
- A solicitor to draft the agreement.
- A financial adviser and accountant to test the money side.
What are the granny flat tax rules and Centrelink impacts?
Centrelink. Services Australia applies a reasonableness test to what's paid for the interest. Any amount above it may be treated as a gift and assessed under the deprivation rules for 5 years.
If the older person leaves within 5 years, Services Australia may look at whether that move was foreseeable. A move into aged care can trigger this, and it can also end the arrangement, so write down what happens to any payment if it does.
Tax. Since 1 July 2021, eligible formal written arrangements may receive a CGT exemption, subject to conditions. Stamp duty and other state rules vary, so speak to your solicitor and accountant before you sign anything.
How can you reduce the risks?
- Avoid rushed decisions, and take time to consider the arrangement fully.
- Get both legal and financial advice, now and for future scenarios.
- Document everything in a clear written agreement.
Our aged care specialists can explain how an arrangement interacts with future care costs, and our retirement and estate planning service looks at where it fits in your estate. If the family is weighing early gifts, read more about the power of early wealth transfer.
Family conversations can get tangled when an estate is involved, and our piece on inheritance and estate distribution challenges explains why. For the wider retirement picture, our guide to financial planning for retirement is a good next read. A granny flat decision is easier when everyone's goals are on the table, so contact a Morgans adviser before anyone signs.
Sophie Doyle (AR#000470612) is a Retirement and Aged Care Specialist at Morgans Financial Limited Gosford (Morgans AFSL 235410 / ABN49 010 669 726); with a passion for assisting families make informed financial decisions, as they navigate their way through retirement and aged care.
Frequently asked questions
Does a granny flat arrangement affect my Age Pension?
It can. Services Australia assesses a granny flat interest and applies a reasonableness test, so check the impact before you pay anything.
Can an older person lose the right to live in the granny flat?
Yes, if relationships break down or promised care isn't provided, especially without a written agreement. A formal agreement and legal advice reduce the risk.
Do I need a written granny flat agreement?
It isn't always legally required, but it's strongly recommended. It sets out occupancy, money, maintenance and exit terms, and can help protect against elder abuse.
What are the granny flat tax rules?
Eligible formal written arrangements may be exempt from CGT since 1 July 2021, subject to conditions. Other tax and stamp duty outcomes vary by state, so ask your accountant.
What is a granny flat interest?
It's a lifetime right to accommodation in return for money or property, and Centrelink assesses it under special rules. It can affect pension payments and later aged care costs.
