Q & A of the month – Granny flat rights

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

By Scott Quinn, Senior Technical Services Manager

Q: My client, Carmel, is age 90. She has paid $250,000 to construct a granny flat dwelling on her daughter’s property. She also transfers an additional $100,000 to her daughter. As a result, Carmel’s daughter grants her a life interest in the granny flat.

Is Carmel considered a homeowner for age pension purposes and will gifting or deprivation rules apply?

A: Carmel will be considered a homeowner if her ‘entry contribution’ (EC) exceeds the ‘extra allowable amount’ (EAA). The EAA is currently the difference between the homeowner and non-homeowner assets test limits (currently $214,500).

If Carmel had only paid for the cost of construction:

  • her entry contribution would be $250,000 (the amount paid or transferred for accommodation), she would be a homeowner and the entry contribution would be disregarded under the assets test
  • there is no gifting, hence no deprived assets.

However, Carmel has transferred an additional $100,000 to her daughter in exchange for the life interest. As a result, we must apply a test of reasonableness (TOR) to determine the EC and whether gifting deprivation rules apply.

The TOR amount it calculated by:

Annual combined couple rate of pension* x TOR conversion factor

*Combined couple rate applies regardless of whether they are a single or a couple and includes the maximum couple pension supplement

Carmel’s TOR = $37,013.60 x 4.52 = $167,301

For further information on how to calculate the TOR amount please see our Strategy Guide – Social Security: Granny Flat Rights.

Where granny flat construction costs are paid and additional assets are transferred in exchange for a life interest, the EC is the greater of:

  • the actual cost of construction, or
  • the TOR amount.

Amounts transferred exceeding the EC are a gift.

As Carmel’s cost of construction ($250,000) exceeds the TOR amount ($167,301) her EC is $250,000. Her EC exceeds the EAA making Carmel a homeowner for Age Pension purposes and the value of the EC will be disregarded under the assets test.

The $100,000 that Carmel has transferred in excess of the EC is treated as a gift to her daughter. Assuming Carmel still has $10,000 of available gifting limits, $90,000 will be an assessable asset and deemed under the income test for 5 years from the date of gift.

Proposed tax changes for granny flat rights

The creation, variation or termination of a granny flat right may be a CGT event. In the Federal Budget 2020/21, the Government proposed to introduce a CGT exemption for the creation, variation or termination of a granny flat right on or after 1 July 2021. As at the time of writing this has not yet been legislated.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.