Granny Flat Agreements

What is a granny flat agreement? A granny flat agreement (also known as a granny flat interest) is an interest in accommodation for life. It is a family arrangement offering an alternative for elderly family members (which for this article we assume are parents) who may otherwise have to move into a nursing home or aged care facility. It allows a parent to move in with a relative (which for this article we assume is their child) in exchange for the transfer of an asset without affecting their Centrelink entitlements. Parents are granted a granny flat interest in their child’s home in exchange for exclusive occupancy. The parent, their partner or a trust or company they control must not own the property in which they have a granny flat interest. Does the agreement relate to an actual granny flat? A granny flat agreement need not relate to a separate dwelling known as a granny flat. It can relate to a room or a separate building on the land but must allow for the parent’s exclusive occupancy of the space. What are the requirements for a granny flat agreement? A granny flat agreement will usually include an exchange of assets (possibly property and/or cash) for the parent’s right to live in their child’s property for life. The agreement creates either a life tenancy (which grants the parent the right to live in the property) or a life interest (which grants a parent a right to use and benefit from the property as they wish) but not legal title to the property. The agreement should set out whether the parent pays rent, outgoings, utilities maintenance and repair costs. The agreement says what will happen if the it ends, which may be due to the parent’s death, or their medical needs meaning they can no longer live at the property, or by agreement. The agreement should deal with how the parent will be compensated for giving up their granny flat interest if it ends by agreement. If the parent leaves the property within 5 years, Centrelink reviews the granny flat interest. If their reason for leaving is:
  • something you could expect when you created the granny flat interest – the gifting rules will apply; or
  • something that was unexpected – the gifting rules may not apply.
Unexpected reasons may include sudden illness, family relationship breakdown, elder abuse or property damage. Centrelink implications Before entering into a granny flat agreement, you should seek financial planning advice to ensure that the arrangement will not affect your parent’s Centrelink entitlements. Centrelink will apply the reasonableness test to determine whether the value of the asset transferred for the interest was more than the it is worth. If they assess that the amount paid was more than the value of the granny flat interest, the parent will be considered to have deprived themselves of an asset, which may affect their Centrelink entitlements. Do I need legal advice before entering into a granny flat agreement? Centrelink does not require a granny flat agreement to be in writing but it is highly recommended. A parent should seek financial and legal advice before entering into a granny flat agreement. A properly documented granny flat agreement will ensure that:
  • the parent has the security of tenure; and
  • all parties agree regarding the interest granted, the particulars of the asset exchanged, the parties obligations during the currency of the agreement, and the parties obligations when the agreement ends.
If you need advice regarding granny flat agreements, contact us today.
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