Granny Flats – A Retirement Planning Solution

With life expectancy increasing leading to older Australians seeking to rely on the aged pension and opting to live with their family, the use of granny flats (where permitted under local planning laws) can offer a retirement planning solution for elderly parents looking for a stable home and family support in their retirement.

While establishing a granny flat arrangement can be a useful retirement solution, knowing the social security rules are important. For social security purposes, an elderly parent can transfer certain assets in exchange for a “granny flat interest”.  A common exchange or transfer of asset arises where the elderly parent provides construction funds to build a granny flat or residence on the children’s property.

For a “granny flat interest” to arise, certain rights must be established in the elderly parent in exchange for the transfer or payment of funds, namely:

·         Right of occupancy for life in a residential property

·         Payment has been made for the right of occupancy

·         Elderly parents do not own the property in which they reside

Normally the transfer or payment of funds to meet the construction costs of the granny flat would be deemed to be a gift and would affect the pension entitlements of the elderly parent. However, the “granny flat interest” rules allow for money paid to the children to be exempt from the usual deeming rules for social security purposes.

Services Australia will look at the value of the asset or monies transferred to see if a ‘reasonable amount’ has been paid. If Services Australia consider that the monies transferred is more than the value of the residence right, they will determine that the elderly parents have deprived themselves of an asset that could impact on the amount of the pension available.

Importantly, Services Australia requires a proper legal agreement to support the granny flat arrangement.  In addition to knowing the impact on the social security entitlements, it is imperative to have regard to other considerations including:

·         ability to meet future aged care costs

·         estate planning

·         disputes if parents have a falling out with their children

·         tax consequences