Aged Accommodation Choices – Granny Flats

Generally speaking, a granny flat is considered to be a self-contained unit attached to a private home but Centrelink uses the term ‘granny flat right’ to assess living situations where money or assets have been transferred in exchange for a right to a lifetime accommodation.

Granny flat rights are usually informal family arrangements where a person transfers money, assets or the title of their home to a family member (or other person) and in exchange, receives either the right to accommodation for life or a lifetime interest in private accommodation owned by someone else. The person does not have any legal ownership of the property that they live in.

Establishing granny flats

A granny flat right can be created in the following ways:

  1. Person A transfers or provides funds to Person B in exchange for the right to live in an existing home owned by Person B.
  2. Person A transfers or provides funds to Person B to pay for expenses to modify Person B’s home or to build a stand-alone granny flat to accommodate Person A in exchange for a lifetime right to live there.
  3. Person A pays Person B to purchase a new home and Person A also moves into this home with the right to permanent accommodation.
  4. Person A transfers title of their home to Person B and receives a lifetime right to continue living in that home (Person B and their family may or may not also move in with Person A).

Normally, a transfer of money and/or assets would be assessed by Centrelink or DVA under gifting and deprivation rules but special rules apply where a legitimate granny flat right has been established. Special rules also apply to determine whether the client is a homeowner or non-homeowner for assets test purposes because it is not as straightforward as looking at the ownership of the home.

Asset test assessment

The amount paid by a person for a granny flat right is important when determining the impact of granny flats on Centrelink or DVA entitlements and to determine whether the person continues to be assessed as a homeowner or not.

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’. If Person A transfers more than the amount spent by Person B, or Person B does not spend any money to provide the accommodation, the reasonableness test is applied to the amount transferred. This determines whether a gift will be assessed under deprivation rules.

If the reasonableness test is applied and it is decided that the amount paid is greater than the reasonable amount, the excess is treated as a gift and deprivation rules apply. The reasonableness test uses a formula to determine what is considered a ‘reasonable’ amount to create a granny flat right. The formula is based on:

  • The person’s age next birthday (or age of youngest member of a couple).
  • The annual age pension payable to a couple at the time the granny flat right is created. Note that the age pension rate for a couple applies regardless of whether the person is single or a member of a couple.
  • An age-related conversion factor.

An example

Michelle is moving in with her son and his family. Her son has enough room in his home and does not have to pay for any modifications to accommodate his mother.

In exchange for permanent accommodation, Michelle pays her son $230,000. As this is more than his expenses (which were nil) the $230,000 is measured against the reasonableness test to determine if gifting rules apply.

Michelle will be 85 next birthday so her age-related factor is 7.11 and the maximum age pension for a couple is $37,013.60 per annum. Michelle can reasonably transfer up to $37,013.60 x 7.11 = $263,167 without deprivation applying.

Therefore, gifting rules and deprivation do not apply to the $230,000 transferred. If however, she had given her son $300,000, the excess of $36,833 would be assessed under deprivation rules.

Homeowner status

Once deprivation has been determined, any amount paid that is not considered to be a deprived asset is used to determine if the client is a homeowner or not. This amount is called the entry contribution.

The entry contribution is measured against the extra allowable amount. This is effectively the difference between the homeowner asset test threshold and the non-homeowner threshold at the time of setting up the arrangement. For a granny flat set up between 1 July 2020 to 30 June 2021 the extra allowable amount is $214,500

If the amount of entry contribution paid is less than or equal to the extra allowable amount, the person is considered a non-homeowner with the entry contribution amount included as an assessable asset. Alternatively, if the entry contribution paid is more than the extra allowable amount, the person is considered a homeowner and the entry contribution paid is exempt from asset-testing.

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.

Importance of legal agreements

A granny flat interest can be created even if nothing is in writing. However, it is recommended that a legal document be drawn up by a solicitor to have evidence and outline the terms of the arrangement. This can help to prevent problems in the future if one or both party’s personal circumstances change. No matter how close a family may be, a falling out or disagreement can occur, leaving the child wanting the parent out and the parent seeking return of their money.

A solicitor can help to identify relevant issues. Some issues to include in an agreement are:

  • The quality and type of accommodation to be provided
  • Whether the accommodation must be provided in a particular property or can be provided in any property
  • Obligations to pay rent, expenses and/or maintenance of the property
  • How the granny flat right can be dissolved if the arrangement no longer suits the parties.

The person should also 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 person’s estate. Some beneficiaries may consider that their entitlement has been eroded and the arrangement is inequitable.