In many Chinese families it is natural for parents to live with an adult child. Often the parents contribute money: they pay for an extension, help pay off the mortgage, sell their own home and put the proceeds into their child’s property, or move from overseas and fund a larger house. In return, they expect to live there for the rest of their lives.
Usually nothing is written down. That works well until something changes.
What can go wrong
- The child separates from their spouse, and the property becomes part of a family law property settlement.
- The child dies first, and the property passes under their Will or to their spouse.
- The child gets into financial difficulty and the property is sold.
- Family relationships break down and the parents are asked to leave.
- Other siblings feel the arrangement was unfair, especially after the parents die.
In each case, parents who contributed large sums may have to go to court to recover anything, at a time in life when they can least afford the cost or stress.
What is a granny flat arrangement?
Despite the name, it does not require an actual granny flat. A granny flat arrangement is an agreement under which a person, usually an older parent, transfers money or assets in exchange for the right to live in a property for life. The home may be the child’s main house, a unit on the same land, or a separate dwelling.
Tax and Centrelink
Since 2021, a capital gains tax exemption has applied to formal granny flat arrangements that meet certain conditions. These include having a written agreement, the arrangement not being commercial, and the person with the right to live there having reached age pension age or having a disability. Without the right structure, the property owner could face an unexpected tax bill.
Centrelink also has specific rules for granny flat interests. They affect how the parent’s payment is treated under the assets test and whether it counts as a gift. Getting this wrong can reduce a parent’s pension.
If land itself is transferred between parents and children, Victorian stamp duty may also need to be considered.
What a written agreement should cover
- how much the parents contributed, and for what;
- which part of the property they may occupy, and for how long;
- what happens if the property is sold, or if the parents move to aged care;
- whether, and how much, money is repaid if the arrangement ends;
- who pays for rates, insurance, repairs and outgoings;
- what happens if the child separates or dies.
Both the parents and the child should receive independent legal advice. This protects the parents, and it also protects the child against later claims that they took advantage of their parents.
Wills should match the arrangement
The child’s Will should recognise the parents’ right to remain in the home. The parents’ Wills should take into account the money already contributed, so that their other children are treated fairly.
How Chua Tan Associates can help
We prepare granny flat agreements and coordinate them with Wills and powers of attorney for the whole family, including parents who have moved from overseas. We advise in English, Mandarin and Cantonese.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice. Victorian law unless stated otherwise.
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