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Is granny flat income taxable?

CGT exemption for granny flat arrangements A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life. From 1 July 2021, capital gains tax (CGT) does not apply when a granny flat arrangement is created, varied or terminated.

ato.gov.au - Granny flat arrangements and CGT | Australian Taxation Office
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Granny flat arrangements and CGT

Find out if your granny flat arrangement is exempt from CGT.

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CGT exemption for granny flat arrangements

A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life. From 1 July 2021, capital gains tax (CGT) does not apply when a granny flat arrangement is created, varied or terminated.

When the CGT exemption applies

A granny flat arrangement is exempt from CGT if:

the owner or owners of the property are individuals

one or more eligible individuals have an eligible granny flat interest in the property the owners and the individuals with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature. The exemption only applies to creating, changing or terminating a granny flat arrangement. Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules. Example: eligibility of events for the CGT exemption Garry is eligible for a granny flat interest and enters into a granny flat arrangement with his daughter Sandra. Under the arrangement, Sandra agrees to build an attached flat on her property for Garry to live in. Garry agrees to pay $500,000 to Sandra to finance the build. Garry obtains the money from selling shares in his investment portfolio. For Sandra: Ordinarily an arrangement like this may trigger CGT because it is the creation of a contractual or other right (CGT event D1). However, under the CGT exemption, the CGT event will not happen. Sandra will have no CGT liability from the creation of the right. For Garry: The sale of his shares is not exempt from CGT under these provisions. Although the proceeds from the sale are used to finance the building of the attached flat, the sale is not sufficiently related to the creation of the granny flat interest. End of example

Granny flat interest

An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement. A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner's main residence or a separate property. It is not restricted to what is commonly referred to as a 'granny flat'.

The interest may be in part or all of the property.

For more information on granny flat interest, visit the Services Australia websiteExternal Link.

Granny flat arrangement

To be exempt from CGT, a granny flat arrangement must:

be in writing

indicate an intention that the parties are legally bound

not be commercial in nature

It should include:

the parties involved in the arrangement, including the individual(s) with an ownership interest in the property

the circumstances in which the arrangement can be varied or terminated

what happens when the arrangement is varied or terminated

A granny flat arrangement can be entered into with any party, including family or friends.

Varying or terminating an arrangement

A granny flat arrangement might need to be varied when something happens that was not included in the original arrangement. The parties involved in the original arrangement can vary the existing arrangement, adding in new terms and conditions.

They can also terminate the existing arrangement and create a new one.

The following examples explain the tax consequences of the granny flat rules. For information on the social security consequences, visit the Services Australia websiteExternal Link.

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Example: creating and varying a granny flat arrangement Jim and Joan are of pension age. They live in a home on a large block, which they are struggling to maintain. They decide to sell their home and buy a 6-bedroom home in their son, Isaac’s, name. The home can accommodate themselves and Isaac’s family. Jim and Joan: sell their old home for $800,000. The sale is exempt from CGT under the main residence exemption

buy a new home for $600,000

transfer the additional $200,000 to Isaac

create a written granny flat arrangement with Isaac. All the requirements of a granny flat arrangement have been met. Therefore, Isaac will have no CGT consequences for granting the granny flat interest to Jim and Joan. Some years later, Isaac and his spouse separate. Isaac sells the 6-bedroom family home and buys another home not too far away. Isaac is entitled to the main residence exemption on the 6-bedroom home, so there is no CGT when he sells it. Jim, Joan and Isaac move into the new family home and vary their written granny flat arrangement so that it covers the new home. As Jim and Joan are still eligible to enter a granny flat arrangement, there are no CGT consequences for Isaac when the arrangement is varied. End of example

Eligible individuals

For a granny flat arrangement to be exempt from CGT, the individual with the granny flat interest must either:

have reached pension age External Link

require assistance for day-to-day activities because of a disability.

