Understanding the rules around granny flats and the aged pension

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For Centrelink, a ‘granny flat agreement’ starts when an Age Pensioner transfers assets to another person in exchange for future accommodation. ‘Granny flat accommodation’ comes in various forms: from a self-contained building; an apartment in a larger building; or simply the spare bedroom of a family home with use of the family bathroom. 

A formal, written granny flat agreement helps clarify the terms of the deal for both the residents and the hosts. 

For Centrelink, a written agreement isn’t essential. Centrelink simply looks at the transfer of assets and the Age Pensioner’s explanation of what they hope to receive in exchange.

The impact on your Age Pension depends on the asset you transfer as your granny flat in-going payment.

Continuing as a ‘homeowner’

If you transfer ownership of your current home to another person in exchange for a lifetime tenancy with no future rent or other property related payments, Centrelink could continue your Age Pension as a ‘homeowner’ with the same other assets and income as you had before the transfer. 

In other words, transferring ownership of your current home in exchange for the right to live in your granny flat would not normally impact your Age Pension.

If you transfer assets valued at less than $207,000 in exchange for a permanent place to live, then you would be a ‘non-homeowner’ at Centrelink. And, if you don’t pay any in-going amount, Centrelink would consider you a non-homeowner, which means you will likely be paid some rent assistance if you’re contributing to the ongoing costs of occupying the granny flat. 

Centrelink does limit the amount you can claim as your granny flat, in-going payment. The maximum reasonable amount approximates to the maximum Age Pension payment rate for a couple multiplied by your life expectancy in years. In other words, it’s the maximum the Age Pension couple, at their age, could be paid over the rest of their lifetimes.

If, your in-going amount is higher than what is considered a reasonable amount, Centrelink will count the excess as a gift. Gifts totalling more than $10,000 in any financial year or $30,000 over a five-year rolling period can reduce your Age Pension.

Judy’s story

Judy, aged 80, is still mentally sharp, but no longer confident living alone. Judy’s only relative is a niece, Jane. Jane invites Judy to come and live with her family. So, Judy plans to sell her home unit for $400,000 and transfer $300,000 to Jane as her granny flat in-going amount.

Judy currently gets the full Age Pension because she has less than $40,000 in the bank and no other assets. Judy had sold her car when she gave up driving a few years ago. She wants to buy some new furniture and keep some money to pay for a carer to help her shower and accompany her to medical appointments and social activities. 

Centrelink calculates Judy’s ‘reasonable amount’ as close to $320,000. Judy’s proposed in-going amount of $300,000 is reasonable according to Centrelink—given Judy’s age. 

After the move, Judy has $100,000 in the bank and a comfortable new home. Centrelink treats Judy as a homeowner with assets of $100,000 in cash and $3,000 of personal assets. She keeps her full Age Pension while living in the granny flat arrangement.

What happens if you leave your granny flat

If you exit the granny flat arrangement after five years, Centrelink will ignore the amount you paid as your in-going contribution. You would start your new post- granny flat life as an Age Pensioner with whatever assets and income you take with you.

But if you exit the granny flat arrangement within five years of paying your granny flat in-going contribution, Centrelink could treat that payment as a ‘gift’ to your granny flat hosts. 

During Judy’s fifth year of living with Jane, she has a few falls. Jane and Judy consider residential aged care for Judy and look carefully at the costs. 

After investigating their situation, they realise that if Judy enters permanent residential aged care before the end of that fifth year, Centrelink could count Judy’s granny flat in-going payment as a gift to Jane. The information given here was correct at the time of writing.

That would mean Judy would be considered to have more than $300,000 of assets and be required to pay the full cost of her aged care accommodation. 

But if Judy came home to live with Jane for another year, Centrelink would disregard the granny flat in-going amount when assessing Judy’s assets. Waiting until five full years had been completed in the granny flat arrangement allows Judy to enter residential aged care as a ‘supported resident’ who only needs to pay a means-tested ‘accommodation contribution’ together with her basic daily fee.

Granny flat arrangements are complex. Both the granny flat hosts and the granny flat residents need legal, taxation and specialist Centrelink means testing advice before starting a granny flat arrangement. 

This is part of a continuing series about Centrelink by Christine Hopper the Director of Financial Care Services, an independent advisor. Financial Care Services is focused on mature people considering a change of lifestyle including retirement and particularly new living arrangements in: retirement lifestyle community villages; granny flats; supported or assisted living, and Commonwealth regulated aged care. She can be contacted through https://financialcareservices.com.au.

Christine talks to Centrelink as a customer and on behalf of clients. She understands the range of Department of Veteran Affairs and Centrelink income support benefits, their relevant means tests and eligibility conditions. She’s an actuary who also holds a Bachelor of Science, a Diploma of Financial Planning and a Certificate of Theology.

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Category: Housing, Retirement, Where to Live

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