Guide to granny flats | Accurium

Guide to granny flats

There are a number of accommodation options for older people who require assistance and may not want to live by themselves. While residential aged care homes generally suit those with high care needs who can’t manage on their own, granny flats can be a suitable option for people looking to maintain some independence and have support and assistance from family and friends.

What is a granny flat interest?

A granny flat is often considered as a self-contained unit connected to a family home. While this is the real estate definition of a granny flat, the Centrelink definition of a ‘granny flat interest’ differs from this.

According to Centrelink, the term granny flat right, or granny flat interest describes an agreement for accommodation for life, not a description of the type of dwelling. A granny flat interest can include various types of living situations that help people to care for elderly family members.

Centrelink considers a granny flat interest as one where someone:

  • ‘pays’ for a life interest or life tenancy, and
  • the life interest or life tenancy is in a private residence, that will be the person’s principal home.

Centrelink also considers there to be two ways to have a lifetime right in a property:

  • Life tenancy – the right to live in the property
  • Life interest – the right to use the benefit from the property as you wish

For Centrelink purposes, it’s not possible for someone to have a granny flat interest in a property they own or part own. This is because they already have a right to live in their home because of their ownership.

The granny flat rules enable a person to transfer assets over the allowable gifting limits1 to another person in exchange for a right to accommodation for life in residential property.

How is a granny flat interest valued?

The value of a granny flat interest is the amount paid or transferred by someone if they only:

  • transfer the title of their home to a person and receive a life interest in that person’s home, or
  • pay for the construction of accommodation on another person’s property and receive a life tenancy in that unit, or
  • purchase a property in another person’s name in return for a life tenancy in that property.

Centrelink deprivation rules do not apply in these situations.

However where assets are transferred in addition to one of the situations above, the Social Security Act determines the granny flat interest to be valued at a different amount under the ’reasonableness test’ rules.

The reasonableness test

The reasonableness test uses ‘conversion factors’ to determine the amount a person of a certain age could gift to another for a life interest.

Reasonable value = ‘Combined annual partnered pension’ rate x Conversion factor where:

  • The ‘combined annual partnered pension’ is a standard rate – i.e. it is used irrespective of the person’s marital status or actual pension received.
    The current rate used is $34,819.20.
  • Conversion factors are based on a person’s age on their next birthday, as outlined in the table below.

Reasonableness test conversion factors2

Age next birthday Conversion factor
Age next birthday
Conversion factor
Age next birthday
Conversion factor
65  21.48
77
12.07
89 5.26
66  20.64 78
11.37
90 4.87
67 19.80  79
10.70 91 4.52
68
18.98  80
10.04 92 4.19
69
18.16  81

9.41

93 3.89
70
17.36
82
8.80 94 3.63
71
16.56
83
8.21 95 3.40
72
15.77
84
7.65 96 3.19
73
15.01
85
7.11 97 3.01
74
14.25
86
6.60 98 2.86
75
13.50
87
6.13 99 2.72
76
12.78
88
5.68 100+ 2.60

Note that for a couple, the youngest partner’s age on their next birthday is used.

The value of the granny flat interest is then the greater of the cost for the home and the reasonableness test amount.

Importantly, in cases where the amount paid is above the value of the granny flat interest, the excess amount is treated as a gift by Centrelink.

Example 1

Margaret (75) transfers the title of her house worth $1,200,000 to her son in exchange for a life interest in the house. She does not transfer any additional assets. The reasonableness test is not triggered because no additional assets were transferred. The value of the granny flat interest is $1,200,000 and no amount is treated as a gift.

Example 2

Joe (77) pays $300,000 for the construction of a self-contained unit on his daughter’s property and pays $200,000 cash on top in exchange for a life tenancy in the unit. Since assets in addition to the home have been transferred, the reasonableness test is triggered.

The reasonable value is $395,894 ($34,819.20 x 11.37). The value of the granny flat interest is therefore $395,894 because this is greater than the $300,000 paid for construction of the unit. As a result the amount paid above the granny flat value, $104,106 ($500,000 – $395,894), is treated as a gift. This may be reduced by up to $10,000 if the gifting limits have not already been met.

