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Are you considering a Granny Flat arrangement…. What could go wrong?

A lot as it turns out. To decrease disaster, it’s worth considering a formal agreement which lays out everyone’s expectations on the table.

Why are Granny Flat arrangements becoming so popular?

Unaffordable property prices and unreasonable rents are pushing many families to rethink their living situations. Granny flats can often be a popular solution as it may provide you the opportunity to continue to live independently in a home for longer whilst providing suitable and reasonably priced accommodation for the younger generation.

Also, capitalising on the families grouped financial resources and support creates another possible alternative to aged care.

The main types of granny flat arrangements are;

  • The parents selling their home and utilising part of the funds to build a separate residence or extension on a home, or paying for renovations on their children’s home, whilst obtaining the right to live there for the rest of their life.
  • Or transferring title rights of their principal home to a child/children, or trusted person, with the right to live there for the rest of their life.
  • Or buying a home in their child/children’s name but maintaining the right to live there for the rest of their life.

There are no doubt serious discussions have taken place during the initial stages around how bills and meals might be shared as well as ongoing care needs and then everyone just goes about their daily business. Now, whether it involves everyone living under the same roof or purpose-built accommodation in the backyard, these family care scenarios have plenty of ways they can turn sour such as:

  • The marriage breaks down and the home needs to be sold.
  • Death, divorces or separation and the biological child leaves the family home, and the older person is left living with a daughter or son-in- law who is not physically or financially in a position to support the required level of care.
  • Financial trouble from the child, daughter or son-in- law comes about and the home is at risk.
  • The care needs are increasing but the appropriate care is unavailable or not provided.

Tax changes have occurred to encourage formal agreements

There was a gap between what Centrelink said you could do and the tax characteristics of these types of arrangements. Following a review, the government announced in 2020 that as of the 1st July 2021, when a formal arrangement is in place to provide lodging for the elderly or those with disabilities, that there will be a CGT exemption.

The thought of a tax implication was apparently enough for some families to either avoid setting up these live-in family care arrangements or keep it informal – either of which could potentially put an older person at risk of elder abuse.

Please note: The exemption only applies to establishing, modifying or concluding a granny flat arrangement.

Other CGT events outside this type of agreement may be prone to CGT. For instance, the sale of a home that had a granny flat arrangement, which has since concluded, is subject to the regular CGT rules.

What Age Pension guidelines apply?

Under the guidelines, gifting $10,000 a year or $30,000 over 5 years, prior to assets being considered to be deprived assets and counted anyway. If the gifting limits are breached, the amount in excess of the gifting limit is considered to be a deprived asset of the person and/or their spouse and subjected to deeming under the income test. After the expiration of the 5-year period, the deprived amount is neither considered to be a person’s asset nor deemed.

Certain gifts can be made without triggering the gifting provisions one of these is the assets given or construction costs paid for a ‘granny flat’ interest.

Where the value of a granny flat interest is the same as the amount paid for the interest – for example, when a new property is bought, or the cost of the renovation is covered – there is no deprivation amount and the pension entitlements remain the same.

However, if the amount paid exceeds the accommodation the person is getting, such as a property plus cash, then the Centrelink ‘reasonableness test‘ may be applied to determine if deprivation has occurred. Deprivation rules may also be tested if the person making the gift later needs to move into aged care. It may fall on the family to prove that it could not have reasonably been foreseen that care was needed.

Your home is an exempt asset for Age Pension calculations. If you were to sell your home and buy another one of a similar value, then there would be no impact on your pension entitlement. But if you sold your home, invested the money and moved in with family, then the money from the sale proceeds could reduce your entitlements. If this was to happen and the remaining capital is still under the minimum tests, or even within the acceptable levels where a part Age Pension is still a suitable diverse income stream this could still be an appropriate outcome for some people.

How much you pay or give matters – whether it is through the transfer of the title to your home, to build or fit out something new, or buy a new place in someone else’s name in return for a life interest. It is important that the creation of formal agreements or right via a gift is put in writing so that Centrelink is clear.

Reasonableness test what is that?

It is a test that establishes the highest amount of assets that can be transferred without initiating deprivation. This is commonly used when the cost for the accommodations interest is not clearly showed.

It is an age-based formula used at the time the granny flat right is created, the formula is a couple rate which is used whether the person is single or a partner of a couple.

For example, if the reasonableness test value is less than the total amount of assets transferred, the remainder would have the deprivation rules apply.

What happens if mum or dad have to move into Aged Care?

Well, they must submit an assets and income assessment and as long as the granny flat was in place for 5 years or more, the granny flat will not be an assessable asset classifying them as a non-homeowner.

The 5-year rule is important to note because if a granny flat arrangement is entered into just to avoid the asset assessment by Centrelink for the purpose of reducing aged care fees they will fail as rules exist to stop people from doing so.

Dependent upon their other income and assets they might or might not be a supported resident for aged care reasons.

Formal agreements

Not everyone will be impacted by Centrelink and tax problems but that shouldn’t stop formal and legally enforceable family care agreements in every case.

As it puts in place some safety measures for mum and dad if unexpected events do happen.

It also helps to make clear for everyone the plans that have been put in place and the expectancies everyone has of each other such as:

  • What occurs when health deteriorates and care requirements change and residential care is required?
  • Who is providing care and when, who does the cleaning, cooking, lawn care, pays the utilities etc…
  • Are you expected to mind the grandchildren and are you happy with this?
  • How much privacy will you require? Is this level of privacy achievable?

Ultimately clarity for the people that are expected to care for you and you care about can only be a good thing.

In summary

Formalising Granny flat arrangements can work brilliantly for all involved.

However, the tax implications, Age Pension and possible Aged Care foresight required for these types of arrangements can be complicated, making professional advice from your legal representative, accountant and financial adviser an important part of ensuring they work smoothly for everyone involved.

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