Understanding Granny Flat Agreements

More and more retirees are considering a granny flat arrangement for their retiring years. They appear, at first glance, to be a simple and informal way for children to help their parents age in a way that allows them to be part of every-day family life. 

Legally, however, these agreements can very quickly become complex beasts.  A well drafted agreement and proper legal advice is critical.  Often, as a lawyer it will be necessary to help clients navigate complicated family dynamics and consider the implications for estate planning and decision making.   

What is a “Granny Flat” Interest?

A granny flat interest is either:

  1. a life tenancy – the right to live in the property for life; or
  2. a life interest – the right to use and benefit from the property as you wish, for life.

Importantly, a person acquiring a granny flat interest will not have an interest which can be registered on the title to the property. A person’s right to live in the granny flat is based in contract. 

There is no legal requirement for a person to document a granny flat interest, however failing to do so may result in disputes, uncertainty, capital gains tax liability for the homeowner, and will be more difficult to substantiate to Centrelink. 

One of the benefits of these arrangements is the special treatment they are given by Centrelink. 

The Services Australia website defines a “granny flat interest or right’ as a right to live in a specific home for life. This interest or right is purchased for consideration.  It must be:

  • all or part of a private residence;
  • the person’s principal home; and
  • not owned by the person acquiring the granny flat interest, their partner, or a trust or company controlled by the acquirer of the interest.[1]

The interest exists only for the lifetime of the person acquiring the interest. It does not form part of the acquirer’s estate when they die.

There are no restrictions on the type of property in which a person can hold a granny flat interest – that is, it does not have to be a traditional “granny flat”. 

The interest may include:

  • a space in the same building as the owner of the home
  • a separate, self-contained building on someone else’s land.

For example, you could transfer:

  • ownership of your home and retain a lifelong right to live there, or in another private property; or
  • assets, including money, in return for a lifelong right to live in a property.

Preparing your Granny Flat Agreement

If a person intends to enter into a granny flat agreement, it should cover a number of important elements, such as:

  • the elements required for determination of a “granny flat interest” by Centrelink, namely:
  • the person transfers a described and valued consideration for a life interest or right to accommodation for life; AND
  • the life interest or right to accommodation for life is in a detailed private residence that is to be the person’s principal home, and the holder of the life interest is not the registered owner of the property.
    • a clear description of the consideration to be paid, when it is to be paid, and how it is to be applied;
    • a clear description of the property in which the granny flat interest is to exist;
    • all material obligations regarding payment of maintenance costs, repair and outgoings;
    • any personal care and support to be provided (usually from adult child to parent, but also from parent to adult child, especially where caring for grandchildren is part of the arrangement);
    • whether any party expects to receive Carer’s Payment or Carer’s Allowance from Centrelink as a consequence of care and support to be provided;
    • division of living spaces within the home;
    • a clear and comprehensive mechanism to deal with early termination of granny flat interest:
      • due to: Relationship breakdowns, ill health, bankruptcy or mutual agreement, need for residential aged care or the like, or mutual agreement
      • method for calculating compensation if necessary (including whether capital gains are to be factored in);
      • whether the registered owner is required to grant a granny flat interest in another home, if possible.
    • an acknowledgement that all parties have received, or at the very least have had the opportunity to take, independent legal and financial advice.
    • ideally, an obligation on the property owner to consent to a caveat being registered against the title to the property to secure the granny flat interest.

Our lawyers are experienced in the preparation of these agreements.  Please contact us to arrange an initial consultation to discuss your circumstances.

 Dispute Resolution

There is no question that a poorly drafted granny flat agreement, or worse still, no agreement at all, is fertile ground for disputes. 

If your granny flat arrangement is not working out, our lawyers are experienced in helping clients navigate these difficult circumstances to reach a resolution.

 Centrelink & Deprived Assets

A person paying for a granny flat interest will be required to prove to Centrelink that the interest has been created, what was transferred to the owner of the property (that is, money or property), and where the granny flat is or will be located.

Centrelink will then assess:

  • whether the granny flat interest holder is a homeowner or non-homeowner under the special residence rules (which will determine whether the value of the granny flat interest is exempt from the asset test, and which asset test threshold applies for pension purposes); and 
  • whether what was transferred in exchange for the granny flat interest was a “reasonable amount”. If it is determined that an amount in excess of a “reasonable amount” was paid, Centrelink’s deprived asset rules will apply.[2]

Where a person is found to have “gifted” an asset, that asset will be viewed by Centrelink as a deprived asset. The Social Security Guide defines a deprived asset as an asset that has been disposed of for nil or less than its value.

Where an asset is a deprived asset, the value of the asset is still included by Centrelink for assessment purposes and can impact upon assessment of pension eligibility and rates.[3]

Some or all of what is paid for a granny flat interest may be a “deprived asset” where the consideration paid for the granny flat is too little (and the granny flat interest holder is not a “homeowner”, or is too high (not a “reasonable amount”). 

Please call us to discuss your circumstances with a lawyer.

 Capital Gains Tax

A significant CGT liability can arise on the creation, variation or termination of a granny flat interest (that is, CGT Event D1, which happens on the creation of a contractual right or other legal or equitable right in another entity).[4]

In the last budget the Morrison Government announced a “targeted Capital Gains Tax (CGT) exemption for granny flat arrangements where there is a formal written agreement in place.[5]

The Treasurer announced that under the measure, CGT will not apply to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities. 

The amending legislation commenced on 1 July 2021. 

Informal, undocumented agreements will not be eligible for the exemption.

 Estate Planning

Transferring a large amount of capital to one or more children during your lifetime may impact on your ability to benefit your other children or dependents in your will. It is vital that you consider the impact of any granny flat agreement on your estate plan. Our lawyers can provide you with tailored estate planning advice and assist in the preparation of a new will and enduring power of attorney, if desired.


There may be an alternative to a granny flat agreement which would better suit your circumstances.  Our lawyers can discuss these alternatives with you during an initial consultation.

 By Kristel Winkler,  Director

Kristel Winkler and the team at Donovan Winkler regularly assist individuals with their estate plan and retirement living options.    Kristel Winkler presents to lawyers and accountants on retirement living issues across Australia.    Contact us to learn more.


(07) 3188 5124



[1] https://www.servicesaustralia.gov.au/individuals/topics/granny-flat-interest/27756

[2] Australian Government, ‘Social Security Guide Version 1.277’ https://guides.dss.gov.au/guide-social-security-law//4/6/4/50 at 6 January 2021, [].

[3]Section 9(4) Social Security Act 1991 (Cth); Australian Government, ‘Social Security Guide Version 1.277’ https://guides.dss.gov.au/guide-social-security-law//1/1/d/110 at 6 January 2021, [1.1.D.110].

[4] Income Tax Assessment Act 1997 (Cth) s 104.35.

[5] Joint media release issued 5 October 2020 by the Treasurer and the Minister for Housing and Assistant Treasurer https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/removing-capital-gains-tax-granny-flats.




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