Example 3

Aphrodite (71) purchases a home in her daughter’s name for $700,000 and pays $100,000 in cash for a life interest in that property. Since assets in addition to the home have been transferred, the reasonableness test amount is triggered.

The reasonable value is $549,0992 ($34,819.20 x 15.77). The value of the granny flat is $700,000 as the amount paid for the property is greater than the reasonableness value. As a result, $100,000 ($800,000 - $700,000) is treated as a gift. This may be reduced by up to $10,000 if the gifting limits have not yet been used.

Example 4

Martin (80) pays $100,000 to convert his son’s property to suit his needs and pays $150,000 in cash for a life tenancy in the property.

The reasonable value is $327,649 ($34,819.20 x 9.41), which will be the value of the granny flat because it is more than the $100,000 Martin paid for the fit out of the property. No amount is treated as a deprived asset by Centrelink because the $250,000 Martin paid in total is less than the value of the granny flat.

Home ownership status

To determine whether a granny flat interest recipient is a homeowner, you will need to determine the Entry Contribution (EC) and the Extra Allowable Amount (EAA).

The EC is equal to the value of the granny flat interest.

The EAA is the difference between the pension homeowners’ and non-homeowners’ assets value limits when they commence the granny flat interest. Currently this is $203,0003 ($456,750 - $253,750).

The following table summarises the rules for determining the homeowner status of a granny flat interest recipient.

Granny flat homeowner status

  EC ≤ EAA EC > EAA
Homeownership status
Non-homeowner
Homeowner
Entry contribution
Assessed as an asset
Exempt

Example 5

Morgan pays $120,000 for the construction of a self-contained unit on his son’s property and receives a life interest in the property. $120,000 is less than the EAA of $203,000, therefore Morgan is a non-homeowner. $120,000 will count as an asset (not deemed).

Example 6

Theresa’s daughter buys a home for $600,000 of which Theresa contributes $250,000 in exchange for a life tenancy in the home. Theresa is a homeowner and the $250,000 she paid is exempt from Age Pension assessment.

Vacating the granny flat interest

If a person stops living in a granny flat interest less than five years after the time the interest was created, the deprivation rules may apply if the reason they left could have been anticipated. As there is no clear definition of what constitutes an unforeseeable event, Centrelink will assess each case individually.

If a person is in reasonable health when the granny flat interest is created, deprivation may not apply if the person has to move within five years.

However if a move to residential aged care is imminent at the time the granny flat interest is created, then deprivation rules may apply when the person leaves the granny flat to move into an aged care facility soon after. If deprivation applies, it will continue until the end of the five year period from the day the granny flat interest was first created.

Considerations

There are some other important factors to consider before setting up granny flat arrangements. These include:

  • Consider drawing up a formal legal agreement to protect the recipient from any breakdown in the family relationship and to be clear on the details of the arrangement.
    For example:
    • Will the arrangement be a life interest or life tenancy?
    • What happens if the owner of the home decides to sell? Will the life interest continue in a new home or will the recipient be compensated financially?
    • Which party is responsible for the upkeep of the property?
    • What provisions will there be if the recipient moves into aged care?
  • There could be capital gains tax implications for the provider of the granny flat (see TR 2006/14). As such it is recommended that specialist tax advice is sought before the life interest is created.
  • There may also be social security implications for the provider of the granny flat because the lump sum they receive may be assessed.
  • Granny flat interests may assist the recipient with Age Pension assessment, however capital has been passed to the provider of the granny flat. Therefore consider how much capital the recipient might need to last them through their retirement.
  • Be aware of estate planning issues where assets are transferred to only certain children. The client may need to ensure that assets and compensation for the granny flat are fairly distributed between beneficiaries.
  • Centrelink recommend that a legal document is drawn up. If this is not done, then your client will need to speak with Centrelink to confirm that a granny flat interest has been established. 

Case study

In July 2013 Ursula’s husband passed away. As a result she decided to establish a granny flat interest with her daughter soon after. Ursula sold her $700,000 home and paid her daughter $100,000 for the fit out of her home in return for a life tenancy in the home. Although Ursula was in good health, her main reason for moving in with her daughter was for company. Ursula did not pay an amount on top of the purchase, therefore the reasonableness test did not apply and the value of the granny flat was $100,000. At the time, the EAA was $142,5004, which is more than $100,000, so she is a non-homeowner for Age Pension purposes.

