Granny Flats have long been an option for aging parents, older children or those who require assistance with day-to-day activities due to a disability. However, when in the planning stages, it is important to understand the Capital Gains Tax (CGT) implications of such an arrangement. Granny flat arrangements give an eligible person the right to occupy a property for life.
A granny flat is most commonly a smaller, self-contained home built on a property, separate to the main house. They will most likely have their own kitchen, lounge room, bathroom and laundry. It will have a separate entrance but is not on a separate title and is built within the boundary of a property. The granny flat cannot be sold as a separate entity unless it is subdivided under a separate title.
While many granny flat arrangements are informal, it would be worth considering a more formalised arrangement to protect the interests of both parties. This would require a legal contract to be written up.
From 1st July 2021 a granny flat arrangement is exempt from CGT when it satisfies the below conditions:
- the owner or owners of the property are individuals.
- one or more of the eligible individuals have a granny flat interest in the property.
- the owners and the individuals with the granny flat interest, enter into a written and binding granny flat arrangement which is not commercial in nature.
To be considered an eligible individual, and therefore be exempt from CGT, the person with the granny flat interest must either have reached pension age and/or require assistance for day-to-day activities due to a disability.
The parties to a granny flat arrangement do not have to be related, although often the property owners are the children, and the eligible individuals are the parents.
The exemption will only apply when creating, changing or termination a granny flat arrangement. The exemption from CGT will apply to CGT events that occur on or after 1st July 2021, even if the arrangement was entered into prior to this date.
Other CGT events that are not related to the granny flat arrangement are subject to normal CGT rules and may be liable for CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since been terminated.
For further information regarding formalising a granny flat arrangement and the CGT implications, please contact our office and we would be more than happy to assist.
Related Blogs
https://www.faj.com.au/subdividing-main-residence-selling-backyard/
https://www.faj.com.au/tax-consequences-of-short-stay-accommodation/
https://www.faj.com.au/four-year-construction-rule-buy-vacant-land-renovate
Author: Joanne Humphreys
Email: joanne@faj.com.au
