Granny flats and capital gains tax: what you need to know


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Does your elderly parent live with you? Around 8.2% of people aged over 65 years live with their family or other relatives.

If your elderly relatives live either in your home or in a granny flat, do you have a formal agreement or a word of mouth arrangement? Often a formal arrangement means the homeowner may have to pay capital gains tax under the current tax rules.

But these rules are being reviewed.

granny flat rules

The Government has asked the Board of Taxation to review the tax treatment of granny flat arrangements and recommend any changes that would encourage families to enter formal family agreements and not have an ad hoc one.

It follows on from last year's Australian Law Reform Commission (ALRC) report on elder abuse, which identified tax issues that might deter families entering into family agreements relating to accommodation.

If an elderly person has an informal arrangement, it can be unenforceable and put elderly people at a disadvantage.

In its review, the ALRC says the use of formal and legally enforceable family agreements would be a useful measure in preventing elder abuse. Such agreements protect the rights of the older person if there is a breakdown in a living arrangement.

But typically the capital gains tax issue has deterred formal family agreements.

The ALRC is concerned that many 'family agreements' are made informally, without legal advice and without being put in writing.

Typically, older people transfer the title to their home, or the proceeds from the sale of the home or other assets, to an adult child in exchange for ongoing care and housing.

As people age, they are more likely to move in with their family. The ABS found that 12.2% of people aged over 85 were living with children or other relatives.

If the relationship breaks down or the promise of care is not delivered, under an informal agreement the older person may be put at a disadvantage - even be left without a place to live.

The Government has asked the Board to recommend ways to raise awareness and provide incentives for older people and their families to enter formal and legally enforceable family arrangements.

It wants the Board to make any recommendations as to the appropriate tax treatment of these arrangements, considering the current tax law and the treatment of granny flats under the social security rules.

The Government has asked for a final report by the middle of next year.

Take the case given by the ALRC of an elderly parent who moved in with his daughter and son-in-law without a formal agreement.

They didn't get on and a few years later, the parent was evicted from their home. The parent tried to establish his rights under the family agreement but the daughter said the money she received from the sale of her father's house was a gift, with no strings attached.

The ALRC recommended that state and territory tribunals be given jurisdiction over disputes within families over such agreements, to provide cheaper access to justice than courts.

There is an exemption under social security law that ensures that older persons, who enter into agreements, where they transfer title to their home or proceeds from the sale of the home, will not lose their pension.

Known as the 'granny flat interest', it covers the arrangement when a person pays for a life interest or right to use some accommodation in a residence that will be the person's principal home.

The ALRC stresses the need for better evidence of these agreements to ensure it will be easier and fairer when dealing with disputes.

It has recommended that for the purposes of calculating an entitlement to the age pension, the Social Security Act should be amended to require that a 'granny flat interest' be expressed in writing.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.

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