A granny flat at dusk.

Downsizing decisions need care

Lower interest rates and increased demand are pushing up the cost of housing in Victoria. In addition, the financial pressures of the COVID-19 pandemic have meant that some families are suffering financial hardship and are considering ways in which to consolidate their financial positions 

At times like these, older people might think about downsizing or living with their family. That might mean living in a house owned by family, or family moving into a house owned by an older person. Another option is to build a self-contained unit on land that includes the family house. 

For example, an older person might sell an existing property and then pay for the construction of a ‘granny flat’ on a property belonging to their adult child. The arrangement may include a promise by the adult child to provide on-going residence and care to the older person in return for the increase in value to their property by the additional dwelling. These arrangements are called “assets for care” and can benefit both parties. The benefits for the older person can include the chance to be close to grandchildren, care and support when required, and avoiding or delaying having to enter aged care. The adult child can also benefit both financially and from the practical assistance the older person can provide to the family. 

While these can be very satisfactory arrangements for all generations in the family, it is important to consider various contingencies and have a plan to resolve disputes. Issues to consider include the break-down of the adult child’s relationship and subsequent upheaval; the adult child becoming unemployed; increase in the care needs of the older person; or either party wanting to terminate the arrangement. 

Centrelink have specific rules for these types of arrangements. Their advice should be sought before transferring property or assets for careIn certain circumstances, Centrelink recognises these payments and provides an exemption from its gifting provisions (which prevent an older person gifting more than specified amounts without impacting on their Centrelink benefits). 

Previously, an interest created in this way was subject to Capital Gains Tax (CGT) if the funds were applied to the building of a separately occupiable dwelling, for which rent was charged. However, in the last federal budget, the Treasurer announced that from June 2021, CGT will not apply to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities.  

Another complication is the fact that local councils have different permit requirements that need to be considered when building a flat or self-contained unit on the property of a family member. The financial implications of this type of investment can differ substantially depending on the legality of the structure and the permit type requiredIf the council only allows the construction of a “dependent person’s unit” then this unit cannot be used for other purposes such as rental accommodation. More importantly, the unit’s resale value or the value it adds to the property may be less than the cost of its construction. If the relationship with family sours or the older person’s care needs significantly increase, then it may be difficult to recover the construction costs. An older person may be left without funds for alternate accommodation if family relationships are strained. 

Granny flat agreements are a complex area, and the legal position can vary greatly depending on the circumstances of each agreement. Ideally, all such arrangements should involve a formal written agreement that sets out each party’s obligations and entitlements and is legally enforceable. Independent legal advice can be critical to safeguard the interests of the parties, especially those of the older person, who can often render themselves vulnerable by placing their future welfare in the hands of others. 

Case study 1: Investing in a self-contained unit

Case Study 2: Case Study 2: Investing in family property