Granny flat rules

Lyn would like to build her daughter a ‘granny flat’ on her property, but isn’t sure how this will affect her part Age Pension.

Q. Lyn

We are considering building a granny flat on our property, which would be for our daughter and grandchild. At the moment she lives far away where rent is cheap, but she would have less difficulty obtaining work if she lived in Sydney metro area. We would like to provide something decent for her but cannot afford to purchase anything in Sydney area, as well as that it would have an affect on our part Age Pensions due to gifting rules. Our concerns are: 

  • Will Centrelink view this as gifting? This unit would not belong to her, she would only be occupying it for a period of time.
  • Will Centrelink deem us to be earning income even if we don’t charge rent? This is our main concern as it might bump us up over the income limit, depending on how much they deem the rent to be.
  • Would Centrelink treat us more favourably if we added a two-bedroom addition to our property instead thereby increasing the value of our property (same as granny flat) but not actually getting any monetary return from it?
  • If we go via this last method, would we even have to inform Centrelink as our daughter would just be returning home and paying no rent?

A.     Provided by our no-nonsense planner, Maurice Patane

In your case, this should be viewed as a dual occupancy as opposed to a granny flat. You are intending to build on your existing land and on the same title as part of your principal home. If the dual occupancy is let to a near relative (your daughter), then it is part of your principal home and excluded as an asset for assets test purposes. 

With the above in mind, Centrelink should not view this as gifting as it will form part of your principal place of residence.

In addition, as your daughter is living in the home without a formal contribution arrangement, then there is no income to declare (deemed or otherwise). On the other hand, if rent is being charged, then it must be declared.

Your Centrelink position would be the same whether you add two bedrooms or a separate building on your existing home. You should advise Centrelink of any changes in your situation. In fact, your position should improve as you have most likely used personal funds that are currently being assessed to improve the value of an asset (your home) that is not assessable. 

As your daughter may only be there for a period of time, the additional building may provide you with the ability to obtain additional rent in the future. If this occurs, the second home would then be included as an asset and assessed under the asset test, and the rent would be assessed under the income test.

Maurice Patane has been a financial planner for over 25 years. His experience has shown him that many Australians are not living the lives they dream of or wish for, which is often due to poor financial decision-making. Maurice is dedicated to helping everyday Australians take control of their financial future, so that they no longer have to worry about money.

Maurice Patane
Access Financial Management AFSL 229760
Ph (03) 9500 9988
Email: [email protected]

Written by Maurice Patane