You have ageing parents who don't want to move into aged care. There is room to extend your home or build out the back. The prospect of having mum and dad living close by is heartening. It's also mutually advantageous: you can help care for them, while they can help care for your young kids.

So, the simple solution is to build a granny flat. However, it's not as straightforward as it may seem.

Selling home with granny flat can attract capital gains tax, but this will soon change

An existing problem with granny flat arrangements is the risk that part of your home could be subject to capital gains tax when you sell. Fortunately, this problem may soon be overcome, with the federal government announcing that a capital gains tax exemption will be created for granny flat arrangements.

It is expected that the exemption will apply from mid-2021. However, there is an important condition you need to be aware of. For the new CGT exemption to apply, there must be a written agreement between the parties, outlining the details of the granny flat arrangement.

Value of written granny flat agreement goes beyond CGT exemption

Having a written agreement outlining the details of the granny flat arrangement between you and your parents is indispensable. Not only is it necessary to be eligible for the new capital gains tax exemption, but it also addresses a range of questions and potential problems. These include the following.

  • Who pays for the construction costs associated with the granny flat?
  • If your parents are to pay, how is their contribution secured?
  • What happens if things don't work out? For example, if mum or dad eventually need a higher level of care than you can provide?
  • What happens if you decide you need to sell your home?
  • Who pays for the maintenance and upkeep of the granny flat?
  • Will the arrangement affect your parents' pension entitlement?
  • What impact will there be if you suffer a marriage breakdown, or if a default on your mortgage results in your home being sold by your bank?

Relationships can deteriorate and circumstances can change

As lawyers we unfortunately see scenarios in which relations between tenants and owners in granny flat arrangements have deteriorated, or circumstances have changed, causing stress and emotional and financial turmoil for both parties.

A December 2020 article in the Law Society Journal, Failed granny flat arrangements, outlined three cases which reached the NSW Court of Appeal in the preceding 15 months, where a granny flat arrangement collapsed because relationships within the family broke down and the younger generation ultimately evicted the older generation. (For more information, please see also Could the daughter evict her parents, or had she made a contractual promise that they could live in her house for life? Which case won?)

By having a legal document in place before a granny flat arrangement commences, the potential for problems that could cause friction within a family can be reduced.

Client spends life savings on living arrangements which end in AVOs

In a recent matter, one of our elderly clients was living in her children's house as part of a granny flat arrangement. Although not a separate dwelling, she had her own quarters in the house.

Unfortunately, the relationship fell apart and apprehended violence orders were granted for both parties, meaning that our client and her children could not go near each other.

This is very problematic for our elderly client, as without a full kitchen in her living quarters, she needs to access the children's part of the house to cook.As a result of the AVO, she also has to navigate walking around the perimeter of the house to access the garage, which is extremely dangerous and difficult for her, as she has problems with health and mobility.

Having used her life savings to pay for the living arrangements, our client may end up homeless, as she now cannot afford a nursing home bond.

Importance of creating written agreement before commencing plans for granny flat

It's best for you, along with your parents, to consult an appropriately experienced solicitor to prepare a written agreement before building a granny flat on your property. Both parties - the tenants and the owners - benefit from thinking through all potential scenarios and working out a written agreement, with legal advice.

We also often advise parties to include mediation in the written agreement, as a path to be taken before commencing legal proceedings. This can lessen the cost and stress of taking legal action, should it come to this.

Written agreement helps to prepare for the unexpected

We often hear clients who are thinking about entering into granny flat arrangements say that they don't need to worry about things going bad with their children or their parents, as they have a good relationship. While this may be the case, it is always best to prepare for the unexpected.

While people don't like to think about such things, situations can arise that can impact the living arrangements - such as the death of the child and the spouse wanting or needing to sell the house, or sudden financial problems that mean the house needs to be sold.

Danger of being accused of elder abuse

Children also need to be aware that if the actions they take or decisions they make regarding the living arrangements impact on their parents' living situation or finances, this could potentially be construed as elder abuse. This can lead to litigation in a worst-case scenario.

Things can and do go wrong, and that is why it is always wise to seek legal advice before entering into agreements of this type.

Addressing the possible legal problems that could arise will safeguard you against these unexpected events, as well as from the risk of a capital gains tax liability if you decide to sell your home in the future.

Tony Mitchell
Anneka Frayne
Contracts and business agreements
Stacks Law Firm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.