Q: My parents are considering building a home on our property but what are the implications for their Age Pension entitlement? And what happens to the ownership of their home on our property when they pass away, as I have two siblings who would expect to share in their estate. And should I charge them rent for the extra cost of water, electricity etc?

A: This is a tricky situation and you definitely need to get some specialist legal and tax advice. Often these arrangements involve what Centrelink call a ‘granny flat right’, which is where you pay or transfer assets in exchange for a right to live in someone else’s property. From a Centrelink point of view, in order to have a granny flat right the person paying or transferring assets can’t have any legal interest in the property they have purchased the right to live in.

These arrangements can obviously have significant implications for both parents and children. From the parent’s point of view, you need to think about the impact on their pension entitlement and potentially their eligibility for Rent Assistance (which will depend on the amount they pay for their granny flat right and also their age).

There are also estate planning implications, as you’ve pointed out, and in between those two things you need to think about what would happen if the property needed to be sold or the arrangement was to be wound up, and what would happen if one or both of your parents need aged care (either in the home or by moving into a residential aged care facility).

From the children’s point of view, you need to seek advice about the financial implications for you. Capital gains tax (CGT) on the creation of the granny flat arrangement can be a huge upfront cost. Similarly, if you’re charging some form of rent you need to think about the future CGT implications of that (this is because you will have turned at least part of your principal home into an income-producing property).

These arrangements can seem so simple on the surface but I can’t stress enough the need for specialist advice for everyone involved.

If you’ve got questions about retirement income or about downsizing in retirement, don’t miss our FREE, online masterclass at 1.00pm AEST on September 22 with veteran finance guru Noel Whittaker, downsizing expert and author Rachel Lane and Kate Melrose, an expert on land-lease communities at Ingenia Lifestyle. Click here to register to attend.