1. Always take a long term view

It is always advised to take a long term view when setting up a granny flat agreement as problems can set in if parties do not consider the future needs of the elderly family member. The elderly family member may enter into a granny flat arrangement when they are relatively healthy, but their health may deteriorate drastically and can place a heavy toll on emotions, finances and lifestyle adjustments.

2. All family members should be consulted

Before any agreement is drawn up, every family member in the household (such as the child’s spouse) should be consulted including siblings not living in the same household. It is vital for all family members to acknowledge witness and understand the arrangement. This will avoid the perception that one child is receiving an advantage over another and should ensure that future family disputes may be avoided.

3. What type of agreement should it be

The interest created under the agreement will be either a Right of Residence or a Life Interest for the elderly family member. The Right of Residence grants the right to live in the property. However, the life interest grants a right to use the property during their life, should they need to move out then they are entitled to the rent.

The agreement will also set out whether the elderly family member will pay rent, outgoings, utilities and costs for maintenance and repairs.

4. What are the social security implications of granny flats

Centrelink rules are designed to facilitate granny flat agreements. Normally, transferred property or funds would be deemed to be a gift, however, Centrelink’s granny flat rules allow for any property transferred or money paid to the parent’s child to be exempt of the deprivation/gifting rules, so whilst Centrelink recognises different styles of arrangements, there are certain rules which need to be adhered to. These include:

• Centrelink will look at the value of the asset transferred to see if the elderly family member paid a ‘reasonable amount’. Where Centrelink assesses that they have paid more than what the granny flat interest is worth, they will assess that the elderly family member has deprived themselves of an asset and this may affect their social security entitlements.
• Assets that can be transferred in exchange for a ‘granny flat interest’ include transferring the title of the parent’s home, plus other forms such as cash, stocks, bonds or jewellery and heirlooms.

Centrelink requires that if the elderly family member leaves the property within 5 years, they will review the granny flat interest. If the reason for your elderly family member leaving is:

• something you could expect when you created the granny flat interest, the gifting rules will apply
• something that was unexpected, the gifting rules may not apply. Unexpected reasons may include sudden illness, family relationship breakdown, elder abuse or property damage.

5. What is the effect on Capital Gains Tax?

From July 1^st 2021, the rules around granny flats and capital gains tax (CGT) changed for the better. There is now an exemption that applies to any capital gain that occurs due to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities. This includes granny flats that are either stand-alone or attached to a main residences. It will be limited to family arrangements where the flat is supporting an ageing or disabled relative, or “people with other personal ties”.

This exemption occurs where a written agreement with the occupants exists. It is hoped that through this change, the risks of financial abuse and exploitation of the elderly, as well as adult children with disabilities will decrease. This is due to the fact that having a written agreement that is legally enforceable will help protect vulnerable granny flat occupants. I.e. a written agreement will spell out the rights and responsibilities of both parties to the agreement.

6. What is the impact on wills & probate

Everyone involved with a granny flat agreement needs to be aware that money or assets given to the child in exchange for the ‘granny flat interest’ no longer forms part of the parent’s estate. This means that upon the death of the elderly family member, any property or money handed over to the child will not be distributed in accordance with their will.

7. What happens if the property is sold?

The general rule is that once established, granny flat interests or rights cannot be revoked simply because a child wishes to sell the property. They may:

• sell the property with the elderly family member arrangement as a condition of sale;
• transfer the elderly family member life tenancy or interest to another property, or
• compensate the elderly family member financially for losing their ‘granny flat interest’.

8. How to end the granny flat agreement

The agreement will also deal with what happens once the agreement ends. A granny flat agreement may end as a result of the death of the elderly family member, their medical needs mean it is no longer viable to remain at the property, or by agreement. Where the agreement ends by mutual consensus, the agreement should deal with how the elderly family member will be compensated upon them giving up their granny flat interest.

9. Always seek professional advice prior to any agreement

Whilst Centrelink does not require the granny flat agreement to be documented in writing, they will encourage you to obtain financial and legal advice before entering into such agreement.

If a granny flat agreement is properly documented it will ensure that your elderly family member has the security of tenure, that everyone is on the same page regarding the interest granted, the asset exchanged, the obligations for the term of the agreement and the obligations when the agreement ends. This advice should also ensure that the arrangement does not affect any Centrelink entitlements of the elderly family member.