The three tests of the home
Services Australia sets three conditions for the home in a granny flat interest:
- it is a private residence, or part of one
- it is the person’s principal home
- it is not owned by the person, their partner, or a trust or company they control.
The right lasts only for your lifetime and is not part of your estate when you die. Services Australia may also call it a granny flat right. It describes these interests as usually family arrangements providing company and nearby help for older people, and says they don’t have to be for social security purposes.
How one is created
A granny flat interest comes into being when a person gives assets, money or both in return for a lifelong right to live in another person’s property. Services Australia gives two examples: transferring ownership of your home but keeping a lifelong right to live there or in another private property, or transferring assets, including money, for a lifelong right to live in a property. It names two forms, and with both you need to be living there:
| Form | What it gives you |
|---|---|
| Life tenancy | The right to live in the home |
| Life interest | The right to use the property and benefit from it in any way the holder chooses |
Putting it in writing
Services Australia may accept that you have a granny flat interest even if it is not in writing, but recommends a legal document as proof of what was agreed. It says the document should confirm the right to live in the home for life, say whether you’ve agreed to pay rent or look after any upkeep, and set out the compensation the owner will pay if they ask for the interest to be given up. It also asks people to call their regular payment line before creating one, to discuss how it could affect their payments.
For capital gains tax, the ATO’s exemption needs the arrangement in writing; see granny flat arrangements and tax.
How Services Australia values it
It values the interest at the amount transferred or paid to the owner, and uses that to decide whether you are a homeowner and whether you paid more than the interest is worth. It does not treat a person as having paid more than the interest is worth when they:
- hand over the title of their home and keep a lifetime right to live there or in another property
- pay for a granny flat to be built on someone else’s property
- pay for someone else’s home to be converted to suit their needs, with a lifetime right to live there
- buy a property in someone else’s name, with a lifetime right to live there.
It applies a “reasonableness test” when you have transferred extra assets, or made a lump sum contribution to existing accommodation where no construction or renovation has happened. Any amount paid above the value of the interest is a deprived asset, which Services Australia also calls gifting.
Homeowner or not
Services Australia says a person may be assessed as a homeowner even though they don’t own the property. The deciding comparison is between the person’s entry contribution and the “extra allowable amount”, which is the difference between the non-homeowner and homeowner assets test limits.
Entry contribution more than the extra allowable amount
- assessed as a homeowner in the assets test
- the entry contribution is not included in the assets test
- no Rent Assistance, as a homeowner.
Equal to or less than the extra allowable amount
- assessed as a non-homeowner in the assets test
- the entry contribution is included in the assets test
- Rent Assistance may be possible, if the rent paid is high enough.
One of Services Australia’s examples fits this site’s subject. A couple of pension age sell their home and pay to build a granny flat on their son’s property, transferring nothing else, and agree to pay him a weekly amount to cover costs such as electricity and gas. Services Australia says no gifting occurred, assesses them as non-homeowners because what they paid was less than the extra allowable amount, and says they may be eligible for Rent Assistance on the weekly payments. Its examples page has three more, and says they don’t cover every situation.
If plans change
- Leaving within 5 yearsServices Australia reviews the interest. If the reason for leaving was something you could expect when you created it, the gifting rules apply; if it was unexpected, they may not. It lists sudden illness, family relationship breakdown, elder abuse and property damage as possible unexpected reasons.
- Time awayServices Australia says that during those 5 years a person can be away temporarily for up to 12 months, or 2 years if it is due to loss or damage to the property.
- The property is soldThe owner can’t take the interest away. They can sell with your right to live there as a condition of sale, transfer the interest to another property, or give money or assets to you in return for giving it up.