Capital Gains Tax Exemption For Granny Flat Agreements created, varied or terminated from 1 July 2021
The Australian Government has announced a capital gains tax (CGT) exemption for formal granny flat arrangements.
From 1 July 2021, capital gains tax (CGT) no longer applies when a granny flat arrangement is created, varied or terminated.
A granny flat arrangement is exempt from CGT if:
the owner or owners of the property are individuals;
one or more eligible people have an eligible granny flat interest in the property; and
the owner (or owners) and the person (or people) with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature.
Purpose behind the proposed changes
The proposed changes are to encourage the formalisation of granny flat arrangements. The focus is to support stable and long-term housing arrangements and reduce the risk of financial abuse or exploitation of the vulnerable target group being the elderly.
What accommodation does this apply to?
A granny flat interest does not have to relate to properties often referred to as ‘granny flats’.
An individual can have a granny flat interest in a wide range of properties, such as a family home, a family’s rental property or holiday home. A granny flat interest can also include unit of accommodation, a spare bedroom, or an adjacent structure.
What are the legal requirements?
1. Eligibility for a granny flat interest.
For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:
have reached pension age, and/or
require assistance for day-to-day activities because of a disability.
The person does not meet the eligibility requirements if they only need assistance due to injuries they expect to recover from within 12 months.
2. Parties can either own the dwelling (where the granny flat interest will be held) currently or in the future.
3. A third party can be part of the agreement.
For example, the individual can enter such arrangements with three parties such as their family, family friends or members of their cultural community along with the party who owns the dwelling.
4. The arrangement must be in writing and indicate an intention for the parties to be legally bound by it.
The agreement is to include basic matters such as the parties to the arrangement, the circumstances in which the arrangement could be varied or terminated, and what happens on variation or termination.
5. The arrangement is not of a commercial nature.
An arrangement requiring the holder of the granny flat interest to pay rent to occupy the accommodation could be an indicator the arrangement is of a commercial nature.
Example retrieved from the Treasury Government Website
Edith is an 80 year old widow. Living by herself in the family home is too much for her to manage. She intends to sell the home and move in with her daughter Christine and her family.
Christine’s house is not big enough for Edith to live in comfortably and it is decided that Edith will contribute to the costs of building a self-contained flat on the property. Edith and Christine enter into a written agreement under which Edith contributes $200,000 towards building the flat on Christine’s property and acquires a right to live in the flat for life. The agreement also provides that it will terminate should Edith permanently vacate the unit in order to move into a residential care facility.
Under the exemption, the CGT will not be charged from the creation of Edith’s contractual right to live on Christine’s property.
Further information
Further information can be found on the ATO’s website. See also:
We’ve also provided more in to depth information about granny flat agreements in our previous article, Granny Flat Agreements: What are They and Do You Need One?
If you are considering a granny flat arrangement as an option for you, and you would like more information about a granny flat agreement, or would like an agreement prepared for your specific circumstances, contact Ardent Lawyers on (02) 4444 6808 or contact@ardentlawyers.com.au to obtain a fixed fee quote. Our fixed fee quote will guarantee the legal fees for preparing this document so that there are no hidden costs when it comes time to receive your bill from us.
We can also assist you by acting in your conveyancing matter if you are selling your home in order to downsize. We provide fixed fee pricing for conveyancing as well.
