Centrelink and granny flat interests [CPD QUIZ]

01 November 2019

A review of some of the common areas where issues often arise with granny flat interests.

As Australians age, it is becoming increasingly common for older clients to enter into private arrangements to live with their family. This type of arrangement can be mutually beneficial, with grandparents assisting their busy children with household tasks and looking after grandchildren, whilst also helping defer entry to residential aged care for as long as possible.

The rising costs of residential property in Australia in recent times has also led to a greater desire for older Australians to assist their children or grandchildren enter the property market, by transferring assets or entering into co-ownership arrangements. Despite these benefits, it is important that families considering these arrangements seek advice from appropriately qualified professionals.

One such arrangement that can potentially provide a Centrelink-friendly solution to the above goals is a ‘granny flat interest’.

A granny flat interest can encompass different living arrangements and is not just limited to the physical real estate version of a granny flat that most people are accustomed to.

Financial planners can assist predominately in the Centrelink space, however, it is important to be aware of the potential tax and legal issues, so that clients can be referred to appropriate tax and legal professionals.

In this article, we will cover off on some common areas where issues often arise.

Note: This article does not consider the Department of Veterans’ Affairs (DVA) implications of granny flat arrangements. Whilst the DVA rules are similar to those applied by Centrelink, there are some slight differences that are outside the scope of this article.

What is not a granny flat interest?

When a Centrelink income support recipient or their partner are the legal owner (or part legal owner) of property, they do not have a granny flat interest. They have the right to live in the property because of their ownership interest. For example, a person who owns a principal home jointly with their child does not have a granny flat interest, as they have a legal ownership in part of the home.

For Centrelink purposes, they will be considered a homeowner and the value of their ownership interest will be exempt under the assets test, regardless of the value of this ownership interest.

Example 1
Gary, aged 80, sells his $400,000 home and pools this money with another $800,000 from his daughter, Michelle, to buy a large home valued at $1,200,000. The title is structured as tenants in common, with Gary owning a one-third share. Gary and Michelle have privately agreed that Gary will always be able to live in this property unless sold or Gary moves into residential care.

As Gary is a part legal owner of the property that he lives in, this is not a granny flat interest and Gary remains a homeowner, with his $400,000 share of the home being exempt under the usual Centrelink homeowner rules.

What is a granny flat interest?

The Centrelink granny flat rules allow people to transfer assets to another person in exchange for a right of occupancy for life in a residential property, without potentially being subject to the usual deprivation rules.

A granny flat interest encompasses much more than just a self-contained flat in someone’s house. It can include any life interest or right to accommodation for life in a private residence in which the individual does not have any legal ownership.

Although Centrelink may accept that a person has a granny flat interest even if it’s not in writing, it is recommended that a legal document be drawn up by a solicitor to evidence the arrangement and protect the parties involved.

How is a granny flat interest created?

For Centrelink purposes, granny flat interests are created when a person enters into any of the following arrangements:

  1. They transfer the title of a home they live in to someone else and retain a lifetime right to live in that home or in another home.
  2. They pay for the construction and/or fit out of a home on another person’s property and retain a right to occupancy for life.
  3. They provide some or all of the purchase price of a property registered in another person’s name and retain a right to occupancy for life.

In the above situations, deprivation will usually not apply unless the home transferred in ‘point 1’ was not fully exempt from the assets test (see point 4 below). And usually, the value of the granny flat interest for the purpose of calculating the entry contribution, is the value of the home transferred, construction costs paid or purchase price of the property.

There are some other circumstances where Centrelink will assess the granny flat interest against a ‘reasonableness test’ amount. This can apply in situations where an income support recipient:

  1. Transfers the title of their home, or purchases a property in another person’s name, and transfers additional cash/assets.
  2. Pays for the construction of a dwelling and transfers additional cash/assets.
  3. Transfers cash and/or assets to another person for the right to occupy an existing property for life.
  4. Transfers the title of a home they live in, which is not fully exempt (e.g. is on more than two hectares and does not meet the extended land use test), to someone else and retains a lifetime right to live in that home or in another home.
  5. Uses the granny flat rules to gain a social security advantage.

The reasonableness test is used by Centrelink for two reasons. Firstly, to determine whether any gifting has taken place, and secondly, in some cases it may be used to determine the value of the granny flat interest for the purpose of homeownership status. This is discussed in more detail in the entry contribution section of this article.

