A granny flat interest is an agreement for accommodation for life and can help transfer assets to your children without risking your pension payments.
A granny flat interest or right is where you pay for the right to live in a specific home for life. Often this may include signing over the title of a property you own to a family member, but can also be used as a way to pass assets to a child without triggering gifting issues.
The term granny flat is not a description of the type of property for Centrelink purposes, rather it is just an indication of the type of agreement you have reached.
To be eligible the property must be:
- all or part of a private residence
- your principal home
- not owned by you, your partner or a trust or company that you control
The granny flat right only lasts for your lifetime and is not part of your estate when you die.
You can have a granny flat interest in any kind of property. It doesn’t just apply to properties often referred to as granny flats.
Granny flat interests are usually family arrangements providing company and help close by for older people. They don’t have to be for social security purposes.
The granny flat interest may include the same building as the owner of the home or a separate, self-contained building on someone else’s land.
Creating a granny flat interest
It is best to seek financial and legal advice before you create a granny flat interest.
You create a granny flat interest when you exchange assets, money or both for a right to live in someone’s property for life.
For example, you could transfer:
- ownership of your home but keep a lifelong right to live there or in another private property
- assets, including money, in return for a lifelong right to live in a property.
Centrelink may accept that you have a granny flat interest even if it is not in writing, however it does recommend having a legal document in place to prove what you have agreed to and help prevent any problems occurring at a later stage.
The document should:
- confirm your right to live in the home for life
- say if you’ve agreed to pay rent or look after any upkeep of the property
- say how the owner will compensate you if they want you to give up your granny flat interest.
The government recently announced that it would provide a targeted capital gains tax (CGT) exemption for granny flat arrangements where there is a formal written agreement in place.
The tax implications are often a key impediment to families creating formal and legally enforceable granny flat arrangements.
How Centrelink assesses granny flat interests
How you create the granny flat interest will determine whether or not Centrelink considers you a homeowner.
The way the interest is created also determines whether the value of the interest is included in your assets test.
You will need to inform Centrelink of how much you transferred or paid to the owner for your granny flat interest and, depending on how much you paid, this will determine whether or not you are a homeowner, and on whether you are judged to have overpaid for what the granny flat interest is worth.
Centrelink won’t consider you to have paid more than the granny flat interest is worth if you’re:
- transferring the title of your home and keeping a lifetime right to live there or in another property
- paying to build a granny flat on someone else’s property
- paying to convert someone else’s home to suit your needs and getting a lifetime right to live there
- buying a property in someone else’s name and getting a lifetime right to live there.
Centrelink uses a reasonableness test to see if you’ve paid more than the interest is worth and also to work out if you have deprived yourself of assets.
Assessing the value of your granny flat interest
Non-homeowners have a higher assets test limit than homeowners. The difference between the two limits is the extra allowable amount.
Centrelink compares this to your entry contribution.
Your entry contribution may be the amount you paid for the granny flat interest. If Centrelink assessed you under the reasonableness test, it will be either the:
- reasonableness test value of the granny flat interest, if you paid more than your reasonableness test amount
- amount you paid for the granny flat interest, if you paid less than your reasonableness test amount.
If your entry contribution is more than the extra allowable amount, all of the following apply:
- Centrelink assesses you as a homeowner in the assets test
- Centrelink doesn’t include your entry contribution in the assets test
- you can’t get Rent Assistance, as you’re a homeowner.
If your entry contribution is equal to or less than the extra allowable amount, all of the following apply:
- Centrelink assesses you as a non-homeowner in the assets test
- Centrelink includes your entry contribution in the assets test
- you can get Rent Assistance, if you pay a high enough rent.
Leaving the property
If you leave the property within five years, Centrelink will review the granny flat interest.
If the reason for leaving could have been expected then the gifting rules will apply. However, if it was something unexpected then the gifting rules may not apply.
Unexpected reasons may include sudden illness, family relationship breakdown, elder abuse or property damage.
What if the property is sold?
The owner can’t take away your granny flat interest if this happens. They can do one of the following:
- sell it but make your right to live there a condition of sale
- transfer your granny flat interest to another property
- give money or assets to you in return for giving up your granny flat interest.
Do you have a granny flat interest? How does the situation work for you?
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