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Entering into a Granny Flat Agreement: Understand all the Elements posted on the 9th January 2019

With the inquiry into tax treatment of Granny Flat arrangements commencing this year, this is another timely reminder of things to consider out before entering into a Granny Flat Agreement…

Granny flats for aged care caught in Catch 22

Rachel Lane, The Sydney Morning Herald

9 December 2018

 

Last week the Assistant Treasurer announced an inquiry into the tax treatment of granny flat arrangements will commence in the new year. The review is a result of the 2017 Australian Law Reform Commission’s Report that identified formal and legally enforceable family agreements as a measure in preventing elder abuse. The problem is such agreements can have significant tax consequences.

Ross Higgins a partner at Mills Oakley says: “The problem is revealed in the following simple example: Granny sells her home and pays $400,000 to her son and daughter-in-law for a right to occupy a granny flat they have at the back of their principal residence. The intention is to create legal relations, that is for the rights of the parties to be legally enforceable.

For capital gains tax purposes this is treated as a capital gain of $400,000 less any legal costs of getting an agreement prepared. The capital gain is to the son and his wife. The asset is the right of occupancy created under the agreement and disposed of immediately thereafter. Because the asset is held for less than 12 months the general 50 per cent discount does not apply. The tax liability on $400,000 would be up to $188,000 (that is 47 per cent, being the top marginal rate plus Medicare levy). The tax bill will only be sent after lodgement of the tax return for that year – typically months after the agreement has been signed.”

He says there are other ways to deal with these issues, but many will be caught in this simple scenario with a potentially hefty tax liability.

Tax is certainly one element of these agreements that needs to be considered but other factors such as the impact on pension entitlement, eligibility for rent assistance, cost of a home care package and if needed the future cost of residential aged care also need to be added to the list of considerations, not to mention the effect on estate planning wishes after all these arrangements typically involve the sale or transfer of the family home.

Brian Herd, partner at CRH Law says: “The uncertainty created by the tax implications has long been a deterrence to people entering these arrangements. Ironically this is at the same time when Centrelink is encouraging people to enter into these arrangements with their granny flat exemption rules. People were then exposed to a push/pull syndrome from the government – the ATO warning of the tax consequences and discouraging them and Centrelink encouraging them. Hopefully the ATO and Centrelink will finally align providing a consistent incentive for this wave of family care.”

Removing the tax disincentive for granny flats will encourage families to have a formal agreement, providing certainty for granny and the children. My advice if you are thinking about entering into a granny flat agreement, make sure you understand all of the legal and financial implications, tax is just one element. And be sure to ask the “what if” questions such as “what if the children got divorced?”, “what if the children became sick or passed away?” and “what if I need aged care?”

Call your local Granny Flat experts, we’re here to help!

 

Sonia Woolley

0403 309 136

Written by Sonia Woolley