The short answer is: when you read the outline given in the Guide to the Social Security Act.
I am sure most of us think of a Granny Flat as a small structure or extension built onto a current dwelling to accommodate someone’s mother, father or a grandparent.
Depending on the need or the perceived need, the costs of such a structure or extension is very difficult to quantify.
I have seen advertisements for $195,000 granny flats and a video showing how you can build your own for less than $10,000. Although with my carpentry skills, this is one option I will not be attempting.
Why would a person contemplate a granny flat?
There are a number of very common reasons:
- Gran is not well and the kids would like to have her close so that they can care for her;
- Gran is lonely and can no longer afford to maintain the large house after granddad has passed away; or perhaps
- Gran can’t afford a home of her own so the kids build an extension onto their own home to help her out.
But a Granny Flat under the Social Security Act can be so much more!
The Social Security Act version of a Granny Flat is recognition of a “family arrangement that provides support for elderly people”. A very broad interpretation I am sure you would agree.
But what does it mean?
It means that if I want to turn my three bedroom house into a four bedroom house with and an extra bathroom, living and dining area and have Gran pay for it, that is fine as long as Gran is going to live in it. If Gran wants to give me her house in exchange for a life interest, that is fine and if Gran wants to buy me a house in exchange for a life interest that is also fine.
But under the Social Security Act, isn’t Gran only allowed to give away a maximum of $10,000 per financial year or a total of $30,000 over five years before the excess is assessed as deprivation? Under the general rules this is certainly true.
However, when dealing with Granny Flats, this is not the case. The following is a direct quote from the guide to the Social Security Act:
“The value of a Granny Flat interest is GENERALLY the same as the amount paid for the interest. This means there is NO deprivation amount.”
Word of warning: before you go off and talk to Gran or Gran decides she is going to give away the house (like all legislation which relates to a person’s entitlement to an age pension) it does come with an additional “test of reasonableness”. This test looks at the value of the assets or assets which have been transferred in exchange for the life interest or the construction of the Granny Flat. So be careful.
If you are contemplating such an arrangement within your family, talk to someone who understands what you can and can’t do…remember, if you go ahead with it and Gran’s age pension is affected, it can be all too difficult and expensive to reverse it.7