MONEY | Important things to consider before building a granny flat

There are three main areas where problems may occur when you go down the granny flat route. Picture: Shutterstock.
There are three main areas where problems may occur when you go down the granny flat route. Picture: Shutterstock.

"Granny flat" is a term you will hear more often as the population ages and senior Australians increasingly choose to age with family instead of in an aged care facility. After all, they have had a lot of bad publicity recently.

Granny flat is such a simple term that you may not give it a second thought. You probably think that a granny flat is a self-contained dwelling you make in your home for your older relations, so all you have to worry about is building regulations, but that is a dangerous delusion.

There are three main areas where problems may occur. They involve family emotions, Centrelink issues and capital gains tax issues.

I would need at least four pages of this newspaper to give you all the details, so today I will just briefly alert you to some of the complexities involved.

Proof of the problems is the fact that in last week's budget the government specifically promised to adjust some of the capital gains tax implications of creating a granny flat arrangement.

While the idea of younger family members looking after their elders is certainly not new, the complexities of such arrangements are often overlooked.

What will happen when the children wish to go on holidays? Will the parent contribute to household expenses such as food, utilities and insurance?

If the living arrangement continues for many years, what would happen if the adult children caring for the parent divorce, become ill or pass away?

What if the parent's care needs change and they cannot be safely looked after in the home? Who should pay for the cost of care?

Obvious answers include seeking assistance through care packages, respite stays or even permanent residential aged care, but often these options have never been discussed and contradict the parent's expectations.

Next is Centrelink. The amount paid for a granny flat determines homeowner or non-homeowner status for Centrelink's pension assets test and whether or not the older person can qualify for rent assistance.

If the home is transferred for the granny flat, pension entitlement would remain unchanged, as the asset position would remain the same. If the proceeds from the sale of the home and assets outside the home are used to purchase the granny flat, pension entitlement would likely increase.

However, there are limits around the amount that may be paid, and once the limits are exceeded the amount above the limit will be treated as a gift to the children.

Another trap is that if you establish a granny flat arrangement within five years of moving into aged care and it was "reasonably foreseeable" that the older person would need to move into care, any sum paid for the granny flat may be considered a gift, and treated as a deprived asset.

Last, and certainly not least, is the issue of capital gains tax. The family home is exempt from CGT, but if part of it is sold as a granny flat, it could be treated as a CGT event, with capital gains tax payable by the homeowner who received the payment. Alternatively, the part of the property that has become a granny flat could become a separate asset for tax purposes, with CGT payable on eventual disposal. Last week's budget attempted to ease the burden created, but the devil is in the detail.

Unfortunately, this is one of the most complex areas of financial planning, and there are no simple answers.

A good starting point is the book Downsizing made Simple by Rachel Lane and myself, but having read that you will still need to take good advice. Granny flats are an area where failing to plan is tantamount to planning to fail.

Noel answers your money questions

Question:

I bought an apartment in 1987 for $106,000. It was for my elderly mother to live in. She was a pensioner and paid me no rent - I paid all the strata fees and rates. She lived there until she died in January 2016. I then rented it out.

I am now looking to sell it for $260,000. Will I be eligible for any concession of capital gains tax given that it was the primary residence of a family member and not income earning for that period?

Answer:

The property was purchased before August 1991 so you cannot use legislation that takes effect from that date which allows you to add expenses such as rates land tax and insurance to the base cost to reduce your capital gains tax.

Because the property has always been in your name, the fact that somebody else lived in it does not affect the capital gains tax position. Therefore the cost base will be the purchase price plus all acquisition costs and any capital improvements you made to the property since you bought it.

You will get the benefit of the 50 per cent discount as its been owned for more than a year, so if we assume the base cost was $120,000 and the net sale price will be $240,000, your gross gain will be around $120,000 which will become $60,000 after discount. This will be added to your taxable income in the year the contract for sale is signed.

Depending on your age, and financial situation, it may be possible to reduce the tax on that gain by making a tax deductible contribution to superannuation.

Question:

How many years prior to getting the age pension are taken into account by Centrelink. We sold our residence in 2017, and in 2019 bought and sold another property in the same year. We bought our current residence this year and intend to apply for the age pension next year. Will any of these transactions be subject to deeming?

Answer:

Centrelink looks back five years for assets that were disposed of in that time. This is to prevent people gifting away assets prior to applying for the pension.

This does not seem to apply in your case because all you have been doing is buying and reselling residences. Your home will be an exempt asset, and any other financial assets that you now have will be subject to deeming. Just keep in mind that deeming only affects people who are income tested.

Question:

My father and I own, as joint tenants, the property he lived in before recently moving into an aged care home. I took out a loan, with the property as collateral, to pay the aged care bond.

The property will soon be rented out, and I have received conflicting advice on whether the loan interest will be tax deductible.

Can the interest be offset against any rental income, and how will this affect the Centrelink family tax benefits we receive? Can you please provide some general advice on this topic.

Answer:

Interest on a loan for an aged care bond will not be deductible, as the bond is not producing interest. The bond paid will be an assessable asset for the aged care means test and the rent will also be assessed for aged care and pension. In two years the father's share of the asset will also become assessable for pension purposes.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au