Last updated 31 October 2022
These arrangements can include older people moving in with their family (often into granny flats) or family members moving in with the older person, and they generally consist of an exchange of something of value for the right of occupancy in a residence. The right of occupancy is generally in the private home of a family member, which need not necessarily be a separate residence from the main home.
In many cases, the person entering the arrangement will pay for the granny flat interest. The payment will often involve the gifting of assets or the payment of money to another person in exchange for a life interest in a home.
Unfortunately, where these arrangements are left on an informal basis, they can often result in disputes arising out of disagreements about how the arrangement was to operate. In other cases, the relationship between the family members can simply break down.
There are significant issues to address before entering these arrangements:
- Is this the best option for long-term care of the person?
- What if the older person has to move into residential aged care?
- How will the parties get on and what happens if they cannot?
- What do other family members think?
- What are the Centrelink implications?
- What are the tax implications?
- Who will pay for what in this arrangement?
Needless to say, it is highly advisable for anyone contemplating such an arrangement to obtain good legal and financial advice before entering the arrangement. This can sometimes mean formalising the arrangement in what is known as a family agreement.
Careful consideration needs to be given to the effects of these family arrangements on a person’s Centrelink entitlements.
In particular, the gifting of assets or money can breach the gifting or deprivation provisions of the Social Security Act 1991 (Cth) and have an adverse consequence on a person’s pension.
Centrelink has special rules in relation to granny flat arrangements, which, if complied with, may have no impact on a person’s pension. If the entry contribution paid by a person is higher than the extra allowable amount (i.e. the difference between the homeowners’ and the non-homeowners’ asset limits at any particular time), the granny flat resident is assessed as a homeowner by Centrelink. For non-homeowners, the entry contribution becomes an assessable asset for Centrelink purposes.
Granny flat interests are usually private family arrangements, and they do not have a market value. The value of the granny flat interest is the same as the amount that is paid for the life interest, and there is no deprivation of assets that affects a person’s pension.
As an example, a person will not contravene the deprivation rules if the amount paid for the granny flat interest is either:
- a transfer of title of their home
- a payment for the construction and fit-out of premises
- a property purchased in another person’s name.
But there are some exceptions to these rules where Centrelink values the granny flat interest differently by using what is known as the reasonableness test. This test assesses the value at a different amount to what is actually paid for the life interest and may be used, for example, where:
- there is a transfer of the home and the transfer of additional assets
- there is a payment made for construction and fit-out of premises and the transfer of additional assets
- the person is using the granny flat rules to gain a social security advantage.
Needless to say, the complexity of these and other rules mean that no arrangements should be entered into until advice from Centrelink, and legal and financial advisors has been sought.
Certain granny flat arrangements may incur capital gains tax (CGT) as indicated in an Australian Taxation Office ruling no 2006/14. This particularly relates to agreements when a parent pays a certain sum of money to a son or daughter, for example, in exchange for the right to live in the latter’s home or to construct a separate granny flat there.
Generally, our principal place of residence is an exempt asset from any taxation implications particularly CGT, however, the issue is complex and both parties to any such granny flat arrangement need to get good legal and financial advice before entering such an arrangement.