What to Consider Before Moving into the Granny Flat

By 4 October 2019Family Law
What To Consider Before Moving Into The Granny Flat

There are many reasons elderly Australians live with their grown children in a ‘granny flat’ situation. It might make financial sense to do so, they might want to be close to and care for grandchildren, or there could be health and aged care reasons for staying so close to adult children.

Whatever the reason, seniors need to understand what their rights and obligations are if they maintain a granny flat as part of their child’s residence. In particular, the potential effects of the arrangement on the parents pension entitlements and the possible consequences if the parent and child later have a dispute which ends the arrangement need to be addressed.

Because they can start out as an informal arrangement between family members, these situations are often not properly documented in a granny flat agreement. The best way to protect everyone involved is to formulate a granny flat agreement before the arrangement begins. A legal professional with expertise in matters relating to elderly Australians can prove of vital assistance in this situation by creating a legally binding agreement that protects everybodies rights.

What needs to be included in a granny flat agreement?

In order for an agreement to be made, there needs to be a ‘granny flat interest’. This will generally be created when the elderly parent (or parents) exchange something of value for the right of occupancy (also called a ‘life interest’) in the private home of a family member. It should be noted that the so-called granny flat need not be a separate residence from the main home – a designated room or area within the home for the parent’s exclusive accommodation will suffice.

In some cases, the parent will pay for the granny flat interest by the gifting of assets (such as their home, in which they and the adult child’s family are now all living) or the payment of money to their child in exchange for a life interest in a home owned by the child. The other criteria for a granny flat interest is that the parent doesn’t own the home in which they reside under the arrangement with the child.

To summarise, a granny flat interest can be made by:

  • Transferring the title of the house to their child;
  • providing the funds to build accommodation on the child’s property;
  • purchasing a house and then registering it in another person’s name;
  • paying a ‘reasonable’ amount of money to a relative.

Besides confirming the security of the parent’s tenure, a granny flat agreement should address a number of other issues which could arise, such as a falling out between parent and child. The main ones to cover include:

  • Whether the parent/s are responsible for any maintenance of the property, or payment of rent.
  • Who does what for whom (cooking, cleaning, washing, etc.)?
  • Who pays for what (electricity, phone, etc.)?
  • How much privacy will the parent have within the home?
  • How much involvement with any grandchildren is desired or expected, and is regular childcare part of the arrangement?
  • What will happen to the arrangement should the parent/s’ health deteriorate and care needs change (e.g. they need to go into a nursing home or similar care facility)? They may need their money paid back in order to pay for the place in the care facility, and this can often cause disagreement between family members.
  • Are there other siblings in the family and what does the granny flat arrangement mean for their inheritance?
  • Under what circumstances can the assets involved be sold?
  • What happens if the child (and homeowner) passes away?
  • What is the proposed compensation to the parent if the agreement does not work out?

What is the likely effect of an agreement on a parent’s pension?

The transfer of property or funds would normally be deemed a gift, and therefore possibly breach the gifting and deprivation rules within the Social Security Act 1991 (Cth). Centrelink has special rules in relation to granny flat arrangements and provided these are followed, the agreement should not affect the parent’s pension.

There are exceptions which can affect the amount of parent’s pension. Centrelink looks at the value of the asset transferred to see if the parent paid a ‘reasonable amount’. If they consider that the parent has transferred more than the value of the granny flat right, they will determine that the parent has been deprived of an asset which can affect their pension amount.

This can occur if there is a transfer of the home and the transfer of additional assets (such as heirlooms, cash, shares, etc.), there is a payment made for construction and fit-out of premises and the transfer of additional assets, or the person is using the granny flat rules to gain a social security advantage.

A parent will not breach the deprivation rules if the amount paid for the granny flat interest is either:

  • A transfer of title of their home;
  • A payment for the construction and fit-out of premises;
  • a property purchased in another person’s name.

Working through this process can be complicated and the advice of an experienced legal professional like our  Sis a prudent course of action.

What about tax implications?

Generally a principal place of residence is exempt from taxation implications such as Capital Gains Tax (CGT) but certain granny flat arrangements may incur CGT as indicated in Australian Taxation Office ruling no 2006/14. This can occur where a parent pays a certain sum of money to a child in exchange for the right to live in the latter’s home, or to construct a separate granny flat there, but the issue is complex and requires the expertise of an experienced lawyer and/or financial adviser to determine your liabilities, if any, before you make an agreement.

The effect of an agreement on a will

A parent needs to be aware that once property or money is given to a child in exchange for the granny flat interest, these assets are no longer part of the parent’s estate and, therefore, will not be distributed in accordance with their will. This can create problems where there are other siblings who expect their share of the parent’s estate once they die but can’t access it due to the granny flat agreement. For this reason it’s a sensible move for the parent to update their will so that it reflects the terms of the agreement.

The importance of advice

As is clear, making a legally binding granny flat agreement is a valid exercise where elderly parents wish to live in a property owned by an adult child. The agreement can protect the interests of all those involved, and pre-empt any later developments such as sickness or dispute which can (and have) seen family members end up in acrimonious court battles trying to recover money from each other. The services of lawyers with expert knowledge of these issues can save you time, money and a lot of stress.

Whether parent or child in the arrangement, Harris Lieberman Wodonga & Albury family Solicitors has wide experience in advising both when it comes to granny flat agreements. Call our office on (02) 6051 5100 today to arrange a consultation about how we can help you form an agreement that works for everyone.