Traditionally, a “granny flat” is a small, secondary dwelling located on the same property lot as a primary residence. These homes were often used to allow an older person to live close to their family while maintaining some independence. Of course, a granny flat is not only for “grannies”. A secondary dwelling can be used to give an older teenager their own space or to provide a space to run a business. Some granny flats can even be rented out commercially. 

This article looks at the considerations for the traditional model of a granny flat – supported accommodation for an older person who is related to the owner of the primary residence. The information is for general purposes only and we recommend obtaining professional advice relevant to your individual circumstances.

Granny Flat Agreement

An older person who decides to live in the same home as their family member, or in a secondary dwelling on the same property, can benefit from on-the-spot support and companionship. This can be an attractive alternative for an older person who does not need intensive support, but who has trouble maintaining a property, preparing meals, and getting to appointments. Even older people who are still very capable may enjoy having more company and companionship on a day-to-day basis.

However, trouble can arise when the older person makes a significant financial contribution in return for this support. Sometimes the older person will sell their own home to help with the purchase of the primary residence, or to build the granny flat, but will not have any legal interest in the purchased or improved property. This makes the older person vulnerable, especially if their relationship with the family member breaks down.

If any person makes a significant financial contribution to a property in return for a lifetime right to live there, both parties should seek legal advice about their rights and obligations. This is especially important if the person making the investment is vulnerable due to age or incapacity.

Ideally, such an agreement between the parties should be recorded in what is called a “granny flat agreement”. The document is simply a contract that sets out what has been agreed by the parties. At a minimum it should confirm that the older person has the right to live in the home for life, if that is what has been agreed. It should also clearly state any obligations that the older person has to pay rent or contribute to the upkeep of the property. It is also important that the agreement set out a plan for what happens (and how the older person will be compensated) if the residence is sold or the arrangement comes to an end (other than through the death of the older person).

Some people resist getting legal advice and putting things in writing when they are dealing with their family. It can be awkward to talk about money at the best of times, it is especially difficult to pose questions such as “What happens if our relationship breaks down?” or “What happens if you die before me?” However awkward these conversations are when they are purely hypothetical, it is better to have this discussion when everyone’s enthusiasm for the venture is high, and not down the track if things start to go sideways. 

Granny Flat Interest

For an older person receiving a Centrelink benefit, it is important to know that Centrelink has special rules for granny flat arrangements. One of the Centrelink rules is called “granny flat interest” (or the “granny flat rule”). 

A granny flat interest is where a person pays for the right to live for the remainder of their life in a home that belongs to someone else. Basically, they are considered to have purchased an “interest” in the property, even though they do not have any legal ownership on the property title. 

In this scenario, the older person may pay for a right of residence by transferring the title of their home, paying to build a granny flat on someone else’s property, or to convert someone else’s property to suit their needs. They may even buy a property in someone else’s name. The key factor is that in return for this contribution, the older person receives a right to live in the property for the rest of their life. 

The granny flat interest rule is important because an older person receiving the aged pension (or who wishes to receive the aged pension) cannot simply gift their assets away so that they qualify under the Centrelink asset test.

The granny flat interest rule allows the older person to use some of their assets to essentially buy the right to live somewhere for life. This investment is then treated as if it is a primary dwelling for the Centrelink asset test – that is, it is excluded when determining whether a person qualifies. Obtaining a written granny flat agreement is an important step in demonstrating to Centrelink that a transfer of property or cash was an investment in return for a lifetime interest, and not a disqualifying gift. 

If you or someone you know wants more information or needs help or advice, please contact us on 03 8346 4900 or email [email protected].