We often think of granny flats as either a separate dwelling from the main house or a separate area like a self contained flat within the main house.
However, a granny flat doesn’t need to be a separate building to qualify as Granny Flat under the Social Security legislation.
What is a Granny Flat
When used in the context of social security/Centrelink, 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.
There is no need for the granny flat arrangement to be with a family member. So the person can set this arrangement up with a friend if that is what works best for them.
The crucial part is the exchange for the right to live in the accommodation for their lifetime. If a person transfers their home to another person but doesn’t get the right to live in it for their lifetime, this is simply considered a gift and gifting rules apply.
All of the following are considered Granny Flats by Centrelink
1. Carol transfers $90,000 to her daughter, Marcia, for the right to live in her home. The value of the granny flat interest is prima facie $90,000.
2. Tom transfers $150,000 to his son, Ferris, to pay for expenses to modify Ferris’ 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 $150,000.
3. Jessie pays $400,000 to his nephews, Bo and Luke, to purchase a new home. He moves into this home with them with the right to permanent accommodation. The value of the granny flat interest will be $400,000.
4. Henry transfers title of his home to his daughter, Jane, and receives a lifetime right to continue living in that home. Jane and her family may or may not move in with Henry. Jane 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.
The value of the Granny Flat
Generally the value of the money paid is the value of the granny flat. But there are limits as to how much is allowed for Centrelink purposes. Centrelink will apply the “Reasonableness Test”. This is a mathematical formula which is set down in the legislation. For further assistance in determining if your granny flat falls within this test please contact us, phone 07 3018 0587.
Does Centrelink consider a Homeowner or Not?
As you know the answer to this has wide ranging consequences on how much and what your are eligible to receive from Centrelink.
The general rule is that if the allowable amount (after applying the reasonableness test) is less than $200,000, then the person is a non homeowner and the amount paid for the granny flat right is an assessable asset under the assets test. They may also be eligible for rental assistance, but only if rent is actually paid.
If the allowable amount is over $200,000 they will be considered a homeowner and the amount paid up to the reasonableness limit will be an exempt asset under the assets test. They will not be eligible to receive any rental assistance.
In our examples above, Carol and Tom will be non homeowners and Jessie and Henry will be considered homeowners.
What happens when you move into Age Care?
Provided you have been in the granny flat arrangement for longer than 5 years, you will be considered a non homeowner at the time your granny flat interest ceases, ie when you move into the age care facility and the value of the granny flat interest will be an exempt asset. This is irrespective of whether or not you are considered to be a home or non homeowner for Centrelink pension purposes before the move. Confusing I know!
If you have been in the granny flat arrangement for less than five years, things become a little more complicated.
If it can be shown that it was likely you would of needed to move into care within that the 5 year time frame, the granny flat interest will be counted and you will be treated as a homeowner under the age care rules. An example of “likelihood” is where before moving into the granny flat the person had an ACAT assessment which assessed them as needing care, but they decided they weren’t ready to go into care just yet. But 2 years down the track their health deteriorates to a level where they need to move into care. Under this example they will be considered a homeowner and the granny flat will be assessed as an asset under the age care rules.
Estate Planning Issues
Once you transfer the house or cash to another person to setup the granny flat interest that asset/cash is no longer yours and hence will not form part of your estate when you die.
Therefore, you should make sure your will takes account of this pre death “gift” to ensure all your beneficiaries are treated fairly as per your wishes.
It is strongly advised that you get a legal agreement draw up with the aid of a solicitor to cover all aspects of the granny flat interest. Including but limited too:
It should make provision for your security of tenure
What happens if you wish to move out
What happens if the other party want you to move out
What happens if the other party can no longer guarantee you the life interest in the property.
As with many aspects of the Centrelink rules, the ones around granny flats can be complicated and at times seemingly contradictive. If you are looking to set up one of these arrangements with your family or a friend you should seek your own advice. We are able to assist you in this area.
This advice is general in nature and doesn't take into account your personal circumstances. If you need advice in making these decisions please contact us for assistance, email us by clicking here or phone us on (07) 3018 0587.