Granny Flat Arrangements

What are they and what are the risks?

When we talk about “granny flat” arrangements, many people will picture a small structure being built in the backyard specifically to house an elderly person. However, the concept of a granny flat arrangement can be much broader.

A granny flat interest may be quite different than the ‘real estate’ description above. When used in the context of social security, the term ‘granny flat right’ is used to assess living situations where money, assets or the title to one’s home have been transferred in exchange for a right to a lifetime accommodation in a private residence. The person obtaining the granny flat interest does not have legal ownership of the property they live in. In most cases, this is an informal family arrangement created to provide support for an elderly person. However, there are no age or family relationship rules or requirements.

Although most granny flat agreements often include arrangements for the care of the parent, this does not necessarily have to be the case. Arrangements may just be for the provision of accommodation alone but problems can set in if parties do not take a long term view. A parent may enter into an arrangement when they are relatively healthy, but their health may deteriorate drastically and can place a toll on emotions, finances and lifestyle adjustments. Therefore, not only must the child who is party to the granny flat agreement be involved, but every family member in the household (example the child’s spouse) should be consulted about the arrangement as well. Siblings not living in the same household should also be consulted because it may be perceived that one child is receiving an advantage over another.

Centrelink’s ‘granny flat’ exceptions are designed to encourage people to stay out of supported care. They may, however, leave openings for financial detriment or abuse. (Logan, 2017) A granny flat right or interest only exists during the person’s lifetime and is not part of their estate.

Let us help you!

We can help you manage the risks of moving to a Granny Flat Arrangement by:

  • helping you understand the financial implications of your proposed granny flat arrangement,
  • ensure you comply with the special rules that DVA and Centrelink have about granny flat interests,
  • helping you refine the terms of your granny flat agreement to clearly cover the possibilities of changed circumstances,
  • providing you with a comprehensive analysis of the options so that you can make informed choices.

Moving to a Granny Flat Arrangement could effect:

  • your pension entitlement and other benefits,
  • your cash flow,
  • the cost of a home care package,
  • your estate planning, and,
  • taxation, including GST now or later.

Benefits Our Clients Enjoy:

  • Reduced risk of unexpected challenges when the granny flat resident needs to move on,
  • save your family distress and misunderstanding later,
  • a documented ‘pathway’ for the way forward,
  • avoidance of expensive errors, and,
  • no more worry and stress - WE MAKE AGED CARE EASY!

The Technical Stuff..

Establishing and Valuing Granny Flats.

A granny flat right can be created in a number of ways. The value of a granny flat interest will generally be the amount paid (or assets transferred) in exchange for the interest. If the client only transfers part of the title of their home to another person, a granny flat right has not been established. This is because the client still has legal title to the property. The transfer will be assessed under normal gifting rules and the client remains a homeowner, with their share of the home an exempt asset.

Three Ways You Can Granny Flat ...

1. Constructing a new property

Many people think of this as the traditional granny flat arrangement. Ageing mum may have an enormous home and yard, but is too frail to look after the lawn and garden. So instead, she pays to construct a second property on her land to live in, while her daughter or son and their family take over the house. (Cowling, 2015)

2. Everyone sells

One way of bringing adult kids and their parents geographically closer together is by each selling up and buying something together, but putting it into the child's name.
Say you own a house at Alligator Creek but your mum's lives at Bluewater, you could theoretically buy a bigger home for all of you to live in at a more convenient or halfway point, without sacrificing your pension. Again, Centrelink must perceive your purchase as reasonable. (Cowling, 2015)

3. Complete transfer of title

In this scenario, mum or dad puts the home into the name of their adult child in order to pay for a "granny flat interest", which means they have the right to live there for the rest of their life and their adult child moves in to provide companionship and care.There should be a formal legal requirement. This strategy is particularly effective if the elderly parent can no longer afford to look after the house and wants to give their child a bit of a leg up in the property market, while keeping the pension. (Cowling, 2015)
So long as the exchange of assets is deemed fair by Centrelink, it should not affect pension payments. However, if Centrelink considers the arrangement to be an uneven exchange – for instance, if it thinks the parent "overpaid" – they could be penalised based on a "reasonableness test". (Cowling, 2015)

What's the Reasonableness Test?

