The Australian Government has recently introduced draft legislation that aims to formalise ‘granny flat’ arrangements by providing CGT based exemptions.
WHAT CONSTITUTES A GRANNY FLAT ARRANGEMENT?
Granny flat arrangements are deemed to have occurred when an elderly individual transfers some sort of consideration to their adult children in exchange for continued care, support and housing. These agreements are often utilised by parents as a way to provide their children with an early inheritance.
THE PURPOSE OF THE PROPOSED LEGISLATION
In 2017 an Australian Law Reform Commission report showcased how granny flat arrangements that lack formality had a tendency to be easily manipulated by the individuals receiving the consideration. Therefore, these informal arrangements can often lead to Australian Seniors being left homeless.
The current Australian tax system, in particular, the capital gains tax (CGT) system, is setup in a manner that disincentives the formalisation of granny flat arrangements. This is the result, since a formalised arrangement can potentially lead to an upfront tax liability and a reduction in the main residence exemption for the home owner. Alternatively, under an informal arrangement, any consideration is considered a gift and therefore the main residence exemption will remain unaffected.
Recent Draft legislation has been proposed, that would see most formalised granny flat arrangements receive a full CGT exemption.
It is key to note that this would not mean that every separate dwelling out the back of a house will be eligible for a CGT exemption. The proposed legislation uses the legal meaning of a granny flat to differentiate between what arrangements are eligible for a CGT exemption. This meaning states that a granny flat is an agreement that arises when consideration is provided in exchange for a right to use accommodation for life.
The draft legislation provides that no CGT event will arise from a granny flat arrangement where certain conditions are met including where the individual with the granny flat arrangement has:
- Reached pension age or has a disability, and
- That the arrangement is in writing and is not of a commercial nature.