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As the holidays approach and families begin to gather, many families are likely to discuss the future housing and care needs for elderly or vulnerable family members. The impact of COVID-19 lockdowns and the sense of distance between family members has meant that many are looking at options that retain a sense of independent living for their elderly or vulnerable members, but which sees them nearby – receiving companionship and care.

making arrangements for the future

Some families make room for elderly and vulnerable relatives in their home, whilst some make extensions to their homes or build ‘granny flat’ accommodation on their property. The Australian Law Reform Commission (Commission) released a report in 2017 examining the prevalence of elder abuse in relation to these types of arrangements, where they involved elderly family members transferring some sort of consideration to their adult child (often title to property or proceeds from the sale of property, but also rent), in exchange for the promise of ongoing care, support and housing. The Commission found these arrangements tend not to be formalised in writing, leaving the elderly family members in the more vulnerable position in circumstances such as where the adult child pre-deceases the older person, relationship breakdowns occur between the adult child and their partner, or the adult child becomes bankrupt.

Perceived tax consequences were noted by the Commission as one of the major barriers to family members having formal occupancy arrangements in place. Capital gains tax (CGT) events could arise on entering into, varying or terminating these types of arrangements, depending on the circumstances.

To address this concern, the Commonwealth Parliament passed legislation earlier this year designed to encourage the formalisation of granny flat arrangements in a tax efficient manner, to support the stable and long-term housing arrangements of older people and people with disabilities, and to reduce the risk of financial abuse or exploitation.

granny flat arrangements at law

Under the new rules, from 1 July 2021 a CGT event does not happen upon entering into, varying or canceling a granny flat arrangement if the arrangement creates a granny flat interest – being an interest that an individual has under an arrangement that confers on that individual the right to occupy a dwelling for life – and each of the following five requirements are satisfied.

  1. The individual conferred with the right to occupy a dwelling for life has either reached pension age (under social security law) or has a disability for which they require assistance for most day-to-day activities for a period that is likely to continue for at least 12 months. Eligibility is tested at the time the granny flat arrangement is entered into or varied.
  2. An individual (not a company or trust) must own the dwelling where the granny flat interest is held, or is to be held, at the time the arrangement is entered into or varied, or agrees to acquire such a dwelling under the arrangement.
  3. Both the individual who will hold the granny flat interest and the individual who owns (or agrees to acquire) the relevant dwelling must be parties to the arrangement.
  4. The arrangement must be in writing, indicating an intention to be legally bound by the arrangement. While there is no requirement that the granny flat arrangement take a particular form or include any specific terms, basic matters such as the parties to the arrangement, the circumstances under which the arrangement could be varied or terminated and what happens upon termination or variation should be features of the agreement.
  5. Finally, the arrangement must not be of a commercial nature. For example, requiring the holder of the granny flat interest to pay rent at market rates suggests that the arrangement is of a commercial nature. However, where the holder of the granny flat interest pays a contribution to household expenditure, it is unlikely that the arrangement would be considered to be commercial in nature.

The legislation also makes it clear that the existence of a granny flat interest does not affect the application of the main residence exemption on a sale by the property owner in future – another problem with the prior application of the CGT law when granny flat arrangements were created.

example of the new provisions

Miles has reached the pension age and is therefore eligible for a granny flat interest. Miles sells his main residence CGT-free and – under a formal granny flat arrangement with his daughter, Alicia – provides funds to Alicia to construct a flat at the back of her main residence (which she owns) for Miles to live in for the remainder of his life.

 Under the old law, CGT event D1 (creating contractual or other rights) would have arisen from the creation of Miles’ right to occupy the flat on Alicia’s property. However, under the new law, no CGT event will happen. Alicia will not have a CGT liability in respect of the creation of the right and when she later sells her property, the existence of the granny flat arrangement will not prevent her from accessing the main residence CGT exemption on her future disposal of the property.

next steps

While there remains various non-tax variables for families to consider when weighing up the living arrangements of elderly or vulnerable family members, the improved taxation positions should make formalising any such arrangements a must moving forward.  Macpherson Kelley’s Taxation, Family Law and Estate teams are experienced and equipped to provide practical advice to assist families put in place compassionate and beneficial arrangements such as those described above, and would be pleased to discuss your family’s plans in the New Year.

