What the ATO means by a granny flat arrangement
A written agreement under which a person holds the right to occupy a property for life. As with Centrelink, the words describe a right, not a building: the interest can be held in any type of property that is a dwelling, including the owner’s main residence or a separate property, and in part or all of it.
The conditions, as a checklist
The ATO sets three conditions for the CGT exemption:
- every owner of the property is an individual
- at least one person holds what the ATO calls an “eligible granny flat interest” in it
- the owners and the people with the interest enter into a written and binding granny flat arrangement that is not commercial in nature.
The arrangement itself must be written down, show that the parties intend to be legally bound, and not be commercial. The ATO says it should name the parties, including everyone with an ownership interest in the property, and set out when it can be varied or terminated and what happens then. It can be made with anyone, including family or friends.
Who can hold the interest
For the exemption, the person with the granny flat interest must either have reached pension age, or need assistance for day-to-day activities because of a disability. On disability, the ATO sets out more detail:
- They need assistance with most day-to-day activities because of the disability, and are likely to keep needing it for at least 12 months after the arrangement or a variation is made.
- Eligibility is judged at the time the arrangement is entered into or varied.
- Someone eligible for the disability support pension would generally meet the requirement, but eligibility for that pension is not needed.
- Someone who needs assistance only because of injuries they expect to recover from within 12 months does not meet it.
Which events the exemption covers
| Event | Under the exemption? |
|---|---|
| Creating the arrangement | Yes, if the conditions are met |
| Varying it, for example to cover a new home | Yes, if the conditions are met |
| Terminating it | Yes, if the conditions are met |
| Selling the property after the arrangement has ended | No: normal CGT rules apply |
| Selling shares to pay for building the flat | No: in the ATO’s example the sale isn’t sufficiently related to creating the interest |
The ATO adds that creating, varying or ending an arrangement doesn’t affect the main residence exemption, because the arrangement gives a right to occupy the property rather than a right to the property itself.
Commercial or not
A commercial arrangement isn’t exempt. The ATO calls the most obvious case one where the person with the interest has to pay rent, or similar, at a market rate. Contributing only towards ongoing household costs, such as electricity and water, is unlikely to be considered commercial, because it is a reimbursement of actual costs. The ATO’s own example is a couple of pension age who pay to build a granny flat on their son’s property and pay him a weekly amount to cover electricity, gas and water rate costs; it treats that as not commercial.
Why the ATO says to formalise it
A formal arrangement makes it easier for the older person to establish, assert and enforce their rights. The ATO says it reduces the risk of financial abuse or exploitation of older people, provides benefits to the older person such as housing, care and support, and can help the adult child manage property and funds. The parties do not need to be related.
Two agencies, two sets of rules
Services Australia and the ATO use the same words for related ideas, but each applies its own law.
| Services Australia (payments) | ATO (CGT exemption) | |
|---|---|---|
| In writing? | May accept an interest that is not in writing, but recommends a legal document | Must be in writing and legally binding |
| Who can hold it | The page sets no age test; it describes usually family arrangements for older people | Pension age, or a disability needing assistance |
| What it affects | Eligibility, rate of payment and the assets test | Whether CGT applies when the arrangement is created, varied or terminated |
The pension sheet covers the Services Australia side. Renting a granny flat out on commercial terms is a different matter again; see renting out a granny flat.