Don’t let a granny flat arrangement wreck your retirement

Senior financial adviser and aged care specialist Craig Phillips explains where you could go terribly wrong when considering a granny flat arrangement.

The granny flat has been around for years and can be a completely viable living option for a family member or loved one who needs a little extra assistance and no longer wants to live by themselves.

A granny flat arrangement can offer a level of independence and a real alternative to retirement villages, and can be more attractive than permanent residential aged care. If you did a quick poll on the street and asked what people believe is a granny flat, you’re likely to get a few different answers and, surprisingly, there are a few more meanings than you may think.

A granny flat is typically considered to be a self-contained unit either attached to a home or in the backyard. A granny flat interest, as defined by Centrelink, is a bit different as Centrelink is concerned with what type of agreement for life has been established – not so much a description of the real estate. Centrelink considers a granny flat interest as one where someone ‘pays’ for a life interest or life tenancy, and the life interest or life tenancy is in a private residence that will be the person’s principal home.

Until legislation passed in June, many families were reluctant to document the changing of money as it likely meant a possible unwanted immediate capital gains tax event for the recipient of the gift. This was leaving the older person in a vulnerable position should it not work out or the owner of the property suffers an event such as divorce, bankruptcy or a legal claim. The house may be at risk as it could form part of that person’s assets, which then become available to creditors or as part of divorce settlements. Anyone considering granting a granny flat interest by handing over money or titles must have a specialist lawyer explain and document the agreement. You will need to consider that you will lose control over these funds, as ownership will now be controlled by another person. If family relationships break down, you may find the life interest you’ve been granted is no longer honoured. Legal action may then be required to have it enforced. If, later, you need to move to residential aged care, you may not have sufficient assets to pay for entry. This may restrict your choice and access to what you consider ‘appropriate’ care. If you are working through this with your financial planner and he/she isn’t across the aged care landscape, it’s important you find someone who is. It’s a complicated area and it’s easy to make a mistake. If a need to move to residential aged care is reasonably foreseeable within the next five years, it’s possible that the granny flat interest could still be counted as an assessable asset owned by you when determining how much you need to pay to enter care. You should discuss your individual circumstances with your local Centrelink/Department of Veteran Affairs office and/or seek advice.

The value of a granny flat interest is the amount paid or transferred by someone if they: • transfer the title of their home to a person and receive a life interest in return, or • pay for the construction of accommodation on another person’s property and receive a life interest in return, or • purchase a property in another person’s name in return for a life interest.

The Department of Social Services deprivation rules do not apply in these situations. However, where assets are transferred in addition to one of the situations mentioned, the Social Security Act determines the granny flat interest to be valued at a different amount under the ‘reasonableness test’ rules.

2. Pay for renovations on child’s home and move in 3. Buy new home in child’s name and move in

1. Move into child’s home and gift money Granny flat interest

4. Transfer home to child and stay living there

Louise* turned 80 this year and moved interstate to live with her only child. She is a widow but very independent and has no major health issues. After selling her home in Darwin, Louise has surplus funds of about $480,000, excluding her shares, which she could consider gifting to her daughter. In this case, the family has a room for her in the house, so no construction or purchasing is happening. Therefore, for Louise, we (Phillips Wealth Partners) needed to work out how much she could gift and create a granny flat interest and still maintain some of her Age Pension and, second, how much could she gift and retain all of her current Age Pension. Centrelink considers there to be two ways to have a lifetime right in a property: • Life tenancy – the right to live in the property. • Life interest – the right to use and benefit from the property as the person wishes. * Not her real name. Louise has assets of: • cash – $10,000 • term deposits – $509,000 • shares – $220,000.

What is a reasonable amount for a granny flat interest for Louise? The reasonable amount is the combined annual partnered Age Pension multiplied by the conversion factor. That is: $37,341.20 x 9.41 (based on age, conversion table available here), which equals $351,380. She can create a granny flat interest with $351,380 and still be considered a homeowner for the purposes of Centrelink in this scenario. Recalculating her Age Pension now, it would be about $17,680 per annum. Centrelink also uses a figure called the extra allowable amount to determine whether you would then be considered a homeowner for Age Pension purposes. The extra allowable amount is the difference in the lower asset thresholds for a homeowner couple and a non-homeowner couple, that is $621,500 minus $405,000, which equals $216,500. Therefore, Louise could consider establishing a granny flat interest of $216,000 and is left with $532,500. Her Age Pension would now be $21,190 per annum and would not be penalised by any gifting rules. That’s a win-win for everyone.

Craig Phillips is the director and a senior financial adviser at Phillips Wealth Partners.

DISCLAIMER: This information was prepared by Phillips Wealth Partners Pty Ltd (ABN 74624858420) trading as Phillips Wealth Partners and a Corporate Authorised Representative (No. 334567) of Insight Investment Services Pty Ltd ABN 22 122 230 835 AFSL 309 996. The information and examples are of a general nature only and should not be regarded as specific aged care, taxation, superannuation, retirement or social security advice. It is based on the continuation of present aged care, taxation, social security, superannuation laws, rulings and their interpretation as at the date of this article.