Do your homework on ‘granny flats’


Do your homework on granny flats

When we hear the term ‘granny flat’, we envision a self-contained unit attached to a private home. Often, this may be rented out or used by an elderly relative.

A ‘granny flat interest’ may be different than the ‘real estate’ description above. 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. 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. A granny flat right or interest only exists during the person’s lifetime and is not part of their estate.

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.

Let’s consider some examples:

  1. Doreen transfers $80,000 to her daughter, Lynne, for the right to live in her home. The value of the granny flat interest is prima facie $80,000.
  2. Max transfers $100,000 to his son, Tom, to pay for expenses to modify Tom’s home and build a stand-alone granny flat in exchange for a lifetime right to live there. The value of the granny flat interest is $100,000.
  3. Lucy pays $400,000 to her nephew and niece, Bryce and Wendy, to purchase a new home. She moves into this home with them with the right to permanent accommodation. The value of the granny flat interest will be $400,000.
  4. Travis transfers title of his home to his daughter, Katie, and receives a lifetime right to continue living in that home. Katie and her family may or may not move in with Travis. Katie will pay stamp duty on the transfer and may commence to be subject to capital gains tax if the property does not become her principal residence. The value of the granny flat interest will be the market value of the home of $500,000.

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.

Where the granny flat needs to be valued differently

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. 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)

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’.

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.

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 $200,000.

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 $9.97 per day), plus a potential income tested fee (up to $10,416 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.

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.

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.

Therefore, there needs to be provision for what happens if things turn sour or the parent needs money for a bond to go into an aged care facility.

The agreement should:

  • Confirm the client has security of tenure.
  • State any responsibilities of the client, such as 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.

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.

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. Therefore, it is a good idea to make sure wills and enduring powers of attorney are updated, so assets will be fairly distributed amongst the children.

Brooke Logan is Advice Technical Consultant at Unisuper. This article is general information and does not consider the circumstances of any individual.

Some of the details in this article are sourced from ‘Retirement and Aged Care Living 2016-2017’ (Thomson Reuters 2016).