In some cases, the Social Security Act 1991 prescribes that a granny flat interest should be valued at a different amount to the amount paid. This is known as the ‘reasonableness test’. The reasonableness test could be used when a person transfers title to their home or pays for construction of the premises but at the same time transfers additional assets, such as cash. In this circumstance, we need to compare the value of the home or construction with the amount determined under the reasonableness test. (Logan, 2017)

The Social Security Guide has several examples that are interesting to note: Example 1 and Example 2

The legislation basically says there is no set value for a granny flat arrangement, however, it does say: ..."The value of a granny flat interest is GENERALLY the same as the amount paid for the interest"... but it also goes on to say: ..."If the person is using the granny flat rules to gain a social security advantage"...

The reasonableness test is a quasi-actuarial valuation of the value of the person's life interest or right to occupy the granny flat based on their statistical Life Expectancy calculated using the 'Australian Life Tables' published by the Australian Government Actuary. The reasonable value of the granny flat interest (i.e. the amount not considered a deprived asset) will be the greater of the two amounts.

Under the reasonableness test, the value of the granny flat is calculated as follows:-
Reasonable Value = Combined annual partnered Age Pension rate (on the date the granny flat interest was created) multiplied by an age based conversion factor (based on the age next birthday of the client or younger member of the couple, if relevant)

The reasonableness test may also be applied where:

  • a person vacates their granny flat right within five years of its creation.
  • a person uses the granny flat rules to gain a social security advantage. In this case, the value under the reasonableness test will be applied.

If the Senior transfers title and continues to live in the house under a right to occupy there is no reasonableness test applied.

What not to do...

Blindly handing over your home as a "gift" to the next generation is a big no-no by Centrelink if you want to keep your pension. It is deemed to be very different to the three granny flat arrangements listed above, because it's not seen as a fair deal for either the older party or the public purse.

The key to the granny flat arrangement is it's an exchange for a right and not a gift. You are currently allowed to gift just $10,000 a year – or $30,000 over five financial years – without affecting your pension payments. Any more and Centrelink may think you are trying to dilute your wealth to keep your government entitlements.

Determining Whether the Client is a Homeowner?

When a person has a granny flat interest, special rules apply to determine whether they are a homeowner or non-homeowner for social security income payments. This is determined by comparing the ‘entry contribution’ to the ‘extra allowable amount’.(Logan, 2017)

The ‘extra allowable amount’ is the difference between the Age Pension homeowner and non-homeowner asset value limits at a point in time. Based on current Centrelink thresholds, this is equal to $207,000. (Jul 2018)

The ‘entry contribution’ is determined as follows:

  • If the client was not assessed under the reasonableness test, the entry contribution is the amount actually paid; or
  • If the client was assessed under the reasonableness test, the entry contribution is
    - the value of the granny flat interest – if assessed as paying more than the reasonableness test amount, or
    - the amount actually paid – if assessed as paying less than the reasonableness test amount.

Home Care Packages

Clients living in a granny flat arrangement may be eligible to access a Home Care Package regardless of how the granny flat interest was established. This offer assists them to live at ‘home’ for longer and may include:

  • transport for shopping and appointments
  • home maintenance or modifications
  • assistance with domestic jobs, such as cleaning and washing
  • assistance with personal care, such as washing and dressing

To be eligible, the client will need to be assessed by the Aged Care Assessment Team (ACAT). The amount the client pays for the Home Care Package is means tested and comprises a Basic Daily Fee (currently (Jul 2018) $10.32 per day), plus a potential income tested fee (currently (Jul 2018) up to $10,786 per annum for self-funded retirees).

Moving Out of the Granny Flat and Into Aged Care

Once a person moves into an aged care facility, they will generally become a non-homeowner at the time their granny flat interest ceases. Assuming the granny flat interest was in place for at least five years, the value of the granny flat interest will not be an assessable asset.

Placing a loved one in a granny flat and then into aged care just a few months later is a strategy that has been used to try to circumvent Centrelink asset assessment and minimise aged care fees. However, it will not work if the need for care could have been anticipated.

If a person moves out of the granny flat within the first five years of creating the interest and a move to aged care could have been expected at the time the granny flat interest commenced, the full amount transferred for the granny flat may be treated as a gift and subject to deprivation for five years (from the commencement of the granny flat interest).

