Mention the term ‘granny flat’ and you might picture a cosy, self-contained cottage in the backyard; a place where you can spend your later years with the comfort of having family close by (but not too close!).
Or you may picture a granny flat as a complex legal and financial arrangement that has the potential to wreck your finances, reduce your Age Pension and drive a wedge between family members.
Whichever vision better fits your idea of a granny flat, you should be aware that the second is closer to how Centrelink will consider any granny flat-style arrangement where you give money or assets to a family member, in return for the right to live with them for life.
Under Australia’s social security law, what’s called a ‘granny flat interest’ is created when a person ‘pays’ a family member for a life interest, or in other words, the right to accommodation for life.
To fit this legal definition, you have to live with the family member, but it doesn’t have to be in that idyllic backyard cottage that you paid them to have built to your specifications.
Instead, a granny flat interest can mean transferring the title of your own home to a family member and remaining in residence there with them, or even building a new home for a family member, in which you’ll also live.
In short, you pay, either with assets or money or both, a family member to provide you with accommodation for as long as you live. You don’t own the residence you live in (for example, the granny flat built for you at your own cost), your family member does.
But Centrelink is wise to people who might want to transfer large sums of money to their adult children via such an arrangement, while continuing to claim the Age Pension – in effect, circumventing its strict gifting rules. So it applies what it calls a reasonableness test to check whether you ‘paid’ more for your granny flat interest than was reasonable.
The way your test result can impact your pension is complex and Centrelink rightly encourages anybody considering creating a granny flat interest to get financial and legal advice first – but many people don’t.
In fact, according to Brian Herd, a partner at CRH Law and one of Australia’s foremost experts on all aspects of elder law, many people don’t even have a written agreement with their family member before handing over their cash – often funded by the sale of the original family home.
“The trouble with these family arrangements is most of them remain undocumented,” Herd says. He suggests one of the key advantages of having a properly drafted agreement is that it will help protect you if the granny flat arrangement should come to an end.
“One of the tragic situations that can arise where it’s undocumented is where the relationship between the parent and the child breaks down,” he says.
Substantial sums – many hundreds of thousands of dollars – have already been transferred, and if you aren’t able to stay with your family member any longer but have sold your previous home, you’ll need to find the money to pay for alternative accommodation. Herd says many Australians in this situation end up moving into a residential aged care facility, which again requires a considerable amount of money.
“In order to finance that, they may have to try and get their money back from their daughter or their son,” Herd says.
Herd notes that a properly drafted agreement can also help avoid future conflict between your adult children, particularly if one child has received a cash injection from a granny flat arrangement and you haven’t adjusted your will to reflect the disparity in the amount of money you’ve effectively gifted.
“These are really difficult legal, financial, social and emotional issues that make it absolutely necessary for people to get advice on this kind of arrangement,” Herd cautions. “Sometimes I’ve seen situations where people get advice, and then decide not to do it, because it is so complex.”
Herd says another important issue for you and your adult children to consider is Centrelink’s requirement that accommodation for life means just that.
“If mum gives $300,000 to her daughter for a granny flat arrangement, she may live with her daughter for another 25 years, which may not be what was anticipated at the time,” he explains.
Thus, any granny flat arrangement should be accompanied by a serious talk about your expectations around care in your later years.
You may feel like you’re the only person even considering a granny flat, let alone contemplating these issues with your kids. After all, no one talks much about them these days, so you may get the impression that they’ve fallen out of favour.
The truth is, quite the opposite has occurred. Despite the potential pitfalls, Herd says granny flat arrangements are gaining in popularity, and are likely to continue doing so.
“When people get to a certain stage of dependency and frailty, where do they go?” he says. “They have the option of staying at home and getting home care, but that’s limited. Or they can move into a residential aged care facility, and who wants to do that?
“So, what’s left? The family. The reality is, it’s becoming a more attractive option against the other options and will increase exponentially, particularly because of the Royal Commission and the reputational damage being done to the aged care industry.”
Adding to that is the fact that a granny flat is often more affordable than buying into a retirement community, or indeed the increasingly expensive Aussie housing market. It also allows the granny flat owner to keep their assets, thus likely protecting their Age Pension entitlement (as long as the reasonableness test is passed), so it’s easy to see why Herd’s prediction may be accurate.
The Housing Industry Association (HIA) agrees with Herd. A HIA report in May 2019 confirmed that granny flats were growing in popularity and posited that their trajectory would continue upwards as the Australian population aged.
New South Wales is the most popular state for granny flat-builders, because its planning laws are the most friendly to this type of dwelling, with Queensland coming in second.
The HIA went a step further than Herd by suggesting that with younger generations struggling to get into the property market in some cities, as grandparents died, the granny flats they lived in would make useful dwellings for adult children.
The lesson here? Don’t enter into a granny flat arrangement for yourself or with your parents without careful thought, because that arrangement could last far longer than you think!
Things to know: The information in this publication is general information and factual only. It does not constitute any recommendation or advice. It is an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such. You should consider obtaining your own independent professional advice. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.