REVERSE GRANNY FLATS

With housing affordability going through the roof more Australians are turning to supported housing options one of which includes granny flats. The addition of a granny flat can have both Centrelink and Income Tax consequences.

The traditional granny flat is where the parent transfers their house to their children in return for a life interest.

The reverse granny flat is where the parents build a living area and allow the children to live there.

The Centrelink and Income Tax consequences are as follows:

Centrelink

If the parents pay for construction and maintain ownership and the granny flat is let to an immediate family member then the flat is considered part of the family home and exempt from the assets test. This can have benefits for the parent as they have used previously assessed assets (cash) to build a now exempt asset (part of family home). The reduction in assets may increase the pension. Centrelink assesses any income received under this arrangement as income from boarders and lodgers. Payments for board and lodging from a near relative that is living in the family home (granny flat) is exempt from the income test. If the near relative is partnered Centrelink accepts any payments under this arrangement to be from the near relative.

Although the pensioner has reduced their assets (cash for construction) this may be more than offset by the increase in value of the house, increase pension payments and payment for renting of the granny flat.

Income TAX

In the reverse granny flat arrangement, typically a life interest is not conferred and therefore no capital gains event occurs.

If the child pays a nominal amount to help cover expenses then the ATO will usually consider this to be a domestic arrangement and the amount not assessable to the parent. If the child paid a commercial rent then the tax situation would be different.

Capital Gains.

Creating a granny flat may result in capital gains being payable on the disposal of the property. The ATO concludes in Taxation Determination 1999/69 that the main residence exemption may be available to more than one unit of accommodation if they are used together as one residence or abode. If they are treated as separate dwellings then capital gains tax may apply to part of the dwelling.

It is advisable to seek competent professional advice before entering into any arrangement.