With the cost of housing so high, particularly in our capital cities, more granny flats are popping up across Australia.
In recent years, granny flat legislation has been relaxed in most states and territories, with the aim of increasing the supply and availability of affordable rental housing.
It’s now easier to gain approval to build and rent your secondary dwelling — to people outside the family — in New South Wales, Western Australia, Northern Territory, Tasmania, and the ACT.
In Queensland, the rules vary and certain local councils, including Logan City, Brisbane City, and Ipswich City, have specific granny flat guidelines. Legislation in Victoria and South Australia has restrictions on who can live in granny flats and who can rent them out.
If you are considering a granny flat arrangement, first check the state and local council rules. If you are receiving the Age Pension, there are a number of Centrelink rules to consider before planning any changes to your living arrangements.
Here are four different living arrangement scenarios and how they might affect your Age Pension payments.
1. A family member moves in
If you build a granny flat in the garden and the kids move in, this will not affect your Age Pension payments — even if you ask your child to pay rent.
In general, Centrelink does not consider board and lodging from immediate family members as income, therefore, you should be able to receive contributions from your child towards their living expenses without your Age Pension being affected.
2. Rent the granny flat for income
If you rent out the granny flat to someone who is not in your immediate family (which is legal is some states), Centrelink will count it in the “assets test” and this could affect the Age Pension.
The value of the granny flat 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 20 per cent of the total area of the house and flat, then 20 per cent of the value of the property will be counted.
Furthermore, the net rent (after expenses) is counted by the income test. Singles can earn $168 per fortnight before their Age Pension reduces, while couples can earn $300 a fortnight combined before their payment is affected.
3. You both sell and buy together
You and your adult child might decide to both sell your houses, and buy a place together. If you pay 50-50 and both of your names are on the title, this won’t affect your Age Pension because your home does not count in the “assets test”.
4. You move in with the kids
The reasons why you may consider moving in with your adult child are many. Maybe your health is in decline, or you can’t take care of your large house, or the company of your grandchildren might be the drawcard.
When you transfer money or assets in exchange for the right to live in your child’s house or granny flat, this is considered to be a “granny flat interest”.
Centrelink doesn’t use market value to decide how much a granny flat interest is worth. Instead, it values it at the same value as the money or assets you transfer. For example, if you transfer $100,000 to your daughter for the right to live in her home for life, the value of the granny flat interest is $100,000.
As long as Centrelink deems the exchange of assets fair, it should not affect your pension.
“Where a person transfers the title of their home, or pays for the construction and fit-out of a premises, or purchases property in another person’s name in return for a life interest or right to accommodation for life, then no gifting has occurred,” a Department of Human Services spokesperson said.
“If a person transfers assets other than those mentioned in the above comment, the reasonableness test is applied.”
In other words, older Australians can transfer the whole title of their house to their child for no payment in exchange for a right to residence for life. This is considered to be a granny flat interest without any deemed gifting. The same applies if you pay for granny flat construction costs or buy a home in your child’s name.
If you do anything more, the “more” will be a gift to which a reasonableness test will apply.
Under the reasonableness test, the value of the granny flat is calculated as follows:
Reasonable value = the annual partnered pension rate (irrespective of the person’s couple status) multiplied by an age-based conversion factor (for a partnered couple, use the age at their next birthday for the younger partner).
For a person turning 65, the reasonable test amount is $753,054, but for someone turning 66, it would drop to $723,605. The reasonable test amount for a person turning 80 is $351,986 and for someone turning 81, it is $329,899.
Lucy, 80, transfers the whole title of her $800,000 home to her son without transferring any other assets, in exchange for the right to accommodation for life.
The reasonableness test will not be required as no gifting has occurred.
Lucy, 80, transfers the whole title of her $800,000 home to her son and also pays him $100,000. The total value of assets transferred is $900,000, so any gifting in excess of the reasonableness test is assessed based on the total value transferred.
The reasonableness test calculation is based on Lucy’s age at her next birthday (i.e., 81). The conversion factor would be 9.41, so $35,058.40 multiplied by 9.41 = $329,899.54.
If Lucy is transferring a total of $900,000 to her son, the gifting would be $900,000 - $329,899.54 = $570,100.46. The excess amount is considered a financial asset and subject to the deeming rules.
You are currently allowed to gift just $10,000 a year — or $30,000 over five financial years — without affecting your Age Pension payments.
You can contact the Department of Human Services’ free Financial Information Service (FIS) on 132 300 to discuss your individual circumstances. Otherwise, seek advice from a financial advisor.
Have you considered renting out your granny flat, or moving in with your kids?
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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this information, you should assess your own circumstances or seek advice from a financial planner and seek tax advice from a registered tax agent. Information is current at the date of issue and may change. WYZA Money is a partner of RFE Group Pty Ltd.