Recently Ursula (now 86) had a major fall and requires a level of care which her daughter is not able to provide. As the home can no longer accommodate her mobility needs, they decide a move to a nearby residential aged care facility will provide her with more suitable accommodation and care, given her increased needs.

Ursula needs $100 per week on top of any care fees to meet her other pharmaceutical and personal expenses. She has $5,000 in personal assets and $250,000 in the bank after paying a refundable accommodation deposit (RAD) of $350,000. Ursula’s current cash flow position is as follows:

Current scenario

Cash flow Per annum
Investment income5
$7,500
Age Pension3
$21,594
Less personal expenses
($5,200)
Less basic daily fee6
($17,911)
Less means-tested care fee6
($7,337)
Net cash flow 
($1,354)

The assessment of the granny flat interest upon moving into aged care should be discussed with a Financial Information Service (FIS) officer. They will be able to confirm homeowner status and the value of the granny flat interest, if any, that will be assessed.

In this example Ursula is assessed as a non-homeowner with no amount assessed as an asset. Centrelink has not applied deprivation in this case because they have deemed that Ursula’s move into care could not be foreseen in 2013 when the granny flat interest was established.

Ursula and her daughter see a financial planner to discuss her options. They determine that Ursula’s first priority is to be able to afford her aged care fees, but she would also like to increase her Age Pension, if possible. 

To help improve Ursula’s cash flow position and address her concerns around drawing down capital from her savings, her financial planner recommends an investment of $200,000 in Challenger CarePlus.

Proposed scenario

Cash flow Per annum
Investment income5
$1,500
CarePlus income7 $5,741
Age Pension3
$23,096
Less personal expenses
($5,200)
Less basic daily fee6
($17,911)
Less means-tested care fee6
($6,063)
Net cash flow
$1,163

In taking this recommendation, Ursula will be able to achieve the following:

  • a positive cash flow which allows her to cover aged care fees
    • this is an increase in cash flow of $2,517 p.a.
  • increase her Age Pension to the full amount $23,096 p.a. (an increase of $1,502 p.a.)
  • reduce her means-tested care fee by $1,274 p.a.

In addition to the cash flow benefits, Ursula will be able to ensure that 100% of the amount she invests in CarePlus is paid to her nominated beneficiaries or her estate when she passes away, providing her with certainty and control over her estate planning.

For a detailed explanation of residential aged care fees see the Challenger Tech aged care guide.


1$10,000 per financial year and $30,000 over any rolling five year financial year period.
2Based on Centrelink rates as at 1 July 2017.
3Based on Centrelink thresholds as at 1 July 2017.
4Based on Centrelink thresholds as at 1 July 2013.
5Bank account and term deposit interest rates are 3% p.a.
6Based on aged care rates and thresholds as at 1 July 2017.
7CarePlus rates as at 28 June 2017 for $200,000 investment, monthly payments, no adviser service fees.

The information contained in this update is current as at 11 July 2017 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger CarePlus (Annuity(ies)). It is intended solely for licensed financial advisers and this update must not be passed on to retail clients. The examples shown are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. This information is not intended to be financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should, therefore, consider its appropriateness having regard to these matters and the information in the product disclosure statement (PDS) for the applicable Annuity before deciding whether to acquire or continue to hold an Annuity. A copy of the PDS is available at www.challenger.com.au or by contacting our Adviser Services Team on 1800 621 009. This document may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Neither Challenger nor its related bodies corporate nor any of their employees receive any specific remuneration for any advice provided in respect of the Annuity. Some or all of Challenger group companies and their directors may benefit from fees and other benefits received by another group company. Any taxation, Centrelink and/or Department of Veterans’ Affairs illustrations are based on current law at the time of writing which may change at a future date. Neither Challenger, nor any of its officers or employees, is a registered tax (financial) adviser under the Tax Agent Service Act and it is not licensed or authorised to provide tax or social security advice. Before acting, we strongly recommend that prospective investors obtain financial product advice, as well as taxation and applicable social security advice from a professional and registered tax agent who can take into account the investor’s individual circumstances.