A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life. Ordinarily, an arrangement like this may trigger CGT because it is the creation of a contractual or other right (CGT Event D1).
From 1 July 2021, capital gains tax (CGT) may not apply when a granny flat arrangement is created, varied or terminated.
A granny flat arrangement typically happens between an older person and their adult child. However, the parties in a granny flat arrangement do not need to be related. A granny flat arrangement can be entered into with any party, including family or friends.
Granny flat interest
An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement. A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner’s main residence or a separate property. It is not restricted to what is commonly referred to as a ‘granny flat’. The interest may be in part or all of the property.
For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:
- have reached pension age
- require assistance for day-to-day activities because of a disability
A granny flat arrangement is exempt from CGT if:
- the owner or owners of the property are individuals
- one or more eligible people have an eligible granny flat interest in the property
- the owners and the people with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature.
The exemption only applies to creating, changing or terminating a granny flat arrangement. Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.
The ATO have provided the following examples.
Example 1
Mary is 70 years old. She lives in her own house, which is currently valued at $400,000. Her daughter, Isabella, lives with friends in a different house.
To secure her house for her daughter’s inheritance, Mary:
- transfers the ownership of her house to Isabella
- creates a granny flat arrangement with Isabella under which Mary retains a right to accommodation for life.
- After taking ownership of the property, Isabella moves in and lives with her mother.
When Mary transfers her home to Isabella there is a CGT event. However, Mary is entitled to the main residence exemption on the transfer of her home, so there is no CGT liability. The requirements of a granny flat arrangement have been met. Therefore, Isabella will have no CGT liability for granting her mother a right to accommodation for life. As Isabella moves into the home once she owns it, she will be entitled to the main residence exemption from CGT if she later sells it.
Example 2
Jim and Joan are of pension age. They live in a home on a large block, which they are struggling to maintain. They decide to sell their home and buy a 6-bedroom home in their son, Isaac’s, name. The home can accommodate themselves and Isaac’s family.
Jim and Joan:
- sell their old home for $800,000. The sale is exempt from CGT under the main residence exemption
- buy a new home for $600,000 in Isaac’s name
- transfer the additional $200,000 to Isaac
- create a written granny flat arrangement with Isaac
All the requirements of a granny flat arrangement have been met. Therefore, Isaac will have no CGT consequences for granting the granny flat interest to Jim and Joan. Some years later, Isaac and his spouse separate. Isaac sells the 6-bedroom family home and buys another home not too far away.
- Isaac is entitled to the main residence exemption on the 6-bedroom home, so there is no CGT when he sells it.
- Jim, Joan and Isaac move into the new family home and vary their written granny flat arrangement so that it covers the new home.
- As Jim and Joan are still eligible to enter a granny flat arrangement, there are no CGT consequences for Isaac when the arrangement is varied.
How can we help?
If you have any questions or would like further information or you are seeking property tax advice, please feel free to contact our office via email –info@investplusaccounting.com.au or phone 02 9299 7000 to either speak with someone or arrange a time for a meeting so we can discuss your requirements in more detail. You can arrange a free 15 minute no obligation chat to discuss your options. Please arrange an appointment with our office by clicking here
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Investment Plus Accounting Group, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.