stay up to date with our news & insights

‘granny flat arrangements’ now CGT-free

21 December 2021
kathleen jess

As the holidays approach and families begin to gather, many families are likely to discuss the future housing and care needs for elderly or vulnerable family members. The impact of COVID-19 lockdowns and the sense of distance between family members has meant that many are looking at options that retain a sense of independent living for their elderly or vulnerable members, but which sees them nearby – receiving companionship and care.

making arrangements for the future

Some families make room for elderly and vulnerable relatives in their home, whilst some make extensions to their homes or build ‘granny flat’ accommodation on their property. The Australian Law Reform Commission (Commission) released a report in 2017 examining the prevalence of elder abuse in relation to these types of arrangements, where they involved elderly family members transferring some sort of consideration to their adult child (often title to property or proceeds from the sale of property, but also rent), in exchange for the promise of ongoing care, support and housing. The Commission found these arrangements tend not to be formalised in writing, leaving the elderly family members in the more vulnerable position in circumstances such as where the adult child pre-deceases the older person, relationship breakdowns occur between the adult child and their partner, or the adult child becomes bankrupt.

Perceived tax consequences were noted by the Commission as one of the major barriers to family members having formal occupancy arrangements in place. Capital gains tax (CGT) events could arise on entering into, varying or terminating these types of arrangements, depending on the circumstances.

To address this concern, the Commonwealth Parliament passed legislation earlier this year designed to encourage the formalisation of granny flat arrangements in a tax efficient manner, to support the stable and long-term housing arrangements of older people and people with disabilities, and to reduce the risk of financial abuse or exploitation.

granny flat arrangements at law

Under the new rules, from 1 July 2021 a CGT event does not happen upon entering into, varying or canceling a granny flat arrangement if the arrangement creates a granny flat interest – being an interest that an individual has under an arrangement that confers on that individual the right to occupy a dwelling for life – and each of the following five requirements are satisfied.

  1. The individual conferred with the right to occupy a dwelling for life has either reached pension age (under social security law) or has a disability for which they require assistance for most day-to-day activities for a period that is likely to continue for at least 12 months. Eligibility is tested at the time the granny flat arrangement is entered into or varied.
  2. An individual (not a company or trust) must own the dwelling where the granny flat interest is held, or is to be held, at the time the arrangement is entered into or varied, or agrees to acquire such a dwelling under the arrangement.
  3. Both the individual who will hold the granny flat interest and the individual who owns (or agrees to acquire) the relevant dwelling must be parties to the arrangement.
  4. The arrangement must be in writing, indicating an intention to be legally bound by the arrangement. While there is no requirement that the granny flat arrangement take a particular form or include any specific terms, basic matters such as the parties to the arrangement, the circumstances under which the arrangement could be varied or terminated and what happens upon termination or variation should be features of the agreement.
  5. Finally, the arrangement must not be of a commercial nature. For example, requiring the holder of the granny flat interest to pay rent at market rates suggests that the arrangement is of a commercial nature. However, where the holder of the granny flat interest pays a contribution to household expenditure, it is unlikely that the arrangement would be considered to be commercial in nature.

The legislation also makes it clear that the existence of a granny flat interest does not affect the application of the main residence exemption on a sale by the property owner in future – another problem with the prior application of the CGT law when granny flat arrangements were created.

example of the new provisions

Miles has reached the pension age and is therefore eligible for a granny flat interest. Miles sells his main residence CGT-free and – under a formal granny flat arrangement with his daughter, Alicia – provides funds to Alicia to construct a flat at the back of her main residence (which she owns) for Miles to live in for the remainder of his life.

 Under the old law, CGT event D1 (creating contractual or other rights) would have arisen from the creation of Miles’ right to occupy the flat on Alicia’s property. However, under the new law, no CGT event will happen. Alicia will not have a CGT liability in respect of the creation of the right and when she later sells her property, the existence of the granny flat arrangement will not prevent her from accessing the main residence CGT exemption on her future disposal of the property.

next steps

While there remains various non-tax variables for families to consider when weighing up the living arrangements of elderly or vulnerable family members, the improved taxation positions should make formalising any such arrangements a must moving forward.  Macpherson Kelley’s Taxation, Family Law and Estate teams are experienced and equipped to provide practical advice to assist families put in place compassionate and beneficial arrangements such as those described above, and would be pleased to discuss your family’s plans in the New Year.