It’s no secret that home ownership, or more specifically house ownership, is becoming more and more difficult, as is balancing the needs of a family to take care of their kids, ensure their parents are safe, and somehow pay bills and maintain the balance of it all.
This is why I see granny flat rights becoming very important in family planning, estate planning, and aged care planning in the future. In today’s blog, I thought I would break down some of the concepts, providing you with a better understanding and me with something to reference in future blogs. This one gets a little technical, but it’s hard to avoid.
There is a case study at the back, which can help.
BIG DISCLAIMER: I would highly suggest if this is a strategy for you, you get financial advice and legal advice from professionals who regularly provide this kind of assistance. Don't do this one your own, and dont take this blog as advice.
Understanding Granny Flat Rights
Granny flat rights, also known as granny flat interests, refer to a legal arrangement where an elderly parent has a ‘life interest’ in a property. The benefit is that the lump sum or consideration given to the child from the parent can be partly or wholly exempt from their asset test, allowing families to join under one roof, without the parent/s losing their Centrelink benefits.
Technically speaking, it’s a life interest or right to accommodation for life where:
The parent 'pays' for a life interest or right to accommodation for life, AND
The life interest or right to accommodation for life is in a private residence that is to be the person's principal home.
This doesn’t have to be a lump sum of money; it can also be assets or a combination. For example, a parent could transfer:
The title to their home, while keeping a lifelong right to live there.
Assets, including money, in return for a lifelong right to live in a property.
There are two ways to have a granny flat interest:
A Life tenancy - the right to live in the property.
A Life interest - the right to use and benefit from the property as you wish.
In both cases, you need to be living there. You create a granny flat interest when you exchange assets, money, or both for a right to live in someone's property for life.
It’s important to note that:
Being an owner or part owner in a property does not grant a granny flat interest.
Granny Flat is also a term used in real estate to describe a self-contained unit.
Getting Technical
Centrelink assesses granny flat rights in different ways, depending on the amount/consideration given (Entry Contribution). It's important to note that when being assessed for Centrelink, if you are regarded as a homeowner, you have a lower Asset Test limit than a non-homeowner. This difference in dollar value is called the Extra Allowable Amount.
Option 1:
Where the Entry Contribution is above the difference between homeowner and non-homeowner rates (extra allowable amount), you are still considered a homeowner. Your Entry Contribution is not counted as an asset.
If you give above the Extra Allowable Amount, Centrelink regards you as a homeowner; however, they ignore a certain amount of that asset for the asset test.
Option 2:
Where the Entry Contribution is below the difference between homeowner and non-homeowner rates, you are still considered a non-homeowner, and your Entry Contribution is counted as an asset. You may get rent assistance as well if you pay a regular amount in rent.
Option 3:
For substantial Entry Contributions, Centrelink brings in another rule called the Reasonableness Test.
The Reasonableness Test is an actuarial calculation using the age of the younger entrant (Conversion factor) and the Annual Partnered Pension rate.
To work out your Reasonableness test amount, you look up the table provided by The Australian Government, find the age of the youngest partner, and multiply that number by the Annual Partnered Pension rate.
Entry Contributions below that calculated amount are not considered deprived assets by Centrelink and are considered reasonable contributions.
A Deprived Asset is any money above the amount you are allowed to gift without impacting your assessment ($10,000 per year, maximum $30,000 over 3 years to everyone). You are allowed to give as much as you want, however, Centrelink just includes it in your calculations for 5 years.
Case Study
Depending on how many times you read through the above, that could still not be quite clear and that is ok. Here is a live case study that may help:
Gayle and Peter have decided to move in with their kids Mary and Paul. They sell their home for $1,000,000 and gift the money to Mary and Paul as consideration to move in (Entry Contribution). They have gone with Option 3, the Entry Contribution is substantial, so we need to check the Reasonableness Test to see how Centrelink will regard it.
Gayle is younger than Peter at 65, so we will check the table for her age, getting a conversion factor of 21.48, multiplying that by the Annual Partnered Pension rate which as at today is $43,752.81 – and you get a figure of $939,810. This means they can give $939,810 to the kids as consideration when they move in, and Centrelink will ignore that amount when it comes to their assets test. Any amount above that figure will count on Gayle and Peters Centrelink Assessment for 5 years.
Mary and Paul can do what they want with the money, but this is where the agreement comes in. Chances are the current home of Mary and Paul is not quite set up to have an additional two adults move in while maintaining some semblance of independence between the two couples. Mary and Paul could use this money to renovate the home or buy a new larger home with a substantial mortgage, and pay a lot of it off with this money.
While Granny Flat rights are initially considered to retain the Aged Pension, they are actually a great way to formalize a lifestyle change, whereby parties with assets exchange that for a shift in lifestyle. Arguably there should be more than just the Centrelink reason when setting these up.
Non-Centrelink Reasons to Set Up a Granny Flat Right
Let’s look at the case above and add in some more real-life details:
Mary and Paul have children, but are struggling to balance school pickups with earning enough at work.
Gayle and Peter have been commuting to help where they can, but the travel is getting to them.
Peter is unfortunately of ill health, so Gayle, Mary, and Paul have also been chipping in to get him to appointments, but this has meant Gayle has lost some of her social and community benefits.
Neither Gayle nor Peter want to enter residential care and would like to stay home for the rest of their lives.
When Paul and Mary saved for their home, they lived with Gayle and Peter for 3 years and they all knew each other’s habits and boundaries.
Paul was the only child of Gayle and Peter.
The Benefits
With this Granny Flat right:
Paul and Mary were able to renovate their home, creating two living areas and accessibility measures for Peter and Gayle.
Paul and Mary were also able to reduce their mortgage substantially, reducing the financial pressure and allowing them to balance parenting and care of their parents.
Gayle, gaining back a lot of time with the commute and sharing caring responsibilities, was able to engage in her local community projects.
Peter felt less of a burden to everyone, improving his mental health. He also got more socialization and got to spend more time watching his grandkids grow up.
The Risks
Please note this is an introduction to Granny Flat rights, and there are many things that can potentially go wrong with these arrangements. This is something I would go into in another blog, but at face value:
Poor Contractual Considerations: There are many things you can include in the arrangements; however, having more detail isn’t necessarily better either. This is where bringing in legal professionals with property, estate, and contract experience is paramount.
Estate Balancing: In our case study, a large sum of Gayle and Peter’s estate was given to their son. If there was another sibling or other beneficiaries, this could cause issues down the track. This is where estate lawyers come in again.
Financial Consideration: It is important not to look at this situation in a vacuum. Both couples in our case study should get their own financial advice to look at the impacts of this plan on their long-term goals.
Life Happens: Life happens, and as such, it's really important to be able to have mature and open conversations about when things go wrong and have a plan in place. There are financial implications on Granny Flat Rights broken for foreseeable reasons within 5 years, but also combining family and money can be disastrous for relationships over time.
Conclusion
Granny flat rights offer a practical solution to the growing challenges of aged care and family living. By understanding the legal, financial, and emotional aspects, families can create an arrangement that benefits everyone involved. It’s important to consult with financial and legal professionals to ensure that these arrangements are set up correctly and to protect the interests of all parties. If you're considering this option, seeking professional advice will provide the guidance needed to make informed decisions and achieve the best possible outcome for your family.
