126.96.36.199 Granny flats - features, rights & interests
A granny flat is a type of special residence. This topic explains:
- the granny flat interest rules
- what a granny flat interest is
- how to value a granny flat interest.
Act reference: SSAct section 12C(2) A residence is a special residence if the residence is …
Features of the granny flat interest rules
The granny flat interest rules recognise family arrangements that provide support for older people. The rules do NOT have any tests of age or family relationship. The rules do NOT measure or put a value on the support provided to the older person.
The granny flat interest rules DO reduce the effect of the deprivation (gifting) rules where people transfer property or other assets to family members in return for a life interest or right to accommodation for life.
Note: It is recommended that financial and legal advice be sought before establishing a granny flat interest.
Defining a granny flat interest
A life interest or right to accommodation for life IS a granny flat interest if:
- the person '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.
Explanation: In the real estate industry a 'granny flat' is the name given to a self-contained flat in someone's house. A granny flat interest may be in accommodation that is quite different from the real estate definition of a granny flat.
A person who is the owner (or part owner) of property does NOT have a granny flat interest. They have the right to live in the property because of their ownership.
How to value a granny flat interest
There is no market for granny flat interests because they are private family arrangements. The value of a granny flat interest is GENERALLY the same as the amount paid for the interest. This means there is NO deprivation amount.
Example: The value of a granny flat interest is the amount paid (or value of assets transferred) if a person:
- transfers the title of their home
- pays for the construction and fit out of premises, OR
- purchases property in another person's name in return for a life interest or right to accommodation for life.
In particular cases, where there is a special reason, the SSAct allows a granny flat interest to be valued at a DIFFERENT amount than the amount paid. These particular cases are the EXCEPTION to the rule that the value is the amount paid. The different amount is called the REASONABLENESS TEST.
The REASONABLENESS TEST uses an approximation of actuarial values called the reasonable value conversion factors. The test is described in (188.8.131.52). SOME examples of cases where the reasonableness test is used are:
- the person transfers title to their home (or purchases property in another person's name) AND transfers additional assets
Explanation: Compare the value of the home and the reasonableness test amount. The value of the granny flat interest is the greater of the 2 amounts.
- the person pays the cost of constructing premises AND transfers additional assetsExplanation: Compare the cost of constructing the premises and the reasonableness test amount. The value of the granny flat interest is the greater of the 2 amounts.
- the person is using the granny flat rules to gain a social security advantage.Explanation: The value of the granny flat interest IS the reasonableness test amount.
The following are some examples of how the granny flat rules apply. These examples are not exhaustive, rather they illustrate how the policy works in some situations.
Example: A person buys property in their son's name worth $280,000 AND gives the son assets worth $100,000 in return for a life interest in the home (a total of $380,000). The reasonableness test amount is $310,000. The value of the granny flat interest is $310,000 (because this is greater than the $280,000 cost of the new home).
$380,000 − $310,000 = $70,000
$70,000 IS a gift.
Example: A person sells their home and moves into a house already owned and occupied by a family member, paying for a right to accommodation for life. No construction is needed. The value of the granny flat interest is the amount paid UNLESS the amount paid is greater than the reasonableness test amount. Any amount greater than the reasonableness test amount IS a gift.
Note: The extended land use test (184.108.40.206) is disregarded for the purposes of the reasonableness test, that is, adjacent land above 2 hectares is considered a transfer of additional assets, and may trigger a calculation under the reasonableness test.
Act reference: SSAct section 1147(1D) For the purposes of paragraph …
Policy reference: SS Guide 4.1.6 Deprivation related to home & accommodation transfers, 4.1.7 Deprivation related to farm transfers, 220.127.116.11 General provisions for special residences, 18.104.22.168 Granny Flats - Reasonable Value Conversion Factors