Tech Update

Granny Flats – letting the family stay together longer

As much as we may fight it, growing older is not an optional! It happens to us all. As in most western societies, the twin benefits of a increasing standards of living plus higher levels of medical care in Australia means that we are all living longer as well.

While as financial planners, we tend to concentrate on the financial issues of our clients, one of the key issues impacting on their daily quality of life, over potentially many years, are decisions relating to their accommodation needs.

With most family units needing both spouses to work to meet the cost of their lifestyle choices, having elderly parents move into the family home is not usually a practical option. Issues such as lack of privacy, needing your own space, the elderly parent’s loss of independence are typically sighted as major problems. Retirement villages can be a good option, but they can be costly to enter and care is needed when leaving as some agreements can be quite financially onerous. Hostels and nursing homes are often seen as quite “cold” and even with the best of intentions, can tend to separate the elderly parents from involvement with the larger family unit sometimes leading to feelings of isolation, guilt and other emotional issues for all.

One option that does not seem to be considered very often is the use of a “granny flat”. Certainly in those years where parents are still largely independent requiring only a limited degree of support, to when failing health finally demands a degree of care and support that is unable to be provided in the normal domestic environment, a granny flat can be a practical solution.

A granny flat can have many advantages including:

• Can be Centrelink effective and friendly; 
• Provides a greater degree of privacy to both elderly parents and supporting children; 
• Allows both parties to maintain a higher degree of independence; 
• Adult children can maintain a level of responsibility and involvement such as organizing medications and watching for falls etc; 
• Elderly parents can maintain an involvement with the family by providing support such as after school care for working parents; 
• Various community based services can be bought in as the requirement for care increases. Services such as District Nurses, Meals on Wheels and varying levels of personal care are all possible; 
• Increased continuity to the family unit; 
• Can help maintain “family wealth”. The construction of a granny flat can enhance the value of the children’s home over time, as opposed to loosing any potential capital growth to retirement village contracts or age care facility fees; 
• Potential use beyond the needs of the elderly parents. Once the parents have moved on, the granny flat could be a source of rental income or to the family’s children as a couples “first home” while saving for a deposit.

While granny flats are usually thought of as a self contained unit located either within or attached to another home to allow the resident to be near family who can provide help as required, for Centrelink purposes, a granny flat can include other living arrangements.

For a residence to be treated as a granny flat, there is no need for the provision of care or support to the resident. Whether you live alone, with the owner, or in a separate self contained dwelling on someone else’s property, your residence will meet the granny flat requirements and can be assessed under the special rules if:

• It is all or part of any private residence; 
• It is not owned by you, your partner or an entity (eg trust) you control; and 
• You have established a “granny flat interest”.

You establish a “granny flat interest” when you exchange assets or money for a right to live in someone else’s property for as long as you live.

A lifetime right to live in the property can be established as either a life tenancy where you simply have the right to live in the property or as a life interest where you have the right to live and benefit from the property as you wish. Neither a life interest nor tenancy can be ended just because the owner decides to sell the property. Where this occurs, the owner will need to compensate the resident by either:

• Providing another lifetime right in another property;
• Ensuring that the existing right continues under the new owner; or 
• Provides financial compensation.

You can transfer any assets to the owner of the property to create the life tenancy or interest. For example, you could simply transfer the ownership of your home while keeping a lifetime right to live there, could transfer some other assets (such as cash) for a lifetime right to live in a property owned by someone else or pay to have a granny flat built or for modifications to someone else’s property to suit your needs.

Whichever route you take, Centrelink must be advised so that they can determine whether under their guidelines, you paid too much for the lifetime interest (and therefore deprived yourself of assets) and whether to treat you as a homeowner or non-homeowner for on-going asset test purposes.

Because granny flat arrangements are normally between families, Centrelink does not use a market value method to assess their worth. The granny flat is said to be worth the value of the assets you transferred or paid IF:

• You transfer the title of your residence to someone else and keep a life interest; 
• You pay what it costs to build a granny flat on someone else’s property and establish a lifetime right to reside there; 
• You pay to convert some else’s property to suit your needs and establish a lifetime right to reside there; or 
• You buy a property in some else’s name and establish a lifetime right to reside there.

Where you pay in one of these ways and do not transfer additional assets as well, no deprivation will occur. However, where you transfer assets in addition to the above, Centrelink applies a test of reasonableness.

The reasonableness test amount is the combined partnered rate of annual pension (regardless of whether you are single or partnered) multiplied by an age related conversion factor. If you are a member of a couple, the age of the younger partner is used.

The current age related conversion factors can be found at: http://www.fahcsia.gov.au/guides_acts/ssg/ssguide-4/ssguide-4.6/ssguide-4.6.4/ssguide-4.6.4.60.html

The value of the granny flat interest is the greater of the:

• Value of the home you transferred; 
• Value of the property you bought for someone else; 
• Amount it cost to convert another property; AND 
• The reasonableness test amount.

If the value of money or assets transferred is more than the value of the granny flat interest, the excess is considered to be a deprived asset and could affect the amount of pension payable.

The next step is to determine whether you will be treated as a homeowner or not as this will determine whether the amount you paid is an asset, which asset test applies and whether you are entitled to rent assistance. To do this, Centrelink takes the difference between the asset limit for a home owner and a non-homeowner (known as the “extra allowable amount”) and compares it to the “entry contribution” paid by the granny flat resident. Currently, the “extra allowable amount” is $135,000.

The “entry contribution” is:

• If you were NOT assessed under the reasonableness test:
• The amount you actually paid
• If you were assessed under the reasonableness test:
• The value of the granny flat interest, if you were assessed as paying more than your reasonableness test amount; or
• The amount you actually paid if you were assessed as paying less than your reasonableness test amount.

The table below shows how your entry contribution affects your entitlement both for homeownership and the asset test.

Finally there is the question of what happens if you leave the home in which you have a granny flat interest. If this happens within 5 years, Centrelink will review the situation to determine whether the deprivation rules apply. Generally, if the reason could have been anticipated, the deprivation rules will apply. It should be noted that simply moving from a granny flat into aged care accommodation is not necessarily unanticipated! However, temporary absences of up to 12 months or absence due to loss or damage do not trigger deprivation.

While the rules regarding granny flats are not complex, they are convoluted! However, there are a number of strategies that may be useful and certainly some qualitative and emotional benefits to both the resident and there family that make consideration of these issues well worth while.