CGT exemption announced for granny flat arrangements

In October, the federal government announced that a specific CGT exemption for granny flats with family members would apply so long as a detailed written agreement is prepared. The announcement is expected to apply from July 2021.

Moores welcomes the announcement. When granny flat arrangements work well, it enables families to care for ageing or disabled family members and can strengthen multi-generational relationships. But it is often legally complex to deal with undocumented granny flat arrangements that are no longer working. Undocumented arrangements leave all parties at risk if the living arrangements don’t work out or relationships break down, and can also cause complications in administration of deceased estates where there are undocumented or uncertain interests in property.

Historically adapting a family home for multi-generational living – typically called a granny flat arrangement – has risked a portion of the family home becoming subject to capital gains tax whether the granny flat was a separate structure or by way of extended family members contributing a cash sum to hold an interest in or to extend the same home. The potential tax liability has been a barrier to families formalising these arrangements.

Key lessons

Having formal written agreements in place means that all parties can enter into the arrangement with eyes open, including as to any impact on estate planning. Written agreements will also help to protect the older person from elder financial abuse while living in a multi-generational household. Enforceable agreements will also protect older people – who often make a significant financial contribution to the property – if the arrangement does break down.

Formal granny flat agreements usually need to consider some of the following matters:

  • Legal and/or equitable interests in the property (and impact of Centrelink gifting rules or assets tests on aged care pensioners).
  • The parties’ rights and obligations – maintenance, rates and bill paying, necessary adjustments to the property in the event the older person’s mobility or health deteriorate.
  • Expectations around care needs of the older person, domestic responsibilities, privacy within the home, caring for any grandchildren in the home.
  • What will happen if the older person’s care needs increase and a move into residential aged care is necessary: how that move will be funded.
  • The exit strategy if the arrangement comes to an end due to:
    • Divorce or separation of the adult children
    • A breakdown in relationships between the older person and the adult children
    • Bankruptcy or mortgage default

How we can help

If you or your clients would like further guidance or advice on granny flat arrangements, please do not hesitate to contact us.