How Your Assets Affect Your Income During Your Retirement posted on the 29th July 2018

A great “real-life” situation here which could potentially affect a number of our clients… Well worth a read in our opinion – and, as always, a good reminder to do your homework before commencing any building works!

Check pension rules before building a granny flat

George Cochrane, The Sydney Morning Herald

January 18, 2018

I’m 72, receive a full age pension and have assets of $175,000. My wife is in a nursing home. We own our house and I plan to build a granny flat in the backyard. Would the granny flat be considered an asset and included in the assets test and would it affect my age pension or would it be considered as part of the house and therefore not a separate asset? G.C.

When an age pensioner rents out a granny flat to anyone other than a member of the immediate family, it will be counted by the assets test and its value will be based on a pro-rata percentage of the floor space of the overall property. For example, if the flat covers an area equal to 30 per cent of the total area of the house and flat, then 30 per cent of the value of the property will be counted.

Illustration: Michael Mucci

If you have a home in a capital city, this asset value could amount to many tens or even hundreds of thousands of dollars and would obviously affect your pension. Furthermore, the net rent, after expenses, is counted by the income test. And when the property is eventually sold, there will be a capital gains tax liability in proportion to the area rented and the length of time it was rented.

However, if you take in a lodger, and the area being rented is an integral part of your home, for example, a room with an en suite and a shared kitchen and lounge area, it will not be counted by the assets test. Again the net rent would be counted by the income test but you can choose a simpler formula that counts expenses as 30 per cent of the rent. A CGT liability again arises in proportion to area and time.

In your case, I assume you are planning to rent the flat to obtain income. For other readers, a granny flat can be built with other intentions, typically where the parent(s) of an adult child might build a flat above or onto their child’s home, to live there rent-free for life. In such a case, the usual “gifting rules” do not apply but there is a “reasonableness rule” or formula that determines how much can be spent before Centrelink determines that the parents are depriving themselves of their assets. Also, the CGT exemption for a main residence continues to apply in such cases.


Planning a Granny Flat in your backyard too? 

You know who to call…


Sonia Woolley – 0403 309 136

Written by Sonia Woolley

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