Find out if your granny flat arrangement is exempt from CGT.
A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life.
From 1 July 2021, capital gains tax (CGT) does not apply when a granny flat arrangement is created, varied or terminated.
A granny flat arrangement is exempt from CGT if:
The exemption only applies to creating, changing or terminating a granny flat arrangement.
Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.
Garry is eligible for a granny flat interest and enters into a granny flat arrangement with his daughter Sandra.
Under the arrangement, Sandra agrees to build an attached flat on her property for Garry to live in.
Garry agrees to pay $500,000 to Sandra to finance the build. Garry obtains the money from selling shares in his investment portfolio.
For Sandra:
For Garry:
An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement.
A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner's main residence or a separate property. It is not restricted to what is commonly referred to as a 'granny flat'.
The interest may be in part or all of the property.
To be exempt from CGT, a granny flat arrangement must:
It should include:
A granny flat arrangement can be entered into with any party, including family or friends.
A granny flat arrangement might need to be varied when something happens that was not included in the original arrangement.
The parties involved in the original arrangement can vary the existing arrangement, adding in new terms and conditions.
They can also terminate the existing arrangement and create a new one.
The following examples explain the tax consequences of the granny flat rules.
Jim and Joan are of pension age. They live in a home on a large block, which they are struggling to maintain.
They decide to sell their home and buy a 6-bedroom home in their son, Isaac’s, name. The home can accommodate themselves and Isaac’s family.
Jim and Joan:
All the requirements of a granny flat arrangement have been met. Therefore, Isaac will have no CGT consequences for granting the granny flat interest to Jim and Joan.
Some years later, Isaac and his spouse separate. Isaac sells the 6-bedroom family home and buys another home not too far away.
For a granny flat arrangement to be exempt from CGT, the individual with the granny flat interest must either:
Eligibility to hold a granny flat interest is based on the disability at the time of entering into or varying the granny flat arrangement.
A individual with a disability is eligible to hold a granny flat interest if they:
Generally, an individual who is eligible for the disability support pension would meet this requirement.
However, the individual does not need to be eligible for the disability support pension to meet this requirement.
The individual does not meet the eligibility requirements if they only need assistance due to injuries they expect to recover from within 12 months.
A granny flat arrangement typically happens between an older individual and their adult child. However, the parties in a granny flat arrangement do not need to be related.
A formal arrangement makes it easier for the older individual to establish, assert and enforce rights. These rights are agreed upon by all parties involved in the arrangement, including the owner of the property.
The arrangement:
Sophia and Mateo are of pension age. They:
To secure their interest, Sophia and Mateo create a granny flat arrangement with Ava.
Under the terms of the arrangement, an amount will only be repaid in specific circumstances:
If Sophia or Mateo had to vacate the property, their $500,000 would be repaid to them.
Sophia and Mateo are entitled to disregard any capital gain or capital loss on the sale of their home as it was their main residence.
All the requirements of a granny flat arrangement have been met. Therefore, Ava will be exempt from any CGT that would have applied when she granted the right to accommodation for life.
If the arrangement is varied or terminated, and the amount is returned, there will be no CGT consequences.
If Ava sells her unit, any proceeds from the sale will be subject to the normal CGT rules. If Ava never lived in the unit she will not be entitled to the main residence exemption.
A individual's main residence (their home) is generally exempt from CGT.
The creation, variation or termination of a granny flat arrangement does not affect the main residence exemption. This is because the granny flat arrangement is a right to occupy the property, not a right to the property itself.
Mary is 70 years old. She lives in her own house, which is currently valued at $400,000.
Her daughter, Isabella, lives with friends in a different house.
To secure her house for her daughter’s inheritance, Mary:
After taking ownership of the property, Isabella moves in and lives with her mother.
When Mary transfers her home to Isabella there is a CGT event. However, Mary is entitled to the main residence exemption on the transfer of her home, so there is no CGT liability.
The requirements of a granny flat arrangement have been met. Therefore, Isabella will have no CGT liability for granting her mother a right to accommodation for life.
As Isabella moves into the home once she owns it, she will be entitled to the main residence exemption from CGT if she later sells it.
If the granny flat arrangement is commercial in nature, it is not exempt from CGT.
The most obvious commercial arrangement is where the holder of a granny flat interest is required to make payments (such as rent) at a market rate.
However, if the individual with a granny flat interest only contributes towards ongoing household costs (such as electricity and water), the arrangement is unlikely to be considered commercial. This is because the arrangement is a reimbursement of actual costs.
Yu Yan and Wang Shu have both reached pension age. They:
Yu Yan and Wang Shu agreed to pay Fei Hong $150 per week to cover electricity, gas and water rate costs.
As the payments are a reimbursement to Fei Hong for the household costs associated with the granny flat, the arrangement is not commercial in nature.