Granny flat arrangements and CGT
A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life. From 1 July 2021, capital gains tax (CGT) does not apply when a granny flat arrangement is created, varied or terminated.
When the CGT exemption applies
A granny flat arrangement is exempt from CGT if:
- the owner or owners of the property are individuals
- one or more eligible people have an eligible granny flat interest in the property
- the owners and the people with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature.
The exemption only applies to creating, changing or terminating a granny flat arrangement.
Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.
Click here to view example: eligibility of events for the CGT exemption
Granny flat interest
An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement.
A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner’s main residence or a separate property. It is not restricted to what is commonly referred to as a ‘granny flat’.
The interest may be in part or all of the property.
For more information on granny flat interest, visit the Services Australia website.
Granny flat arrangement
To be exempt from CGT, a granny flat arrangement must:
- be in writing
- indicate an intention that the parties are legally bound
- not be commercial in nature.
It should include:
- the parties involved in the arrangement, including the individual(s) with an ownership interest in the property
- the circumstances in which the arrangement can be varied or terminated
- what happens when the arrangement is varied or terminated.
A granny flat arrangement can be entered into with any party, including family or friends.
Varying or terminating an arrangement
A granny flat arrangement might need to be varied when something happens that was not included in the original arrangement.
The parties involved in the original arrangement can vary the existing arrangement, adding in new terms and conditions.
They can also terminate the existing arrangement and create a new one.
The following examples explain the tax consequences of the granny flat rules. For information on the social security consequences, visit the Services Australia website.
Click here to view example: creating and varying a granny flat arrangement.
For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:
- have reached pension age
- require assistance for day-to-day activities because of a disability.
Person with a disability
Eligibility to hold a granny flat interest is based on the disability at the time of entering into or varying the granny flat arrangement.
A person with a disability is eligible to hold a granny flat interest if they:
- need assistance to carry out most day-to-day activities because of their disability
- are likely to continue needing assistance because of their disability for at least 12 months after the arrangement or variation is made.
Generally, an individual who is eligible for the disability support pension would meet this requirement.
However, the person does not need to be eligible for the disability support pension to meet this requirement.
The person does not meet the eligibility requirements if they only need assistance due to injuries they expect to recover from within 12 months.
Types of arrangements
A granny flat arrangement typically happens between an older person and their adult child. However, the parties in a granny flat arrangement do not need to be related.
A formal arrangement makes it easier for the older person to establish, assert and enforce rights. These rights are agreed upon by all parties involved in the arrangement, including the owner of the property.
- reduces the risk of financial abuse or exploitation of older people
- provides benefits to the older person, like housing, care and support
- can also benefit the adult child with managing property and funds.
Click here to view example: creating, varying or terminating a granny flat arrangement
Arrangements involving the main residence
A person’s main residence (their home) is generally exempt from CGT.
The creation, variation or termination of a granny flat arrangement does not affect the main residence exemption. This is because the granny flat arrangement is a right to occupy the property, not a right to the property itself.
Click here to view example: mother transfers home ownership to daughter
If the granny flat arrangement is commercial in nature, it is not exempt from CGT.
The most obvious commercial arrangement is where the holder of a granny flat interest is required to make payments (such as rent) at a market rate.
However, if the person with a granny flat interest only contributes towards ongoing household costs (such as electricity and water), the arrangement is unlikely to be considered commercial. This is because the arrangement is a reimbursement of actual costs.
Click here to view example: arrangement not commercial in nature
Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.