Centrelink will require details and verification of the interest. For example, documents verifying the transfer of title of the property, copy of a formal agreement or details of the person’s contributions, such as a copy of the building contract.

We suggest obtaining Centrelink’s assessment of individual granny flat interests before implementing the arrangement.

Reasonableness test

When the reasonableness test applies, Centrelink applies the following formula to determine a reasonable value for the granny flat interest:

Combined partnered rate of annual pension   x   Conversion factor

The reasonableness test factors are available in the Guide to Social Security Law. These factors are broadly based on life expectancy; the older the person, the lower the amount available under the reasonableness test. When the calculation involves a couple, the age of the younger spouse is used to determine the conversion factor.

For the purposes of the formula, the combined partnered rate of annual pension, including supplements, is used. For the period 20 March 2019 to 19 September 2019, this rate is $36,301.20.

Importantly, the combined partnered rate of annual pension is used, even if the person is single.

Example 2
Gary, from example 1, decides not to enter into the co-ownership arrangement and instead, gives his daughter $400,000 in exchange for a right to occupy a room in her property for life. Gary’s reasonableness test amount is $341,594.29 ($36,301.20 x 9.41, which is the relevant factor based on his next birthday).

As a result, Gary will have a deprived asset of $48,405.71, which will be assessed by Centrelink/DVA as a financial asset for five years. That is, $400,000 less $341,594.29 less allowable gifting limit of $10,000 (assuming no other gifts have been made).

Entry contribution

The value of the granny flat interest is called the entry contribution (EC) and determines the home ownership status of the person.

Centrelink compare the EC against the extra allowable amount (EAA). The EAA is the difference between the non-homeowner and homeowner assets test thresholds at the time the entry contribution is paid.

The extra allowable amount for the 2019-20 financial year is $210,500 (see Table 1).

Table 1: Centrelink treatment of entry contribution for granny flats

Entry contribution Centrelink treatment
Equal to or less than $210,500 Assessed as non-homeowner under the assets test.

–      EC counts as an asset (it does not count under the income test).

–      May be eligible for rent assistance.

More than $210,500 Assessed as a homeowner under the assets test.

–      EC is not counted under the asset or income tests.

–      No entitlement to rent assistance.


As discussed earlier, in situations where a fully exempt home is transferred, a property is purchased in another person’s name, or an income support recipient pays the costs of constructing a dwelling on another person’s property and no other cash or assets are transferred, the EC will be the value of the property transferred/purchased or the construction costs.

Example 3
Gwendoline, age 86, transfers her fully exempt home, valued at $1 million, to her daughter, Alyona, in exchange for a right to occupy for life.

The EC is $1 million, meaning Gwendoline remains a homeowner. As no other cash or assets have been gifted, and the property was fully exempt in Gwendoline’s name, the reasonableness test does not apply, and no gifting/deprivation has occurred.

When cash and/or assets other than a home are used to pay for a right to occupy a dwelling, or additional cash/assets are transferred over and above the purchase/construction costs, determining the EC becomes a more complicated exercise. However, a detailed discussion of various permutations is beyond the scope of this article.

Vacating the granny flat

Centrelink will review a granny flat interest if the individual stops living in the home within five years of the interest being created. If the reason for leaving the home could have been anticipated at the time the interest was created, the deprivation rules will apply. That is, deprivation is to be assessed from the date they stopped living in the home to the fifth anniversary of the creation of the granny flat interest.

This is particularly important with respect to future entry into residential aged care. If the reason for vacating the granny flat interest was foreseeable and the vacation is within five years of the creation of the interest, deprivation rules may apply.

The client will not have access to the associated capital (because they used it to pay for the granny flat), yet a deprived amount is considered an asset and deemed (until the fifth anniversary of the creation of the interest) when calculating the means tested amount (MTA) for permanent residential aged care purposes.

The MTA is used to determine whether the person is a low means resident and to calculate their means tested care fee (MTCF). Inclusion of a deprived amount could prevent access to a supported (concessional) bed and result in the person being required to pay the advertised refundable accommodation deposit/daily accommodation contribution and a MTCF, despite the fact they may have limited available assets/income.

The Department of Human Services indicates that the deprivation rules would not apply where the reason for vacating the granny flat is unforeseen. This could include, but is not limited to:

  • sudden onset of illness;
  • family relationship breakdown;
  • elder abuse; or
  • a natural disaster or damage to the property that leaves the property uninhabitable.

