Granny Flat Agreements in Victoria: Legal, Tax and Elder Law Considerations

What a granny flat agreement is

A granny flat arrangement (sometimes called a granny flat agreement) is an arrangement under which the older person transfers money, property or other assets to a family member. In return, the older person receives a right to live in a specified home, together with related rights such as access to shared areas, contributions to outgoings and support arrangements.

A private family agreement can provide a fixed-term occupation right. However, a qualifying granny flat interest for Services Australia purposes and for the federal CGT exemption generally requires a lifetime right of occupation. A fixed-term right may still be enforceable as a matter of contract or equity, but it does not automatically qualify for the statutory Centrelink or CGT treatment.

The home may be owned by the family member, or it may be built or renovated with money contributed by the older person. The right of occupation does not have to be registered on title; typically it is not.

Centrelink treatment

Services Australia separately considers whether the amount transferred is reasonable and how the granny flat interest is treated under the assets test. In relevant cases, the reasonableness test determines whether any part of the transfer is treated as a gift or deprived asset.

The entry contribution also affects whether the person is treated as a homeowner. If it exceeds the applicable extra allowable amount, the person will generally be treated as a homeowner and the value of the granny flat interest will not be counted as an assessable asset. If it is equal to or below that amount, the person will generally be treated as a non-homeowner and the entry contribution may remain assessable. The outcome should be checked with Services Australia before assets are transferred.

Tax and CGT

From 1 July 2021, eligible CGT events arising from the creation, variation or termination of a qualifying granny flat arrangement are disregarded, provided the statutory eligibility requirements are met. In outline:

• the arrangement must be in a written agreement;
• it must give the individual the right to occupy the property for life;
• it must be entered into because of family or other personal ties; and
• the individual must have reached age pension age or have a disability.

The concession does not exempt unrelated CGT events, including a later sale of the property by the owner. Tax advice should be tailored to the parties' circumstances.

The written granny flat agreement

A written agreement is required for the federal CGT exemption and is strongly advisable for Centrelink purposes and for preventing disputes. Although Services Australia may accept an unwritten arrangement, proving its existence and terms can be considerably more difficult. Well-drafted granny flat agreements record:

• the parties, and the property involved;
• the consideration provided by the older person (money, property or both);
• the right of residence — the exact area, exclusive-occupation rights, shared access, and duration;
• contributions to outgoings — rates, utilities, insurance, maintenance;
• what happens if the older person needs to enter residential aged care;
• what happens if the family member wants to sell;
• what happens if the family member dies, separates or becomes bankrupt;
• dispute-resolution steps; and
• refund or exit arrangements.

Ownership structures and title

Granny flat arrangements are structured in several different ways, each with different consequences:

• Cash contribution. The older person contributes to the purchase price, extension or building of the property. Title remains with the family member. The older person has a contractual right of occupation.
• Transfer of the family home. The older person transfers their home to the family member. This is the highest-risk structure for the older person and requires the most careful advice.
• Proprietary or title-based protection. Some arrangements give the older person a life estate, lease or other proprietary interest capable of protection through the land-title system. Other arrangements create only contractual rights. The available protection, and any duty and tax consequences, depend on the structure selected.
• Joint ownership. The older person and the family member hold the property as tenants in common. Family law risk on the family member's separation is a particular concern here.

The choice of structure has significant Centrelink, CGT, stamp duty and estate consequences. It is not a "documentation" question — it is a design question that should be worked through before any contract is signed.

Elder-law risks and safeguards

Granny flat arrangements are a known area for suspected elder financial abuse. The older person often transfers most of their liquid wealth to a family member they trust and then depends on that family member for housing. If the relationship deteriorates, or if the family member's circumstances change, the older person can be badly exposed.

The essential safeguards are:

• independent legal advice for the older person, separately from the family member receiving the benefit, is strongly recommended;
• capacity considered and documented at the time the arrangement is entered;
• the arrangement documented in a written agreement that addresses exit;
• Wills and powers of attorney reviewed at the same time;
• consideration of family provision (TFM) exposure to other children; and
• a contingency plan for residential aged care, if the older person's needs change.

Where an existing arrangement is showing warning signs of misuse, see our guide to elder financial abuse in Victoria.

What happens if the older person needs residential care

Older people who enter granny flat arrangements sometimes later need residential aged care. The written agreement should address:

• whether the older person is entitled to a refund of some or all of the consideration paid;
• how any refund is calculated;
• timing of payment; and
• how the funds will be used (for example, to pay a Refundable Accommodation Deposit).

Where the older person still has capacity, they can decide whether to invoke the exit provisions. Where capacity has been lost, decisions typically fall to an attorney or an administrator — which is why a valid enduring power of attorney is so important.

Wills, TFM claims and equalisation

Granny flat arrangements often involve one child receiving a significant benefit compared with other children. This can complicate estate planning. Where the older person's Will divides the residue equally between children, the child who received the granny flat benefit will have received a substantial extra benefit. Where the Will is adjusted to compensate other children, family provision (TFM) claims can still be a concern. The estate plan and the granny flat arrangement should be considered together, not separately.

How we help

Our powers of attorney and elder law and wills and estate planning teams advise older Victorians and their families on granny flat arrangements — the structure, the documentation, the interaction with Wills and powers of attorney, and the safeguards that should be in place before any money changes hands. We routinely act for the older person independently of the family member benefiting from the arrangement.

Frequently Asked Questions