Tax Exemption For ‘Granny Flat’ Arrangements
To protect older Australians, the Government has moved to formalise ‘granny flat arrangements’. They are providing an incentive to protect all parties in the arrangement.
Typically, granny flat arrangements occur when an older person transfers some sort of consideration to their adult child. This is in exchange for the promise of ongoing care, support and housing. In some circumstances, it’s a way for a parent to give their children access to their inheritance when it’s needed not at a later point when the person dies.
However, a 2017 Australian Law Reform Commission report highlighted the potential for elder abuse where these kinds of arrangements fall apart. If the relationship breaks down, or other unforeseen circumstances arise, the older person can be left homeless. A central problem is a lack of formality in these arrangements.
The tax system, in particular, the Capital Gains Tax (CGT) system, acts as a disincentive to formalising a granny flat arrangement.
Under current rules, a formal arrangement can trigger upfront tax for homeowners and reduce the children’s main residence exemption. An informal gift from the parent usually avoids these issues.
Recently released exposure draft legislation seeks to overcome the disincentive to formalising a granny flat arrangement by providing a CGT exemption.
This does not mean that every separate dwelling built out the back of a house will have a CGT exemption. The legal meaning of granny flat is derived from social security law. It describes an arrangement rather than a type of accommodation. It can arise whenever money or other consideration is given in exchange for a right to use accommodation for life.
The draft legislation provides that no CGT event will arise from a granny flat arrangement. This is where certain conditions are met including where the individual with the granny flat arrangement has:
- Reached pension age or has a disability, and
- That the arrangement is in writing and is not of a commercial nature.
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The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. You should always get individual expert advice.