Subsequent entry into residential aged care

The care requirements of a person who has established a granny flat interest may increase over time, resulting in the subsequent need to enter residential aged care.

Consideration will need to be given as to how a granny flat interest will impact residential aged care fees. Current advice from Centrelink indicates that the treatment depends on whether the granny flat interest ends when the person enters care.

If the interest does end (and no deprivation occurs), no value will be counted for residential aged care means testing purposes. Depending on the client’s other assets, this may mean that the person is eligible to be a low means resident and either pay no accommodation payment or an accommodation contribution. However, given there are only limited places for such residents, the choice of facilities may be restricted due to this status.


There are various costs that may be incurred when establishing a granny flat interest. These may include capital gains tax (CGT), land tax, stamp duty and legal fees for the drafting of agreements and transfer of property title.

Where the property is transferred to another party and that property had been used to produce income at some stage during ownership (e.g. rented out or used partly as a place of business), there may be CGT consequences, notwithstanding that the property was the person’s main residence at the time of transfer.

Further, Taxation Ruling TR 2006/14 discusses the possible CGT implications of granting a lifetime right to reside in a property.

Estate planning

The client’s overall estate planning wishes should also be revisited when establishing such an arrangement, given that one party will generally benefit from the amount/asset given to them to establish the granny flat arrangement. This may need to be addressed in the client’s will using estate equalisation methods.

Further, by creating a granny flat interest, the person will generally lose control of the asset (i.e. the home transferred or funds used for construction of the granny flat). Remember, the legal title of the dwelling will not be in the client’s name – they only have a lifetime right to reside in the dwelling.

Other considerations

Apart from the above considerations, other matters that should be considered before establishing a granny flat interest include:

  • Who will be responsible for the costs associated with the upkeep of the property?
  • What will happen when a family member can no longer provide the required care?
  • What happens if the family member wishes to go on holidays? How will care be provided in their absence?
  • What happens if the family member wants to sell the property?
  • Are the family aware of their options if care needs increase? For example, Commonwealth Home Support Programme (CHSP) and/or a home care package.

Jason Hurst, Technical Service Manager, AMP.




To answer the following questions, click here.

1. Centrelink will only assess an arrangement as a ‘granny flat interest’ if a separate dwelling is built.

  1. True.
  2. False.

2. In which of the following circumstances would Centrelink apply the reasonableness test?

  1. Don transfers his fully exempt home worth $500,000 to his daughter in exchange for a lifetime right to live in the home with his daughter.
  2. Billy purchases a home worth $800,000 in the name of his nephew in exchange for a lifetime right to live in the property with his nephew.
  3. Basil pays $210,000 to construct a separate dwelling at the back of his son’s house in exchange for a lifetime right to live in the constructed dwelling.
  4. Colin gives his son $500,000 in cash in exchange for a lifetime right to live in his son’s existing property.

3. Which of the following statements is incorrect?

  1. The entry contribution of Tom’s granny flat interest created in August 2019 is $250,000. He will be considered a homeowner and the EC will be assessed as an asset.
  2. The entry contribution of Lisa’s granny flat created in September 2019 is $150,000. She will be considered a non-homeowner and the EC will be assessed as an asset.
  3. In July 2019, Denise paid her son $300,000 to construct a dwelling on his land in exchange for a lifetime right to live in the dwelling. Denise’s EC is $300,000, she is assessed as a homeowner and the EC is exempt from the assets test.
  4. In August 2019, Barry provided the funds to purchase a property for $800,000 in his son’s name in exchange for a lifetime right to live in the property. No deprivation applies and Barry will be a homeowner.

4. Basil, aged 74, transfers his $1 million home to his son in exchange for a right to reside in the property. Which of the following statements is correct?

  1. Centrelink will calculate a reasonableness test amount based on Basil’s age to see if any part of the $1 million will be captured as a gift.
  2. The reasonableness test will not apply, and no deprivation has taken place.
  3. This will always be seen as a gift, due to the fact that Basil has transferred ownership of his home.
  4. Basil will be classed as a non-homeowner by Centrelink.

5. Which of the following statements is incorrect?

  1. By creating a granny flat interest, a person will lose control (i.e. legal title) of the asset.
  2. Creating a granny flay interest will not have any impact on a person’s subsequent entry into residential aged care.
  3. CGT may be payable when a granny flat interest is created.
  4. None of the above.