Why a granny flat might be better than an aged-care home—Part 2

Granddaughter visiting grand-parents in senior home

Image: Goodluz/Bigstock.com

Part 1 considered various family and practical aspects of granny flats. Part 2 looks at various financial and legal aspects.

There’s no attempt to do the sums involved with granny flats here because each case is different. The aim is to point out the numerous financial issues surrounding Centrelink assessments. This means you need to have a formal, legally drafted agreement in place, referred to as a Granny Flat Agreement.

You’ll find that the law refers to a ‘Granny Flat Interest’ (an agreement for accommodation for life—for more go here) which is defined as a life interest or right to accommodation where:

  • The person ‘pays’ for a life interest or right to accommodation for life, and
  • The life interest or right to accommodation for life is in a private residence that is to be the person’s principal home

How do you value a Granny Flat Interest? 

This issue is important for people receiving Centrelink benefits, which in most cases will be the Age Pension. There’s no market for Granny Flat Interests because they’re private family arrangements.

The value of a Granny Flat Interest is usually the same as the amount paid. The Social Security Act provides that, in special circumstances, a different value can be attributed to the Granny Flat Interest provided that the figure used is deemed to pass the ‘reasonableness test’.

The reasonableness test uses an approximation of actuarial values called the reasonable value conversion. A detailed explanation of the reasonableness test can be found on the Centrelink website.

If Centrelink considers that the amount transferred from the parent/s to the child is more than the value of the granny flat, they will determine that the transaction has resulted in ‘deprivation’ of an asset. The deprivation rules treat the amount deprived as an asset for the Assets Test. This can result in a lower rate of Age Pension, and it may also impact on whether the pensioner can receive rental assistance.

Why an agreement is important, and what it should contain

It’s advisable to have a legally drafted agreement to give evidence of the Granny Flat Interest. The agreement should include some or all the following:

  • Confirm security of tenure
  • State who is liable for the upkeep of the property
  • Nominate a weekly rental figure if this is appropriate
  • Set out who does the cooking, cleaning, washing, and shopping
  • List who pays the phone, electricity and other accounts
  • What happens when extra care is needed
  • How much independence will the person have, and how much will the family timetable impact on the arrangement
  • Will there be any childcare involved?

The impact on wills

A Granny Flat Interest from the transfer of money from a parent to a child reduces the size of the parent’s estate because the Granny Flat Interest does not form part of the parent’s estate.

A new will should be put in place and Powers of Attorney drawn up. Importantly, all family members should be informed of the legal issues involved.

Are there any tax considerations involved?

The first consideration relates to the payment of rent, and whether this is assessable income in the hands of the property owner. Arguably the rent could be treated as board and lodgings—similar to what some families impose on their children when they commence employment.

Board and lodgings are usually nominal in size and not regarded as taxable income. If, however, the arrangement involves a significant amount of regular income, it would be wise to seek professional advice from a Registered Tax Agent, Public Accountant, or a lawyer.

The next consideration relates to Capital Gains Tax (CGT). Investing in a Granny Flat involves the creation of an asset, but when the person leaves the property, there’s no disposal of the asset, and therefore CGT should not apply. This assumes that the title of the property has not changed and no sub-division of land took place.

There may be circumstances where CGT may apply, so it would be wise to seek advice.

A workable alternative

For many families, a granny flat will provide a workable alternative to a nursing home or retirement village. It should also provide greater peace of mind for families because of the proximity of the elderly person/s to a family member. There’s little doubt that this may be a much cheaper option to other forms of accommodation.

Finally, consideration should be given of how to fund a possible future nursing home arrangement should the care needs become too great in the years ahead.

Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi.

Category: Ageing, Finances, Where to Live

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