Whilst most people express the desire to remain in their own home for as long as they can, for many, moving to some sort of alternative accommodation in later years becomes necessary. This could be the consequence of physical or mental frailty or just the desire for social company that, for example, a retirement village offers elderly people.
Retirement living can include alternative retirement village settings or aged care for the frail and infirm. An alternative is mum or dad (or both) living with one of the children, frequently known as a “granny flat” option. Granny flat living is becoming a favoured alternative – particularly in light of social security gifting concessions where Centrelink requirements are met.
What is a granny flat?
The Social Security Act defines a “granny flat interest” in a person’s home if:
- the residence is the person’s principal home as a private residence; and
- the person acquired for valuable consideration or has retained:
- a right to accommodation for life in the residence; or
- a life interest in the residence.
Where a genuine granny flat interest has been acquired for Centrelink purposes, the elderly person’s son or daughter/carer cannot revoke that interest simply because the child/carer may want to sell the property. Indeed, if the child wants to sell the property they can only do so if:
- the child/carer ensures the parent’s right to live there is a condition of the sale (obviously unacceptable to a third party buyer);
- the child/carer transfers the granny flat interest to another property (the more likely scenario); or
- the child/carer provides money/assets to the parent in return for the loss of mum or dad’s interest.
Payment by the parent in consideration for the right to reside in a property for house improvements etc is considered an exempt asset for Centrelink gifting purposes and so the asset deprivation or gifting rules will not apply; provided Centrelink requirements are met.
So, if the parent has:
- transferred title in their own property to a child/carer in exchange for a lifetime right to live there; or
- paid for building improvements in a property owned by a child/carer to suit their own needs; or
- purchased a property in a child’s name in exchange for a lifetime right;
then Centrelink will not assess any of these contributions under the gifting rules. If however the consideration for the occupation right is something different or in addition, then Centrelink will assess it against a reasonable value test. In that instance, if Centrelink deems an amount to be paid over and above a reasonable sum (based on its own assessment), then that surplus will be deemed to have been gifted to the child/carer. That has implications for the parent’s pension.
This all means that where a parent and a child are looking at a granny flat interest, great care must be taken in the arrangement to ensure there are no Centrelink/pension impacts.
But in addition to the impact on the parent there can be implications also for the child/carer. This is because there can be CGT implications of the child/carer if they receive a payment from a parent which exceeds the market value of the right created. The CGT considerations are quite involved. Suffice to say that there can be revenue implications, both for the parent and for the child if careful planning is not carried out.
How should the arrangement be structured?
One of the key aspects of a granny flat interest is to assess how best to structure the arrangement. Should assets be gifted or lent and should security be taken? For example, is it best that the parent gift the amount of the intended home improvements to the child/carer (with consequential impact on the value of the elderly person’s estate) or should those monies be loaned? If monies are loaned, are there financial implications for the parent and should the loan be repaid to the estate on death?
To meet Centrelink granny flat interest requirements, the parent cannot obtain a legal interest in the property in which he or she lives and so that would generally inform the decision that Mum or Dad ought to lend monies to a child if home improvements are required. Then there is the issue of the implications for the parent’s pension income because of the deeming rate applying to interest payable on the loan – even if the loan agreement provides that interest is not payable.
So, once again, careful planning has to be considered because the amount of the loan made will influence the deemed income/interest return on monies lent and so has a potential implication on the parent’s pension income.
The importance of a granny flat agreement
Irrespective of the manner in which a granny flat interest is structured and the dollars involved, both parties to the arrangement should consider a formal agreement to document the arrangement. This is particularly important where there are other siblings involved – if only to ensure that everyone is on the same page to mitigate the risk of argument and disharmony on Mum’s or Dad’s death.
What should be covered in a granny flat agreement?
Granny flat agreements need to address the following issues:
- who the parties to the agreement are;
- a detailed recital to explain the family circumstances and dynamics which ought to demonstrate the process come to and the involvement of other family members;
- the nature and purpose of the contribution to be made by the older person being cared for;
- how the interest of the older person’s contribution is to be secured and perhaps if not, why not;
- the care and services which are to be provided to the older person;
- the legal status of the older person’s occupation of the property e.g. life tenant;
- how outgoings are to be apportioned;
- how absences and respite care for the carer are to be dealt with;
- appropriate indemnities and insurance provisions;
- voluntary and involuntary termination of the agreement e.g. deal with termination as a consequence of relationship breakdown as well as death/incapacity;
- dispute resolution;
- ensure that the agreement is binding upon the estate of a deceased party; and
- how incapacity might be addressed (consider appropriate enduring power of attorney provisions).
As always, the devil will be in the detail. Some of the challenges of old age which need to be thought through to focus on what the elderly person is to receive under the arrangement will include such things as:
- how the proposed agreement will affect other family members; will they feel dispossessed;
- precisely what household tasks will the older person have done for them;
- how will food and utility costs be shared;
- is there to be an expectation that the older person will provide childcare services for grandchildren;
- will there be access to a car, telephone or internet;
- is the older person in a position to enjoy a separate social life; how will that change;
- will there be separate access to the older person’s living accommodation arrangements; and
- will the older person be able to have a pet.
There have been a lot of cases in recent years where argument has arisen as a consequence of shared living arrangements between elderly parent and child. One of the learnings from the cases is that, ideally, the parties to a granny flat agreement should be separately represented by lawyers to avoid arguments of duress or unconscionable conduct.
Granny flats offer a sensible and, from the government’s perspective, a simpler and cheaper lifestyle alternative for a lot of elderly people. They are not for everybody but if a family is considering this option for an elderly parent or parents, then it is important that careful consideration is given to Mum’s or Dad’s financial position; particularly for pensioners. Further, there could be quite unwittingly financial implications for the child/carer as well and these need to be thought through.
Careful advice is required and we strongly recommend the arrangement be documented by an appropriate agreement for which both parties are separately represented.