Australians will finally be able to build granny flats for elderly or disabled family members without facing a potential capital gains tax sting under a major reform unveiled in the 2020-21 budget.

The Australian Government has today announced that it will be providing a capital gains tax exemption for granny flat agreements.

This will mean that Australians will be able to build a granny flat, sign an agreement allowing an elderly or disabled family member to occupy the flat, and no longer face the prospect of paying capital gains tax.

Until now, signing such an agreement has been fraught with legal danger and potentially triggered, rather than avoided, a capital gains tax impost on the family home. 

This has meant that many people building granny flats for family members have avoided signing such agreements, which in turn has not provided any occupancy security to the family member.

In a joint statement, Treasurer Josh Frydenberg and Housing Minister Michael Sukkar said around 3.9 million pensioners and around four million Australians with a disability would be eligible for the exemption.

“Tax consequences can be a key impediment to families creating formal and legally enforceable granny flat arrangements,” the Ministers said.

“When faced with a potentially significant capital gains tax (CGT) liability, families may opt for informal arrangements which can leave open the risk of financial abuse and exploitation, for example following a family or relationship breakdown.

“Under the measure, CGT will not apply to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities.”

The measure will commence as early as 1 July 2021, subject to the passing of legislation.

This change will only apply to agreements that are entered into because of family relationships or other personal ties and will not apply to commercial rental arrangements.

The reform follows an investigation by the government’s Board of Taxation, which was finalised in November last year. Concurrently with today’s announcement, the Board of Taxation has now released its advisory report.

It’s expected that the reform could trigger a building boom in new granny flats, while at the same time deliver good social outcomes by allowing families to more easily care for elderly or disabled family members.

“As part of the 2020-21 Budget, this will boost the construction industry, stimulate demand for new housing and support tradies’ jobs at a time when the economy needs it most,” the government’s statement said.

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