Granny flat boost piques interest but lacks detail

Oct 13, 2020

Tax experts have welcomed a capital gains tax exemption for homeowners with granny flats where a written agreement with the occupants exists.

However, they will have to wait to see the fine-print of the draft legislation, announced in the budget, to know how the new system will work.

The CGT exemption applies to granny flats that are either stand-alone or attached to a main residences. It will be limited to family arrangements where the flat is supporting an ageing or disabled relative, or "people with other personal ties", and is expected to start in July, 2021.

It is estimated that more than 3.9 million pensioners and 4 million Australians with a disability could benefit from having the protections of a written agreement.

Many arrangements for granny flats between elderly parents and their children are informal. The government says that increases the risks of financial abuse and exploitation of the elderly, as well as adult children with disabilities.

In the event of a family or relationship breakdown, having a written agreement that is legally enforceable would help protect vulnerable granny flat occupants. A written agreement would spell out the rights and the responsibilities of both parties to the agreement.

The 2017 Australian Law Reform Commission’s Report: Elder Abuse – A National Legal Response, which has partly prompted the change, says that while "such arrangements can fulfil an important social purpose, there can be serious consequences for the older person... if the relationship breaks down". "It may be difficult to establish that a contract was intended, and what its terms were."

A principal place of residence is exempt from CGT, whereas investment properties are subject to tax on any capital gains on sale of a property. That means for a granny flat being rented in the usual way with a residential tenancy agreement, CGT would be paid on the portion of the capital gains that is attributable to the value of the granny flat.

Ross Prosper, partner, tax and business services at Bentleys WA, says the latest reform would give "peace of mind" to granny flat owners that they would not be subject to CGT if they enter into a written agreement.

"Right now, a lot of granny flat agreements are informal and the reasons for that is so owners will not be subject to CGT," Prosper says.

Under the new measure, CGT would not apply to formal granny flat arrangements between "family members, or people with other personal ties".

"We will wait to see the legislation for what 'other personal ties' means," Prosper says. "I suspect there may be some sort of registration process for entering a granny flat arrangement."

Adrian Raftery, founder of Mr Taxman, says there are a "multitude of potential remuneration combinations and permutations with these arrangements".

An elderly parent could pay rent to a son or daughter or pay a lump sum upfront to live in a granny flat, or agree that the payment will be made through an inheritance, Raftery says.

"The CGT situation can get pretty messy," Raftery says.

The building of granny flats in Victoria significantly lags New South Wales.

Figures provided by the Housing Industry Association shows that 6,065 granny flats were constructed in NSW in 2018, but only 166 in Victoria, where the rules are far more restrictive.

NSW has a fast-track approval process whereas, in Victoria, granny flats cannot be rented out and can only house "dependents" of the owners. However, that looks set to change.

Victoria has started a pilot program of a fast track process for granny flats for Murrindindi, Moreland, Greater Bendigo and Kingston. The program will conclude in March, 2021, with a view to having it rolled out across the entire state.

The government is hoping the change will help stimulate demand for new housing and support the jobs of tradespeople at a time when the economy needs a boost most.

Jackson Yin, director of iBuild Building Solutions, which builds hundreds of granny flats, kit homes, and modular buildings each year, says "it is early days", but that his company has already seen some enquiries for new builds prompted by the CGT changes announced in the budget.

Originally article published here by The Sydney Morning Herald on 13 October 2020.

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