10 December 2021
CGT implications of Granny Flat Arrangements
On 24 June 2021, the Treasury Laws Amendment (2021 Measures No. 4) Bill 2021 was enacted into law. The Act amended the Income Tax Assessment Act 1997 and Income Tax (Transitional Provisions) Act 1997 to provide a capital gains tax (CGT) exemption for “granny flat arrangements” in certain circumstances. The amendments are intended to ensure that CGT consequences are not an impediment to formalising granny flat arrangements and aim to reduce the risk of financial abuse and exploitation of older Australians and other vulnerable people.
The granny flat arrangement rules commenced on 1 July 2021.
A “granny flat arrangement”, derived from the term “granny flat” in the Social Security Act 1991 (Cth), generally describes an “assets for care” arrangement, where money or other consideration is given in exchange for a right to accommodation for life. Often, they involve an older person transferring their home or other assets to their adult child in exchange for the promise of ongoing care, support and housing. They can be formal, but more often than not they are informal.
When operating effectively, they can provide benefits to the adult child (in the form of property or funds), and benefits to the older person (in the form of care, support and accommodation).
However, the older person tends to be in a position vulnerable to elder abuse. Typically, problems can arise as a result of:
the adult child pre-deceasing the older person
relationship breakdowns between the adult child and their partner
the adult child becoming bankrupt.
Previously, one barrier to parties having a formal granny flat arrangement in place were the perceived adverse tax implications in connection with entering into, varying or terminating a formal arrangement.
The amendments ensure that a CGT event does not happen on entering into, varying or terminating a granny flat arrangement, provided certain requirements are met.
When is a granny flat arrangement exempt from CGT?
Broadly, under Division 137 of the Income Tax Assessment Act 1997 a CGT event does not happen on entering into, varying or terminating a granny flat arrangement if the following apply:
the person has, or will have, the right to occupy a dwelling for life (called a “granny flat interest”). This includes the dwelling’s adjacent land and structures, up to a limit of 2 hectares
the person who holds the right either:
has reached pension age at or before that time. Pension age is the same age threshold that is used in determining eligibility for the Age Pension and varies according to date of birth and gender; or alternatively,
needs and for the next 12 months is likely to continue needing assistance to carry out most day-to-day activities, because of a disability. Disability takes its ordinary meaning. The ability to recover from a disability is not an impediment to accessing the CGT exemption, nor is the ability to undertake employment while having the disability.
If the person meets either of the above two requirements relating to age or needing assistance, then they will be “eligible for a granny flat interest”.
Another person (“the owner”) owns the dwelling which will be the subject of the granny flat arrangement. Alternatively, parties can enter an arrangement and agree that the owner will acquire a dwelling where the other party will hold their granny flat interest at a future time.
The owner and the holder of the granny flat interest must be parties to the arrangement. The arrangement must be in writing and indicate an intention for the parties to be legally bound by it. Otherwise, however, there is no requirement that a granny flat arrangement must take a particular form or include specific terms.
The arrangement must not be commercial in nature. Commerciality is determined on a case by case basis. Broadly, however, the requirement to pay market rent might indicate that the arrangement is of a commercial nature. On the other hand if the granny flat interest holder merely contributes to the costs of running the household, then this might indicate that the arrangement is not of a commercial nature.
Granny flat arrangements before 1 July 2021
The amendments in Treasury Laws Amendment (2021 Measures No. 4) Bill 2021 commenced on 1 July 2021. However, they have retrospective effect and therefore apply in relation to arrangements which were entered into before 1 July 2021 (being the date the amendments commenced): section 137-10 of the Income Tax (Transitional Provisions) Act 1997 (Cth).
For taxpayers who have entered into granny flat arrangements before 1 July 2021 and paid CGT in respect of the arrangements, this may mean that they are eligible for a refund of the tax paid if Division 137 would have applied to the arrangements.
How we can help
Depending on the particular circumstances, granny flat arrangements can provide mutual benefits to parents and their adult children.
When prepared properly by a legal adviser, they provide security and certainty to all parties, and can operate tax effectively.
If you and your family are contemplating a granny flat arrangement, we can explain the legal and tax implications and assist with implementing the arrangement in a way which achieves your objectives.
Authors: Peter Kramer & Jeremy Tjeuw