Business during COVID 19 - see here for more details

Granny flat arrangements – pros and cons

Downsizing from your family home may be an attractive option in today’s property market freeing up funds for you to enjoy your retirement and providing freedom to travel.

Constructing, or contributing towards the cost of, accommodation at a family member or friends’ own property can give peace of mind and support to assist in later years.

In a typical case, granny flat arrangements occur when an older person transfers some sort of consideration (often title to property or proceeds from the sale of property) to their adult child or close friend in exchange for the promise of ongoing care, support and housing. The arrangements can be formal, but more often than not they are informal.

These arrangements can be beneficial to all parties involved.

When operating effectively, they can provide benefits to the adult child or friend in the way of property or funds, and benefits to the older person in the way of care, support and housing.

However, the older person tends to be in a more vulnerable position and can suffer serious consequences if circumstances change. Problems can arise, for example in the case of:

  • the adult child/friend predeceasing the older person;
  • either party wanting or needing to sell or move;
  • relationship breakdowns between the adult child/friend and their partner; or
  • the adult child/friend becoming bankrupt.

Such contingencies are often not considered, and this, combined with the common informality of granny flat arrangements, can make it difficult for the older person to establish, assert or enforce their rights under the arrangement.

What is a granny flat arrangement (GFA)?

It is the right to accommodation for life (circumstances allowing).

It might be that the granny flat is a traditional self-contained freestanding dwelling, or it may be a part of a family home, or a separate unit.

Sometimes, it is the transfer of a home to someone else for no cost (or the purchase of a home in someone else’s name), and the retaining of a lifetime right to reside in that home, or in another home owned by that person.

CGT Considerations for property owner

Until recently, the property owner had concerns regarding capital gains tax (CGT) events which could arise upon entering into, varying or terminating a GFA.

Legislation changes from 1 July 2021 provide for a CGT exemption for GFAs that provide accommodation for older Australians or people with disabilities where there is a formal written agreement in place. Broadly, the effect of these amendments is that a CGT event does not happen on entering into, varying or terminating a GFA that satisfies the legislative requirements.

Also, the existence of a granny flat interest does not affect the application of the CGT main residence exemption for the property owner.

Centrelink/DVA rules

If the resident is entitled to receive the pension, selling/transferring the family home and thereby changing savings or assets which would be subject to the Centrelink/DVA assets and income testing, usually results in a recalculation of pension entitlements.

However, a properly drafted GFA may satisfy Centrelink/DVA’s special rules for the purchase of the right of residency in the granny flat. Centrelink/DVA have a reasonableness test which, if satisfied, can preserve pension entitlements and minimise future aged care fee implications.

What is needed in your GFA

It is important that your GFA addresses everybody’s understanding of each other’s rights because, notwithstanding the best of intentions, things can (and often will) change.


  • Financial contributions, and terms relating to construction (if the granny flat is to be constructed)
  • Contributions for property expenses – rates, water usage and utilities
  • What will happen if the property owner or resident voluntarily, or involuntarily, needs to move?
  • What will happen if the property needs to be sold?
  • The level of care and support that will be provided
  • If the resident dies, does the property owner repay the financial contribution to the resident’s estate? Or does it form part of the property owners inheritance?

Written agreements can also be endorsed by all family members, so that your children or relatives who are not a party to the agreement are informed and assured of your intentions, and this can alleviate any potential conflicts amongst your family in the future.

The Property Law Act enables the registration of a life interest on the property title which will bind all future property owners. However, there are legal implications in registering the life interest (for example the ability of the property owner to refinance or obtain other finance).

There are many pros and cons to be considered and every case for every individual is different and requires both legal and financial advice.

If you would like any further information or advice in relation to your circumstances, Ken Waddington and Mahoney Neuwirth of our office would love to hear from you.

If you need help, or have a question get in touch with us today.