Robert Simon is Technical Strategy Manager at AMP. Prior to that he was Senior Technical Services Adviser at ipac Securities - a position he held from June 2004 to June 2015.
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.
This article is for educational purposes only and is no longer available for CPD hours.
A granny flat interest may be quite different than the ‘real estate’ description above. When used 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)
Example 1 – Lucy
Let’s now assume Lucy, age 75, bought the $400,000 home for Bryce and Wendy but also gave them $100,000 in cash – a total of $500,000 – in return for the life interest in the house.
Reasonableness test value = $34,382.40 x 12.78 = $439,407
The value of the granny flat interest is therefore $439,407, calculated under the reasonableness test because this is greater than the $400,000 cost of the new home.
$60,593 (i.e. $500,000 less $439,407) is a gift and subject to deprivation. The deprived asset is counted as an assessable asset for five years and subject to deeming under the income test.
Example 2 – Clayton
Clayton, age 85, sells his home for $500,000 and moves in to his daughter Abi’s home, paying her $190,000 for a right to accommodation for life. The value of the granny flat interest is the amount paid, unless this is greater than the reasonableness test. Any amount greater than the reasonableness test amount will be considered a gift.
Reasonableness test value = $34,382.40 x 6.60 = $226,923
As the amount paid of $190,000 is less than the reasonableness test value of $226,923, the value of the granny flat interest is $190,000.
The reasonableness test may also be applied where:
a person vacates their granny flat right within five years of its creation. This is discussed later in the article; or
a person uses the granny flat rules to gain a social security advantage. In this case, the value under the reasonableness test will be applied.
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.
Table 1 below summarises the implication of the entry contribution for Centrelink homeowner status.
Asset test treatment entry contribution
Less than or equal to extra allowable amount
May be payable
More than extra allowable amount
Note: Home owner status is assessed separately for illness separated couples.
Example 1 – Lucy
The value of Lucy’s entry contribution is $439,407. This is more than the ‘extra allowable amount’ of $200,000. Therefore, Lucy is a homeowner and not eligible for Rent Assistance.
Example 2 – Clayton
The value of Clayton’s entry contribution is $190,000. This is less than the ‘extra allowable amount’ of $200,000. Therefore, Clayton is a non-homeowner and may be eligible for Rent Assistance.
Example 3 – Travis
Travis transferred title of his home to his daughter, Katie. The value of the home ($500,000) exceeds the extra allowable amount of $200,000 and Travis remains a homeowner, with the value of his home an exempt asset.
Having more than one granny flat right
A client can create more than one granny flat right. Provided the total amount paid does not exceed the reasonable amount (and the amounts paid are proportionate to the time to be spent at each place), deprivation will not apply.
Ernie, age 81, intends to split his time between living with his daughter, Willow, in Brisbane for nine months of the year and with his son, Tyler, in Melbourne for the remaining three months.
He pays Willow $180,000 and Tyler $60,000 for a lifetime right to live with each of them.
Reasonableness test value = $34,382.40 x 8.80 = $302,565
The total amount paid of $240,000 is less than the reasonableness test, so there is no deprivation.
If Ernie has instead paid his two children a total of $340,000, this would exceed the reasonable amount. In this case, as he will spend most of his time with Willow, her home will be considered his principal home and the amount paid for the granny flat interest with Tyler will automatically be considered a gift and subject to deprivation rules.
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; and
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.
Justine, aged 80, undertook an assessment by ACAT to determine whether she may be entitled to any services to help her stay at home. She received ACAT approval, which indicated she was eligible for residential aged care.
However, Justine chose not to move into aged care and instead sold her home and paid $250,000 to her son, Adrian, to construct a granny flat at his home, where she would live. She was assessed as a home owner and received Age Pension of approximately $11,000 per annum.
Her health rapidly deteriorated and after one year, it was decided she needed to move into aged care.
At the time of ceasing the granny flat arrangement, Justine had $400,000 in cash and shares.
As Justine will now be a non-homeowner, her Age Pension is estimated to be $18,800 per annum. She is assessed to pay a means tested care fee of $12.48 in addition to the basic daily care fee of $48.44.
However, Centrelink will review Justine’s assessment, as she moved out of the granny flat within the first five years. As she was approved for aged care at the time of commencement, Centrelink may decide the $250,000 is a deprived asset.
Inclusion of the deprived assets would increase Justine’s means tested fee by $8.97 per day to $21.45 and reduce her Age Pension to an estimated $7,200 per annum.
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 is 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 – for example, liability for upkeep of the property or payment of rent; and
outline how the client will be compensated if the property owner cannot maintain the life interest.
The creation of a legal agreement may have capital gains tax implications for the parties involved and therefore, it is important that tax advice is sought.
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.
This means that 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.
It is therefore a good idea to make sure wills and enduring powers of attorney are updated, so assets will be fairly distributed amongst the children.
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