Recent Changes to Taxation Treatment of Granny Flat Interest

A granny flat interest is an arrangement used in the context of social services as an alternative living arrangement for elderly family members. A granny flat interest, also known as a granny flat agreement, is an interest in accommodation for life and is used as an alternative for elderly family members having to move into a nursing home or aged care facility and allows such elderly family members to move in with a relative (usually an elderly parent and child) in exchange for the transfer of an asset (such as cash or property) without affecting that elderly family members social security entitlements.

See our blog for more details on what a granny flat agreement is -  https://bit.ly/3NR0N3C

There is no legal or social security requirement for a granny flat arrangement to be formalised in writing and it had become apparent that when faced with the possibility of incurring a significant capital gains tax (CGT) liability, families were opting to not formalise granny flat arrangements. As a result, elderly family members were left being exposed and at risk of financial abuse and exploitation in the event of a familial dispute.

Consistent with the Federal Government’s National Plan to Respond to the Abuse of Older Australians, the Board of Taxation’s Review of Granny Flat Arrangements, and the 2017 Australian Law Reform Commissions Report: Elder Abuse a National Legal Response legislation has been enacted that provides for a targeted capital gains tax (CGT) exemption in relation to granny flat arrangements.

From 1 July 2021, CGT does not apply when a formal, written granny flat arrangement providing accommodation for older Australians or people with disabilities is created, varied, or terminated. The CGT exemption will apply if:

  • The property owner or owners subject to the granny flat arrangement are individuals;
  • An eligible person or persons have an eligible granny flat interest in the property. An eligible person is a person or persons who have reached pension age or a person or persons who as a result of disability require daily living care assistance and their disability will continue for at least 12 months;
  • The parties enter into a written and binding agreement to document the granny flat arrangement.

The CGT exemption will not apply to commercial rental arrangements. A commercial arrangement may include where the person obtaining the interest is required to pay market rent, etc. The obligation to pay for utilities and outgoings is unlikely to be considered commercial in these circumstances.

The ATO also recommends that the written agreement should include the following:

  • the parties involved in the arrangement, including the persons with an ownership interest in the property;
  • the circumstances in which the arrangement can be varied or terminated;
  • what happens when the arrangement is varied or terminated.

In addition, the parties may wish to include the following in the granny flat agreement:

  • the obligation for the payment of utilities and outgoings;
  • responsibility for maintenance and repairs;
  • the consideration being paid for the granting of the granny flat interest and the circumstances of, if and when, such consideration becomes repayable;
  • what happens if there is a breakdown in the relationship between the parties or if due to health requirements the property is no longer suitable.

A granny flat agreement can be a complex document but the improved taxation position should make the granting of and formalising granny flat interest arrangements more desirable. Before proceeding with any type of transaction of this nature, we always recommend that you obtain accounting and legal advice to best protect your position. Please contact our office today on (07) 4052 0700 to discuss your options for a granny flat agreement. 

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