Granny Flats

GRANNY FLATS

Granny flats are generally considered to be created on the transfer of property, often from an elder family member to a younger family member in exchange for a promise to provide care and accommodation. Granny flats may include the following structures:

1. Transfer or purchase of property, or a gift of money by the elder to the younger family member for the elder’s lifetime right of residence in the younger’s home
2. Co-ownership between the elder and the younger family members
3. A loan of money by the elder to the younger family member for the elder’s lifetime right of residence in the younger’s home

Apart from granny flats, other accommodation options available for elders include retirement village accommodation. In considering accommodation options, preliminary discussions with family members are often beneficial concerning relevant issues including:

• Financial circumstances of the parties
• Transactional costs including fees, duties and taxes, and who pays these costs
• Ongoing expenses and living costs, and who pays these costs
• Pension entitlements
• Recoverability of contribution
• Effect on testamentary intentions

Apart from family discussions, independent legal advice should also be obtained as to the nature and consequences of any proposed transaction and a written agreement prepared and signed by the parties to the agreement. The agreement should set out details of the entitlements of the parties including entitlements on the happening of events such as marriage breakdown, bankruptcy, and relationship breakdown and declining health issues.

Fundamental to any legal transaction is full mental capacity of the parties to understand the nature and consequences of the proposed legal transaction.

GRANNY FLATS AND PENSION ENTITLEMENTS

Granny flat interests may be disregarded as a disposal of an asset and an existing pension entitlement may be retained if the requirements of the Social Security Act 1991 are satisfied. Unless additional assets are transferred, the transfer of money or assets by an elder for a granny flat interest of a lifetime right of residence or life interest in a private residence (the structure referred to in paragraph 1 above) will be disregarded for pension purposes. However, on transfer of additional assets, Centrelink applies the reasonableness test to the total assets transferred and assets exceeding the age related reasonableness test amount are treated as a gift or financial asset with deemed income and may reduce pension entitlements.

Neither co-ownership (referred to in paragraph 2 above) nor a loan (referred to in paragraph 3 above) satisfy the requirements of granny flat interests in the Social Security Act 1991. Whereas co-ownership retains the principal residence exemption for pension purposes, a loan is a financial asset for pension purposes with deemed income and may reduce pension entitlements.

CONCLUSION

Granny flat interests should only be created on the basis of informed decision making as to the nature and consequences of the transaction and comprehensively documented in writing.