Homeowners will be able to accommodate family friends in a granny flat - without becoming liable to pay capital gains tax - in a surprise move revealed in draft legislation released by the Australian Government.
On 16 April, the Australian Treasury released draft legislation which seeks to implement the government’s 2020/21 Budget announcement to remove the potential for capital gains tax applying to granny flat arrangements.
The reform followed a review by the government’s Board of Taxation, which found that scrapping the potential tax impost should make it easier for families to look after and provide companionship for eldery or disabled relatives.
The review had recommended the reform be limited to ‘family-like’ relationships, such as when a son or daughter seeks to accommodate a mother or father in a backyard granny flat.
The draft legislation goes further and makes it clear that homeowners can enter into a granny flat agreement with any person - and avoid capital gains tax - as long as this agreement is “not of a commercial nature”.
A Treasury explanatory memorandum says homeowners who sign a granny flat agreement with “any party” - including but not limited to relatives, friends and members of the same cultural community - will be able to benefit from the legislation.
According to the memorandum, a definition of what is considered a “commercial” relationship would have to be determined on a case-by-case basis, but is likely to include situations where market rent is payable by the granny flat occupant.
At the same time, the memorandum says the granny flat occupant may be asked to reimburse reasonable household expenses, without this being considered “commercial”.
The government’s reform - due to commence on 1 July - is set to make granny flats a more attractive over 50s housing option, by allowing homeowners to accommodate older family members and friends without exposing the entire home to capital gains tax.
The reform may also reduce the potential for elder abuse, as it makes it more attractive for families to enter into formal granny flat agreements based on legal and financial advice, which more clearly define the occupation rights of the elderly family member living in the granny flat.
However, according to the draft legislation, for the granny arrangement to be tax-free:
The granny flat occupant would have to have reached pension age, or have a disability which means they required assistance for most day-to-day activities for 12 months; and
The granny flat agreement would need to give the granny flat occupant the right to live in the dwelling for life
In addition, the new law will apply to granny flat arrangements made before the law commences, if those arrangements may have led to a capital gains tax event if the new law had not been in place.
Feedback on the draft legislation is due by 29 April.
Comment from our CEO
Downsizing.com.au CEO Amanda Graham said the draft legislation was a step forward in recognising extended family situations and to improve the certainty for people entering into granny flat arrangements.
“Granny flats are an important option in allowing families to more easily accommodate and care for elderly or disabled family members,” Ms Graham said.
“Until now, there have been significant risks that occupancy of a granny flat could trigger a capital gains tax event on the entire family home.
“It’s good to see the government is considering extending the reform to family friends and even members of the same cultural community. However, the proposed rules are complex and we’d encourage people to express their view before the closing date.
“Importantly, we would urge anyone who is looking at accommodating a friend or family member in a granny flat to get their own legal and financial advice, even if this reform goes through, as this will still remain a complex area of social security and tax law.”
Find out more:
- Australian Treasury’s draft granny flat capital gains tax legislation
- Granny flat building boom expected due to tax cut pledge
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