CGT (event D1) and granny flats

Looking into granny flats i have come across an interesting outcome regarding the cgt consequences when one family member pays for the construction of a granny flat on another family member's property. For example where an elderly couple sell their home and using these proceeds pay their child say $100K to be used to build a granny flat on the child's property for them to live in for the rest of their lives.

Under this scenario according to taxation ruling TR 2004/16 cgt event D1 is triggered - creating a right. Due to this event, the child is deemed to have made a $100K capital gain and to make matters worse this is not subject to the 50% discount. This means that almost half of the $100K intended to be used for the granny flat may be lost depending on individual tax rates.

Is there any way to avoid this from occurring?

 

Not granting an interest in the property would work. A loan from Granny perhaps. But this may have centrelink consequences.

 

Not quite sure about that. This is at core of my (unproven) belief that a granny flat is not going to trigger a CGT issue on its own and may not be a CGT asset so D1 is dubious. I keep trying to find time to seek a extensive ruling on granny flats and CGT issues. It is not an article (Para 15). It is attached to land however that land isn't necessarily not adjacent to a main residence. I don't believe it is a CGT asset OR a asset that triggers D1. How can a GF be sold ? In theory it can be sold by craneing it off the land but that's no different to any other Div 40 / Div 43 assets and they don't result in CGT. It cant be separated from the land and sold with its adjacent land.

And a further issue can arise if the GF is occupied by family v's rented. Its complex but may leave the land adjacent and a part of the main residence.

Granny flat proceeds can be exempted from gifting is my only clue.

 

Its not the granny flat that is the issue but the granting of a right such as a life interest.

But if the property is a main residence this CGT event would probably be exempt at the granting stage. At the sale of the property stage it would be more complex.

this could also be used as an asset protection strategy too.

 

My wife may have a life interest in my home too. Please explain the difference between spouse and parent. A parent can live in a main residence and not trigger a concern so what difference is a GF ?

 

S 104-35 ITAA97 is the relevant section:
INCOME TAX ASSESSMENT ACT 1997 - SECT 104.35 Creating contractual or other rights: CGT event D1

It says the creation of an equitable right is also a CGT event. Equitable rights could arise in many situations such as family law, improving someone else's property - actually this may be an equitable interest which would be different to a right perhaps.

A complex area that is not commonly considered.

 

I guess the main issue is that a pensioner may give away certain assets and not be assessed as still owning those assets if a life interest is granted.

e.g. Granny is getting older and has to sell her main residence and either go into a nursing home or into one of her adult child's homes. Moving into a child' home is not an issue if she just moves in there. But if she uses $200,000 of her own money to build a granny flat on that child's land then centrelink will deem her to still have that $200k and be earninng the deeming rate on it as if it was invested. so there will be an effect on the assets test and the income test. Granny can get around this by the child granting her a life interests in the son's property. Granting an interest means she has an interest in the property and centrelink will assess it similar to as if she legally owned a separate main residence.

The granting of an interest in the property also protects her legally if the relationship breaks down.

Keep in mind there are many sorts of interests - a right to reside, a right to receive income of the property etc and these rights can be time limited or life interested - expire on death.

See my legal tip Legal Tip 78: What is a life interest in property?