Granny flat traps

Article published 1 February 2019

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NASTY things can happen if you’re not careful with granny flats.

For example, a pensioner sells their home and pays $400,000 to their son and daughter-in-law for a right to occupy a granny flat they have at the back of their house. Legal documents are created.

The first nasty surprise might be that the son and his spouse have to pay capital gains tax at the highest rate (47 per cent plus the Medicare levy) on  $400,000. That’s $188,000.

There are (legal) ways around this, but the people in the example use the simplest, most straightforward and prudent method to set up a granny flat arrangement.

The Australian Government has ordered the Board of Taxation to review the tax implications of granny flat arrangements, so hopefully relief is on the way.

Apart from tax, other things need to be considered, such as the impact on pension entitlement, eligibility for Rent Assistance and aged care means-testing.

If you live in a granny flat, Centrelink calls this a ‘granny flat interest’. The granny flat interest also covers other arrangements, such as live-in arrangements or even buying a house under someone else’s name and living in it yourself. What these arrangements have in common is that you have paid money for the right to live somewhere.

Centrelink will look at how you created your granny flat interest to determine whether you are a home-owner or not and whether the value of the interest is included in the asset test. A home-owner has a lower pension cut-out limit than a non-home-owner. A non-home-owner might be eligible for Rent Assistance.

A key factor for Centrelink is how much you paid for your granny flat interest. If Centrelink considers you paid more than is reasonable, it may take the view that you are gifting money or even trying to hide money in order to get a higher pension.

Given all these snakes and ladders, it is important to realise that the actual building of a granny flat is the easy part. It’s the planning that is difficult and requires sound financial advice. The Australian Government’s Financial Information Service on 136 357 is a good place to start.

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