This may increase the means tested care fee payable by increasing the asset and income components when calculating the Means Tested Amount (MTA). This rule exists to avoid people manipulating the rules and artificially creating a granny flat right to reduce assessable assets.

The deprivation rules do not apply if a person is temporarily absent from the home for up to 12 months. If the temporary leave is due to loss or damage to the home, this period may be extended for up to two years. (Logan, 2017)

The Importance of a Legal Agreement

The granny flat arrangement allowed by Centrelink is an excellent opportunity to provide solutions for elderly parents looking for a stable home and family support in their retirement. (Logan, 2017)

A granny flat interest can be created even if nothing is in writing. However, it is very strongly recommended that a legal document is drawn up by a solicitor to have evidence and outline the terms of the arrangement. People usually go into these arrangements with the best of intentions, but it is very difficult to predict what the future holds. If you are transferring your property to your child, or spending a large sum of money to build a granny flat structure in their backyard, you need to consider what would happen if you had a falling out with your child. Then you need to consider what would happen if your child got into financial trouble and the house had to be sold. Perhaps in the future your child’s marriage might fall apart, resulting in a property settlement order that requires the property to be sold. All of these possibilities would leave you in a very undesirable situation and it may result in you being left out in the cold.

Unfortunately, it is impossible to eliminate all risks in these situations. Therefore, it’s important that you seek legal and financial advice so that you understand the risks and decide whether you want to take them on. If you decide to proceed, you should have a legal document drawn up, so that everyone goes into the arrangement knowing what the expectations are.

Centrelink recommend that you have a properly drafted legal agreement drawn up to give evidence of the granny flat interest. The legal agreement can cover what the parties intentions are if things go wrong, such as financial trouble, marriage break ups etc., to try and lessen the risks as much as possible.

To ensure the agreement falls under the granny flat rules the document should, at the very least, the agreement should:

  • confirm the client has security of tenure
  • state any responsibilities of the client – for example, liability for upkeep of the property or payment of rent
  • outline how the client will be compensated if the property owner cannot maintain the life interest

Other factors that should also be considered and included in the agreement include:

  • Who does what for whom (eg cooking, cleaning, washing etc)?
  • Who pays for what (electricity, phone etc)?
  • How much privacy will you have within the home?
  • How much independence will you have to lead your own life versus how tied down will you be by the family’s timetable?
  • How much time do you want to spend with grandchildren, and do you want to be involved in childcare?
  • What happens if your health deteriorates and your care needs change (eg you need to be placed in a nursing home or similar care facility)?

The creation of a legal agreement may have stamp duty and capital gains tax implications for the parties involved and therefore, it is important that professional legal and tax advice is sought.

Impact on Estate Planning

A client should review their estate plan when the granny flat right is established. The amount used to create the granny flat right may be a significant portion of the client’s estate. This amount no longer forms part of the client’s estate. The right only exists during their lifetime.

This means that upon the death of the client, any property or money handed over for the granny flat interest will not be distributed in accordance with their will.
It is therefore a good idea to make sure wills and enduring powers of attorney are updated, so assets will be fairly distributed among the children. (Logan, 2017) This way all family members are protected and everyone knows what is going on. Sometimes jealous siblings cause friction if they are kept in the dark. ​For these reasons, we often advise our clients that all affected family members should “sign off” on the granny flat agreement – not because they are direct parties to the agreement but because it is vital they acknowledge witnessing and understanding the arrangement which should be as transparent as possible to avoid disputes later on.

This article covers just some of the aspects that you will need to consider if you are thinking about a granny flat arrangement with family. The important thing to keep in mind is that the first step you should take is to speak to your lawyer and your financial planner to discuss the financial implications and legal risks and decide if it is the best arrangement for you.

Cowling, K. (2015, Novenber 26). How to give property to your kids and keep the age pension.
Logan, B. (2017, April 10). Centrelink and ‘granny flat’ interests.

The information provided on and made available through this website does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. I recommend that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.

Golden Age Advisory helps you manage the risks of moving to a Granny Flat Arrangement by

  • helping you understand the financial implications of your proposed granny flat arrangement
  • ensure you comply with the special rules that DVA and Centrelink have about granny flat interests
  • helping you refine the terms of your granny flat agreement to clearly cover the possibilities of changed circumstances
  • providing you with a comprehensive analysis of the options so that you can make informed choices

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