Granny Flat Arrangements

Last amended: 22 December 2010

Definition of a granny flat

A life interest or right to accommodation for life is a granny flat interest if:

• the person provides valuable consideration for a life interest or right to accommodation for life; and
• the life interest or right to accommodation for life is in a private residence that is to be the person's principal home.

Valuable consideration for a life interest may include transferring the title of the person's principal home to a family member in exchange for a right to accommodation for life. It may also include paying for a unit to be built at the rear of a family member's property. This contribution is considered the entry contribution for a granny flat interest. A granny flat interest may be in accommodation which is quite different from the real estate definition of a granny flat (a self contained flat in someone's house).

Granny flat interests are usually family arrangements to provide assistance for a pensioner. These arrangements are seldom covered by any contract or agreement, which is formalised in writing.

Certainty of granny flat right or interest

The absence of any contract or agreement formalised in writing can make it difficult to determine whether the pensioner does in fact have security of tenure in relation to their granny flat interest which will give them a right to accommodation for life. In cases where doubt exists, written documentation, for example, a letter signed by the family, may provide certainty that a granny flat interest has been created.

Assessment method for granny flat – transfer of title

The assessment method to apply where a pensioner transfers title of his or her principal home, together with additional assets, as a consideration for retaining a granny flat interest in the property, is as follows:

• The value of the granny flat interest will be the total value of the assets transferred - up to the amount calculated as being reasonable.    
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  Reasonableness Test

  Section 9.2.6

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• Where the value of assets transferred exceeds that which is calculated as being reasonable, any excess is assessed under the deprivation provisions.    
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  Deprivation Provisions

  Chapter 9.6

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Assessment method for granny flat – sale of principal home

For a person who sells their principal home and applies some or all of the funds to acquire a life interest in a granny flat, the following two separate assessments must be completed:

• determine if the person is a homeowner by calculating the [glossary:Extra Allowable Amount:] [glossary:(:][glossary:E:] — [glossary:A:] — [glossary:A:][glossary:);:]    
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  Extra Allowable Amount

  9.2.5/Special Residence - Basic Assessment Rules

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• apply the reasonableness test.    
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  Reasonableness Test

  Section 9.2.6

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Incomplete transfer of property title

A person who retains full, or partial, title to their principal home does NOT have a granny flat interest. They have the right to continue to live in the property because of their ownership. For example, if a person retains the title to their principal home and moves into a small unit attached to the house, while family members live in the main part of the house, they have not acquired the right to live in the property in return for valuable consideration. As a result, they do not satisfy the granny flat test.

If a person retains the title to their former principal home, and moves into another property on a permanent basis, then they have not acquired a granny flat interest in their new home. The former principal home must therefore be included in the pension assessment as an assessable asset. If the person rents out their former principal home, then the rental income, less any expenses, is also assessable.

Multiple granny flat rights

Where a person sells a former home, and transfers the proceeds to a number of near relatives with the intention of living with each on a rotation basis, the value of the property transferred is compared with the amount assessed under the reasonableness test.

Application of reasonableness test

To ascertain whether or not the amount contributed for the rights to a granny flat can be considered reasonable, a reasonableness test must be applied.    

Relevance of reasonable amount

The amount of the contribution to a granny flat that is considered to be reasonable for a person is the amount to be treated as an entry contribution to that granny flat. This amount is then assessed according to the special residence assessment rules. Any amount of the contribution that exceeds the reasonable amount is assessed according to the deprivation provisions.    

Vacation of granny flat

When a granny flat is vacated within five years, it must be determined if the deprivation provisions should apply.