Australia’s ageing population, coupled with pressure on older generations to ‘downsize’, has seen a surge in the popularity of the humble ‘granny flat’. So called because such dwellings are typically compact and occupied by a grandparent, granny flats have been an attractive proposition for many, offering a blend of independent living and an ongoing close connection with family members from younger generations.

Parliament recently introduced a law excluding interests in certain granny flats from any form of capital gains tax (“CGT”).

Since the introduction of CGT in 1985, the grant of a right to reside in a property for life (or for a period of time) has triggered a ‘CGT event’, giving rise to potential liability for CGT.

So, if for example Mum grants a lifetime right to Grandma Shirley to reside in an apartment owned by Mum, and that agreement is intended to be legally binding, then any capital gain realised by Mum would be taxable to Mum. So, if Mum received $50,000 from Grandma and incurred $5,000 in legal fees to establish the agreement, Mum would have realised a capital gain of $45,000. If Mum received no payment from Grandma, Mum will have realised a capital loss of $5,000. Following recent changes to the law, these tax consequences no longer arise in relation to either the capital gain or capital loss.

Special rules apply, however, where the interest granted in the property, while intended to be legally binding, involves what is referred to as a ‘granny flat interest’. And yes, that is the actual terminology used in the legislation. The ‘granny’ in question must be of pension age or suffering a disability in order to qualify. The agreement must be in writing, but must not be ‘commercial’ in nature. If those boxes can be ticked, then CGT will not apply to Mum or Grandma either on establishment, variation or termination of the agreement.

If you are interested in finding out whether the granny flat rules apply to you, or your granny, contact us.