Board of Taxation Review - Granny Flats

The Government has recently requested the Board of Taxation review CGT treatment of granny flat arrangements. Source : Assistant Treasurer media release 29 Nov 2018.

The Govt is concerned that in some cases, the tax consequences of partial loss of the main residence exemption may deter a formal and legally enforceable granny flat concession well recognised by Dept of Human Services and of benefit in some cases for social security benefits.

The advice is not expected until after the election. It should address any suggestions to modify existing tax treatment

 

To borrow the words of a red headed female polly who used to run a fish & chips shop, "Please explain!"

 

The GF concession under social security allows mum & dad to own a life interest in the home (or a GF out the back). There is no gifting. Its a common family strategy. Mum and/or Dad reside there until they die perhaps.

The key issue in this is that the Govt want to make it easier. If they see tax rules as an obstacle it could open a tax benefit.

One of the obstacles is that a GF interest doesnt align with the same views in the main residence exemption and death. Perhaps a law change that allows the GF to pass as tax exempt back to the kids on death ?? Current tax law treats the GF as taxable for that period where an inherited property on death doesnt pass that way.

Its another (legit) way for elderly parents to "gift" money without affecting aged pensions etc. A very popular strategy in asian families.

 

Thanks Paul.

 

As an example, granny is living in her home and getting old. Sonny Jim says hey mum, build a granny flat out the back. Because mum is building on someone else's property this is depriving her of assets and income which could be earned from those assets disposed of (the cost to build). So there are concessions for doing this if the limits imposed under the social security act are met and if mum has a legal right to remain in the property, until death.

But granting a life interest is a tax event as if giving one up. This could potentially cause CGT to apply to both child and mum, under some circumstances.

 

Well described Terry.

 

G’day Terry and Paul.

In addition to the capital gains tax considerations, I also understand you also have to pay stamp duty on the transfer of property (while this would be avoided) if it was inherited.

Can you confirm?

 

Generally not from the deceased to the executor and then the executor to the beneficiary

 

Thanks Terry. I get the deceased part I was more asking about the granny flat arrangement.

If a granny flat arrangement is entered into and a property is transferred, I understand stamp duty would be paid in that situation?

 

What is being transferred? Title or a life interest. Granny flats generally do no come on depart titles so cannot be tranferred separately. Granting or transferring a life interest could result in stamp duty