GRANNY flat arrangements will become safer once a law change is introduced that will stop penalising people who create formal granny flat contracts.
Currently, if an older person agrees to move into a granny flat on their adult child’s property and there is a formal contract agreed to, the adult child will have to pay Capital Gains Tax (CGT) on the value that is added to their property.
If there is no formal contract, CGT will not be charged on the granny flat because for CGT to be applied there must be a triggering event. A CGT-triggering-event occurs when a contractual or legal right in an entity is created, such as a formal granny flat agreement.
Older parents not wanting to have their children pay extra tax may choose to not create a formal arrangement. If there is no formal granny flat arrangement in place an older person may be exposed to financial abuse. For example, if an older person’s son and daughter-in-law’s relationship breaks down, an older person may be forced to move and may not be able to recover any money that was invested in the granny flat as there was no formal agreement in place to spell out the rights and responsibilities of both parties.
On 16 April, the Australian Treasury released draft legislation that will exempt CGT from granny flat arrangements.
The draft legislation says that for a granny flat arrangement to be free from tax the occupant must have reached pension age or have a disability that requires daily assistance, and that the agreement gives the occupant the right to live in the granny flat for life.
Commercial relationships where a granny flat is built and rented out will still be charged CGT.
This is good news for all parties. This law change will encourage formal granny flat arrangements which will mean older people living in granny flats have greater security of tenure and less exposure to financial abuse, without placing their children in a worse tax position.
The law change is expected to be implemented 1 July of this year.
Even after this change is implemented it is still strongly recommended that legal and financial advice are sought after before entering a granny flat arrangement.