Individual with a disability

Eligibility to hold a granny flat interest is based on the disability at the time of entering into or varying the granny flat arrangement. A individual with a disability is eligible to hold a granny flat interest if they:

need assistance to carry out most day-to-day activities because of their disability

are likely to continue needing assistance because of their disability for at least 12 months after the arrangement or variation is made. Generally, an individual who is eligible for the disability support pensionExternal Link would meet this requirement. However, the individual does not need to be eligible for the disability support pension to meet this requirement. The individual does not meet the eligibility requirements if they only need assistance due to injuries they expect to recover from within 12 months.

Types of arrangements

A granny flat arrangement typically happens between an older individual and their adult child. However, the parties in a granny flat arrangement do not need to be related. A formal arrangement makes it easier for the older individual to establish, assert and enforce rights. These rights are agreed upon by all parties involved in the arrangement, including the owner of the property.

The arrangement:

reduces the risk of financial abuse or exploitation of older individuals

provides benefits to the older individual, like housing, care and support

can also benefit the adult child with managing property and funds.

Example: creating, varying or terminating a granny flat arrangement Sophia and Mateo are of pension age. They: sell their home for $500,000 transfer these funds to their daughter, Ava, in return for a right to accommodation for life in a unit owned by Ava. To secure their interest, Sophia and Mateo create a granny flat arrangement with Ava. Under the terms of the arrangement, an amount will only be repaid in specific circumstances: Sophia or Mateo need to vacate the property due to ill-health Sophia or Mateo need to vacate the property due to a breakdown in their relationship with Ava

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Ava sells the property

any of the parties die. If Sophia or Mateo had to vacate the property, their $500,000 would be repaid to them. Sophia and Mateo are entitled to disregard any capital gain or capital loss on the sale of their home as it was their main residence. All the requirements of a granny flat arrangement have been met. Therefore, Ava will be exempt from any CGT that would have applied when she granted the right to accommodation for life. If the arrangement is varied or terminated, and the amount is returned, there will be no CGT consequences. If Ava sells her unit, any proceeds from the sale will be subject to the normal CGT rules. If Ava never lived in the unit she will not be entitled to the main residence exemption. End of example

Arrangements involving the main residence

A individual's main residence (their home) is generally exempt from CGT.

The creation, variation or termination of a granny flat arrangement does not affect the main residence exemption. This is because the granny flat arrangement is a right to occupy the property, not a right to the property itself. Example: mother transfers home ownership to daughter Mary is 70 years old. She lives in her own house, which is currently valued at $400,000. Her daughter, Isabella, lives with friends in a different house. To secure her house for her daughter’s inheritance, Mary: transfers the ownership of her house to Isabella creates a granny flat arrangement with Isabella under which Mary retains a right to accommodation for life. After taking ownership of the property, Isabella moves in and lives with her mother. When Mary transfers her home to Isabella there is a CGT event. However, Mary is entitled to the main residence exemption on the transfer of her home, so there is no CGT liability. The requirements of a granny flat arrangement have been met. Therefore, Isabella will have no CGT liability for granting her mother a right to accommodation for life. As Isabella moves into the home once she owns it, she will be entitled to the main residence exemption from CGT if she later sells it. End of example If the granny flat arrangement is commercial in nature, it is not exempt from CGT. The most obvious commercial arrangement is where the holder of a granny flat interest is required to make payments (such as rent) at a market rate. However, if the individual with a granny flat interest only contributes towards ongoing household costs (such as electricity and water), the arrangement is unlikely to be considered commercial. This is because the arrangement is a reimbursement of actual costs. Example: arrangement not commercial in nature Yu Yan and Wang Shu have both reached pension age. They: sell their home for $400,000 pay $152,000 to construct a granny flat on their son Fei Hong's property only pay for the construction of the granny flat and do not transfer any additional assets. Yu Yan and Wang Shu agreed to pay Fei Hong $150 per week to cover electricity, gas and water rate costs. As the payments are a reimbursement to Fei Hong for the household costs associated with the granny flat, the arrangement is not commercial in nature. End of example

Find out if your granny flat arrangement is exempt from CGT.

ato.gov.au - Granny flat arrangements and CGT | Australian Taxation Office
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