Generally, when people refer to “Granny Flats”, they envisage a self-contained dwelling attached to or built adjacent to a private home. However, from Centrelink’s point of view, a granny flat interest may be very different from the above description. To obtain the maximum benefits available through Centrelink (now called Department of Human Services), you have to do it right.
As far as Centrelink is concerned, for older people there are four ways they can set up a granny flat arrangement and remain eligible for the pension. These are:
- Transferring the title of a property to a family member on the basis that the transferor retains the right to a lifetime accommodation in the whole or part of the property;
- Paying a lump sum payment to a person on the basis that the payer receives the right to lifetime accommodation in part of the property owned by that person;
- Paying to build a granny flat on somebody else’s property; or
- Contributing to the purchase of a property in someone else’s name on the basis that the payer gets a lifetime right to live in all of or part of the property.
The crucial element is that the property must be in someone else’s name and the basis of any payment or transfer of property must be that the payer or transferor receives a lifetime right to live in the property.
To avoid people abusing the system, Centrelink requires that there be a reasonableness test to avoid people divesting themselves of an unreasonable amount of assets in order to get under the assets test limitations. If Centrelink has reason to review the arrangement and finds that the amount transferred or paid exceeds the “reasonable” limit, the “overage” will be regarded as a gift and subject to the current limits of $10,000.00 per year for both singles and couples and no more than $30,000.00 over a five year period. Any sums above those limits will be subject to the means test meaning, in effect, that they will be counted as assets of the transferor or payer and will affect their pension eligibility.
There is a further catch. If the person getting the benefit of the life interest in the granny flat property leaves within five years, Centrelink will review the granny flat interest. If the reason for leaving is something that was expected when the granny flat interest was created, the gifting rules will apply. If it was something unexpected like sudden illness, family relationship breakdown, elder abuse or property damage, the gifting rules will not apply.
A properly documented Granny Flat Agreement would provide that if the right of residence was terminated before the death of the life tenant, damages would apply and these could be anything from a specified lump sum or the refund of the moneys paid or the value of the property transferred.
As the person obtaining the benefit of the granny flat arrangement does not have any title in the property, in order to comply with the Centrelink requirements, great care has to be taken to consider claims of various family members upon the death of the life tenant, so, in part, the whole granny flat arrangement should be carried out as part of a well considered estate planning arrangement.
There are many traps for the unwary and whilst there are many benefits for the parties involved, it is most important that the parties take legal advice and advice from a financial planner. Paul Pritchard has considerable experience in this area and can be contacted on (02) 9543 1444.
Paul Pritchard
