Granny Flats – As Easy as Apple Pie or a Recipe for Disaster?

It is not uncommon for parents to live close by their children as they age. Usually family members make an informal agreement on where the parent will live and what contribution will be made to the family home. However, family relationships often break down and the consequences can be time consuming, stressful and expensive.

In Australia, where the agreement is informal, the court will often find that a parent that contributes funds towards a home, has an equitable interest in the home proportionate to the contribution.

It goes without saying that you should consider documenting the agreement.

What is a granny flat agreement?

A Granny Flat Agreement will outline the respective financial contributions, usually by the parent, in return for the right to live in the home for life.

The federal government has encouraged granny flat contributions by granting concessions to parents that make granny flat contributions. If the contribution meets the test, the parent will not have the contribution added back, as a gift, into the parent’s assets for the purpose of determining Centrelink pensions.

‘Granny flat interest’ (in the Social Security Act 1991) means:

(a)  the residence that is the person’s principal home is a private residence; and

(b)  the person has acquired for valuable consideration or has retained

(i)  a right to accommodation for life in the residence;

(ii)  a life interest in the residence.

Centrelink and Granny Flat Agreement

Under the granny flat rules, Centrelink does not automatically deem a parent’s transfer of property or payment to their child to be a gift. Instead, Centrelink states that a granny flat interest is created when on “exchange assets, money or both for a right to live in someone’s property for life.”

Centrelink assesses whether contributions are reasonable: is the amount transferred or paid to the owner of the property equivalent to the value of the interest. If a parent pays over value, Centrelink will determine that they have deprived themselves of an asset.

Granny Flats and Family Provision

Families should document the GFA not just to ensure that the Centrelink assets test is satisfied, but to also ensure certainty of estate distribution between competing beneficiaries when the parent dies.

In a recent article we looked at family provision claims, and how a dependant can make a claim on estate if the deceased did not make adequate provision for the dependant, often a widow or child.

Where a parent has contributed to a child’s house, another child, that did not so benefit, might claim that the parent made inadequate provision for the deprived child. The documentation of the contribution to the house, and the reasons for it, and how the estate is to be distributed having regard to that contribution, can help avoid family dissension and even litigation following the parent’s death.

The lesson is, get good financial, taxation and legal advice about family financial matters. You might want to do it on the cheap, but longer term, you might find it an expensive option.

Source: Written by Peter McNamara, Partner at Clark McNamara Lawyers, Sydney, October 2019.