A granny flat agreement or interest is a good way to protect your interests, while creating a new home environment that suits the whole family.
What is a granny flat agreement?
A granny flat agreement or interest is a written agreement that gives somebody the right to occupy a property for life. The property that they have the written agreement to then becomes their principal home for life.
It’s generally used as a legal contract that provides secure long-term accommodation for an individual, usually an older person. Granny flat arrangements are becoming an increasingly popular alternative to an aged care facility.
It is also an effective way to formalise financial contributions that an older person might make to a home, such as selling their own home to help finance a family home for their child.
What type of property can be used for a granny flat agreement?
Any type of property can be used for a granny flat agreement. It can be a separate granny flat, or a room or area in a main home.
Eligibility for a granny flat agreement is more dependent on the individuals involved than the property.
What assets can you transfer + how much does a granny flat agreement cost?
Usually, a granny flat agreement involves transferring the title or ownership of their existing home to a family member, like an adult child. The agreement includes the lifelong right to remain at that same property or another property owned by the family member.
Alternatively, you can transfer a sum of money to your family member so that they can buy a new property, which will accommodate you, build a granny flat on the block, or renovate or modify their existing property so that it will also suit you.
A granny flat agreement doesn’t cost anything in itself. The cost comes from the charges around drafting the agreement, and are likely to include legal fees and the cost of independent financial advice.
We recommend consulting a financial planner with an understanding of Centrelink rules, as a granny flat interest can have implications for your pension.
What are the essential requirements for valid granny flat agreements?
It’s essential for granny flat agreements to be drafted as formal, legal agreements with independent legal and financial advice for all parties involved.
Both parties need to be clearly identified in the agreement. If you are the party with the granny flat interest, you must be of pension age, or alternatively require assistance with day-to-day living due to a disability.
How does Centrelink assess your granny flat interest?
As we mentioned above, a granny flat interest agreement can have implications for your pension, which is why it’s worth getting independent financial advice.
How you create your granny flat interest will determine whether Centrelink considers you to be a homeowner, or whether Centrelink considers the value of the granny flat interest when conducting your assets test to determine your pension eligibility.
Centrelink also needs to assess whether you paid more than the granny flat interest is worth. They do this by conducting a reasonableness test.
Do granny flat agreements trigger Capital Gains Tax?
One of the advantages of granny flat agreements is that, if constructed correctly, they can avoid Capital Gains Tax (CGT).
To avoid CGT, both parties must be individuals, rather than corporations or businesses. The person with the granny flat interest must have either reached pension age, or require assistance with day-to-day living, due to a disability or impairment.
They must also enter into a written and legally binding contract. There cannot be a commercial interest in the agreement.
The contract should include:
- who is involved in the granny flat interest
- any circumstances under which the agreement is expected to be varied or terminated
- what happens when someone terminates the agreement
What are common mistakes to avoid with granny flat agreements?
Common mistakes to avoid are not being clear in your agreement, or not writing things down.
It’s vital that you write down your granny flat agreement and make it formal and legally binding by seeking independent, professional advice for both parties. No matter how close your family are, a handshake won’t cut it.
You should also factor in estate planning and consider all possible scenarios, including break ups and bereavements.
Make sure to discuss day-to-day living responsibilities so that everybody involved is on the same page with how you plan to get along together.
Don’t forget to factor in any tax implications and make sure that you’ve assessed the impact that a change in living circumstances will have on any Centrelink payments.
What happens when granny flat agreements go wrong?
Unexpected life events or unrealised expectations are the main reasons that granny flat agreements go wrong.
Divorces or bereavements can change the status quo of a living situation and trigger an unexpected desire for one or both parties to want to end the granny flat interest agreement.
Alternatively, the reality of a shared living situation can sour relations when one party is disappointed.
That’s why it’s so important to draft your agreement clearly, and anticipate any factors that might complicate it. A well-drafted contract might have an early termination clause to protect both parties.
If things do start to go wrong, it’s important to seek legal advice immediately to protect all parties.
At Granny Flats WA, we have over 20 years experience helping people build the granny flats that suit individual family circumstances the best. Contact us now to request a quote or have a chat about whether a granny flat might be right for you.
