25 August 2020

Granny Flat Agreement

Preston Law


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Explanation of a Granny Flat Agreement – definition, requirements & social security implications.
Australia Corporate/Commercial Law
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A granny flat agreement, also known as a granny flat interest and is an interest in accommodation for life which is most commonly used in the context of social security. Such an arrangement is commonly seen as an alternative for elderly family members having to move into a nursing home or aged care facility and allows such elderly family members to move in with a relative (usually an elderly parent and child) in exchange for the transfer of an asset without affecting that elderly family members social security entitlements.

What is a granny flat agreement?

Is usually a family arrangement whereby an elderly family member, generally a parent, in exchange for an asset is granted a granny flat interest in a relative's home for that elderly family members exclusive occupancy.

The elderly family, their partner or a trust or company that they control must not own the property that relates to the granny flat interest.

Does the agreement need to relate to an actual granny flat?

A granny flat agreement can relate to any kind of property, not just a separate dwelling off a main residence commonly known as a granny flat. The interest created by such an agreement can relate to a room or a separate building on a family member's land but must allow for your elderly family member's exclusive occupancy of the space.

What are the requirements for a granny flat agreement?

A granny flat agreement will usually include an exchange of assets for the elderly family member's right to live in a relative's property for life. The asset being exchanged may include property and/or cash.

The interest created under the agreement will be either a life tenancy or a life interest. The life tenancy grants to the elderly family member the right to live in the property. The life interest grants to the elderly family member a right to use and benefit from the property as they wish. The interest must not give the elderly family member legal title of the property.

The agreement should set out whether your elderly family member will pay rent, outgoings, utilities and costs for maintenance and repairs.

The agreement must also deal with what will happen should the agreement end. A granny flat agreement may end as a result of the death of the elderly family member, the elderly family member's medical needs mean it is no longer viable to remain at the property or by agreement. Where the agreement ends by agreement the agreement should deal with how the elderly family member will be compensated upon them giving up their granny flat interest.

For social security purposes, Centrelink requires that if the elderly family member leaves the property within 5 years, they will review the granny flat interest. If the reason for your elderly family member leaving is:

  • something you could expect when you created the granny flat interest, the gifting rules will apply
  • something that was unexpected, the gifting rules may not apply. Unexpected reasons may include sudden illness, family relationship breakdown, elder abuse or property damage.

Social security implications

We recommend before entering into a granny flat agreement, you seek financial planning advice to ensure that the arrangement will not affect your elderly family member's Centrelink entitlements.

Centrelink will consider the value of the asset you elderly family member has transferred for the granny flat interest by using the reasonableness test to see if your elderly family member paid more than the interest is worth. Where Centrelink assesses that your elderly family member paid more than what the granny flat interest is worth, they will assess that your elderly family member has deprived themselves of asset and this may affect their social security entitlements.

Do I need legal advice before entering into a granny flat agreement?

Whilst Centrelink does not require the granny flat agreement to be documented in writing it is strongly recommended.

Centrelink also encourage you to obtain financial and legal advice before entering into such agreement. If a granny flat agreement is properly documented it will ensure that your elderly family member has the security of tenure, that all parties are on the same page regarding the interest granted, the particulars of the asset exchanged, the parties obligations for the term of the agreement and the parties obligations when the agreement ends.

If you need advice regarding granny flat agreements, get in touch with our lawyers today.

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.

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