Granny flat arrangements: The good, the bad and the ugly

When many people hear the words ‘granny flat’ they instantly think of a small self-contained dwelling in a backyard. The mental picture is often of an oversized cubby house.

The reality of granny flats is quite different. Some of the newer granny flats have considered safety and include access for someone who requires support in the design, as well as being energy efficient and offering a broad range of floorplans and designs to better fit with the main home and location.

From a Centrelink point of view, a granny flat can be almost anything – room in your kid’s house, staying in the house you have always lived in or even buying a new house can all meet the definition of a granny flat. The key to meeting the criteria of a granny flat from a social security perspective is not about what form your housing takes, rather it is about your arrangement.

You see, to have a granny flat for Centrelink purposes you must not have legal ownership in the property. The fact that you don’t have legal ownership is something you need to think about carefully.

There are three common ways a granny flat arrangement is established:

• Parent/s transfer the title of their home to children in exchange for a granny flat right
• Parent/s sell their home and pay for a granny flat right in their children’s home
• Parent/s sell their home and pay for a new home in children’s name/s.

For pension purposes, granny flats are treated the same as most retirement villages. Centrelink will compare the amount you pay to the entry contribution limit (currently $210,500). If the amount you have paid is more than this, then you are classified as a homeowner for pension purposes. The amount you have paid is an exempt asset and you don’t qualify for rent assistance.

If the amount you pay is less than the threshold then the opposite is true – you are classified as a non-homeowner and the amount you have paid is included in your assets and you may be eligible for rent assistance.

There is no detriment in having your granny flat included in your pension assets because as a non-homeowner, your asset threshold is $210,500 higher. So if the amount you have paid is substantially less, then it enables you to have additional assets exempted and possibly claim rent assistance too. But you need to be careful if your total assets are going to be more than the threshold, as the rate at which the pension reduces is effectively a negative 7.8 per cent per annum which can be hard to make up for.

As a general rule, because granny flat arrangements are family agreements, the amount you pay for your granny flat right is considered to be the market price – after all, it can be difficult to place any other value on them. However, if you are a pensioner, under certain circumstances Centrelink can apply a reasonableness test to your granny flat arrangement. They will do this if:

• You transfer the title to your home and also transfer other assets
• Your purchase property in another person’s name and also transfer other assets
• You pay for the cost of construction and transfer other assets
• Centrelink have reason to believe that you are establishing a granny flat right to gain a social security advantage.

Many people assume that the reasonableness test won’t be reasonable at all and is something to be avoided. In reality, the reasonableness amount could work to your advantage – it’s a matter of understanding what works for you.

To calculate the reasonableness test you multiply the annual couple rate of age pension (which at the moment is $36,582) by your conversion factor. Your conversion factor is based on your, or your partner’s age – the test uses the age next birthday of whoever is youngest. For example, if you turn 78 on your next birthday but your partner will turn 68, then the conversion factor to use would be 18.98 giving a reasonableness test amount of $36,582 x 18.98 = $694,326

A full list of the reasonableness factors can be found here. If the amount you have paid is subject to the reasonableness test and exceeds the allowed amount then the excess would be considered a gift.

If you are thinking about a granny flat arrangement for someone who needs care and support, you should be aware that there can be a 5-year look back on granny flat arrangements for people who move into aged care. Essentially if the granny flat has been established within 5 years of the person entering care, the look back will assess whether at the time it was established their need for residential aged care could have been anticipated, if they determine that it could then the value of the granny flat can be subject to gifting rules.

A granny flat can seem like a great family solution – mum or dad (or both) living close by, sharing meals and perhaps helping out with babysitting the grandkids. But these arrangements are complex emotionally, legally and financially. After all, living with your family is very different to enjoying Sunday lunch or the occasional holiday.

If you do decide this is the best downsizing option for you, make sure you get really good legal and financial advice. The implications of these arrangements extend beyond your pension entitlements and eligibility for rent assistance to potentially significant tax liabilities for the children, the cost of your aged care and how much money will be left to your estate.