A granny flat can really work to a pensioner’s advantage … if you know the rules

Apr 12, 2019
A multi-generational home can have relationship AND financial benefits in the right circumstances. Source: Getty

There is a lot more to granny flats than being than a glorified garage in the backyard where an elderly relative came to live before moving to the nursing or funeral home.

With an array of functional and attractive designs, they’re increasingly being seen as part of an important aged care and emotional support matrix for Australians hoping to spend as long as possible living semi-independently.

But a granny flat can create complexities when trying to access the Age Pension, which is overseen by Centrelink and subject to some rigorous gifting rules. That said, although the testing systems for Centrelink and My Aged Care, the federal government’s portal for all aged care funding, are complex, if properly understood, they usually do not present insurmountable obstacles to setting up your dream shack in your favourite progeny’s backyard.

For starters, the granny flat doesn’t have to be a granny flat. The term loosely describes an arrangement where you acquire the right to live in a property for the rest of your life. It can be a separate building, an addition to an existing home or just the right to reside in a home. You can even buy a new home for your kids or transfer the title of your existing home to your kids, provided you have the right to reside there.

The arrangement must be documented and clearly establish that non-revokable right of residence for the rest of your life. There can be exit provisions but that would require some form of compensation to be paid to you if that happens. That becomes important if the arrangement breaks down through relationship issues or if the kids decide to move to another home and there’s no room for you. You’ll need money to make other arrangements.

And if the arrangement lasts less than five years, Centrelink will re-examine the whole deal.

Under the gifting or deprivation rules, you can give away as much as you like. It’s a common misunderstanding that somehow, the government restricts gifting. The issue is how Centrelink treat the gift. It’ll allow you to reduce your assets by $10,000 a year, with a maximum of $30,000 over a five-year period.

If you gave away $100,000 now, your Centrelink assets would be reduced by $10,000 immediately but the $90,000 would be included in the income and asset test calculations for five years, after which it drops off. In general terms, you normally won’t lose any pension, you just won’t gain any more and, of course, you lose the use of that asset.

Granny flat arrangements aren’t caught by this and in some respects, allow you to gift higher amounts than the $10,000 a year limit. Cash or assets are restricted by a ‘reasonableness test’. It’s a figure that limits your generosity with one eye on the purpose of the deprivation rules — stopping people from rorting the system.

The test allows you to spend a reasonable amount on building a granny flat or adding that extension to your progeny’s home where you plan to live until you die. The reasonableness test calculates a figure linked to your age at the time you make the move.

Regardless of whether someone is single or part of a couple, the test is a multiple of the full Age Pension and can allow you to contribute big sums to a granny flat on your relative’s property.

Here’s how it can work to a pensioner’s advantage. We’re looking at the example of a 74-year-old single female who doesn’t own a home but has $750,000 in cash and other assets and receives a small part-pension.

She strikes a deal with her son to hand over $500,000 to him, $300,000 of which will be spend to build and finish a swish granny flat in his backyard. If the $500,000 had been fully spent on the granny flat, the reasonableness test wouldn’t have applied but because not all of the money is spent on the flat, the test is applied to the full $500,000.

To work out how much is ‘reasonable’, we have to multiply the couple’s rate of Age Pension of $39,916.40 by 13.5, and we’d get $484,871.40.

The $484,81.40 reasonableness figure is less than the $500,000 handed over, and the difference of $15,128.60 comes into play. Of this, $10,000 would be taken off under the $10,000 gifting limit, leaving $5,128.60 to be counted under the gifting rules.

If the deal with her son left her with $150,000 in cash and $100,000 in other assets from her original balance of $750,000, she would go from a part-Age Pension of about $60 a fortnight to a full pension of $916.30.

Have you considered living in a granny flat? Or do you prefer to remain completely independent from your children?

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