It’s a beautiful idea: well-meaning children adding granny flat extensions to their homes to accommodate elderly parents.
Unfortunately, it can be fraught with financial risk, leading estate planning lawyer Paul Paxton-Hall explained.
Mr Paxton-Hall said the tax issue occurred when the cost of building the granny flat was paid for by the parents and treated by the Australian Tax Office (ATO) as a financial benefit to the home owner.
He said the current system was counter-productive, with the social services system encouraging people into the ‘family care’ model but the ATO was able to enforce Capital Gains Tax payments on these families.
“The first thing most children worry about in this situation is whether mum and dad will lose any of their pension,” he said.
“But the real issue is the transfer of the funds to the children to cover the cost of building the granny flat in the first place.
“The ATO considers the value of the improvements may be subject to capital gains tax.
“If these transactions aren’t planned and handled carefully they can place a huge and unintended financial burden on children who are just trying to do the right thing by their parents.”
Mr Paxton-Hall said with the increasing cost of homes, our ageing population and a lack of retirement living, people in their later stages of life looking to downsize were more frequently choosing the granny flat model.
“There are two specific ways that these transactions generally occur,” he said.
“Either, in exchange for living in the granny flat, mum and dad transfer the property—or money to buy the property—to the children, or mum and dad pay for the construction of a granny flat to then live in.
“The problem arises if the value of the money received or contributed is less than the market value of these improvements.
“That’s the trigger for Capital Gains Tax event D1.
Here’s the warning: “This means that quite unwittingly the child of an elderly parent who is providing occupancy rights to the parents could find themselves in the situation of receiving a nasty tax bill for displaying generosity.”
Mr Paxton-Hall said while the granny flat model was becoming increasingly popular, the fact that this tax event was created as a result of these transactions was widely unknown.
“Social services is favouring people who move into a model like this,” he said.
“It keeps people out of the system longer, reduces demand on government funding, and keeps willing older people at home longer … But it just seems counter intuitive when the system encourages you to do one thing but hands you a financial penalty in the process.”
This shows how mean the government and society has become. Why make life so complicated for old folks and their caring children who are just trying to do the right thing and have a reasonably comfortable retired life living with their adult children.
Has Australia become that poor that it has to milk every cent out of retirees and their children who are trying to provide for them? Why does it matter if the parents or the children are paying for the construction of the granny flat? When the parents bought or built their home, did ATO and Centrelink ask if they were using the FTB or Youth Allowance money? Did the children contribute by doing casual or part-time work? So why question who is paying for the granny flat now?
The criteria should be simple and straight forward – as long as the granny flat is a modest 1 or 2 bedroom dwelling not larger than say 80 square meters built up then no tax, no CGT and no impact on pension – just do it and nothing to worry about.
If the “granny flat” is a MacMansion intended to make a huge profit when sold or rented out when the parents are gone then ATO and Centrelink can look into it.