As the cost of living continues to rise and the property market remains challenging for younger generations, many Australian parents and grandparents are looking for ways to support their children financially without jeopardising their financial security in retirement.
One strategy that’s gaining traction is the use of granny flats to provide early inheritances while avoiding potential cuts to the Age Pension. But is this clever planning or a loophole that could close? Let’s dive into the details.
The granny flat strategy
The concept of the ‘Bank of Mum and Dad’ has become increasingly familiar as parents step in to help their offspring climb the property ladder. However, gifting large sums of money can have unintended consequences, particularly when it comes to Centrelink’s assessment of your assets and income, which in turn can affect your Age Pension entitlements.
Under current Centrelink rules, there are limits to how much you can ‘gift’ without impacting your pension. If you exceed these limits, you could find your pension reduced.
According to Hank Jongen, Services Australia’s general manager and spokesperson, ‘The value of gifting free areas are the same if you’re a single person or a couple. They are both: $10,000 in one financial year and $30,000 over five financial years—this can’t exceed $10,000 in a single financial year.’
But there’s a strategy that’s been under the radar for some, and it involves the humble granny flat. By building a granny flat, you’re not just gifting money; you’re transferring assets in exchange for a lifetime right to accommodation. This can be a win-win situation: you could help your children with their housing needs, and you potentially protect your pension.
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The legalities and financial implications
Before you start drawing up plans for a granny flat in your child’s backyard, it’s crucial to understand the legal and financial implications. Suzanne Jones, the head of estate planning at Coote Family Lawyers, warns that cash gifting can backfire if the financial implications over the next five years are not taken into consideration.
She explained that if you unexpectedly require care within five years of making a substantial gift, that amount could still be considered part of your assets for the assets test for residential care or the Age Pension.
However, the granny flat arrangement offers a way around this. Financial adviser Noah Capozza explains that when you build a granny flat, you can gift a significant sum to your children, which can shelter your assets from Centrelink’s assessment and potentially allow you to receive the full Age Pension.
Centrelink’s reasonableness test
Centrelink applies a ‘reasonableness test’ to determine the value of the granny flat interest. This involves a conversion factor based on your age and the maximum partnered pension rate at the time the arrangement is entered into.
For example, if 69-year-old Janice gives her son $800,000 for the right to live in a granny flat, but the construction only costs $150,000, the reasonableness test calculates the value of the granny flat interest. In Janice’s case, only $21,313 would be considered a gift under Centrelink’s rules, rather than the full $800,000.
It’s important to note that this is just an example, and individual circumstances can vary greatly. It’s always advisable to speak to a financial advisor to understand how this strategy might work for you.
The rising popularity of granny flats
Search engine trends in 2024 show a more than 50 per cent increase in terms related to granny flats and units compared to the previous year, indicating a surge in interest in this property trend.
Adult children have been building granny flats on their parents’ lots to escape the rental and housing crisis, but the benefits of building a granny flat for the parents themselves are now coming to light.
The takeaway
If you’re considering giving an early inheritance and want to ensure it doesn’t negatively impact your Age Pension, the granny flat strategy could be worth exploring. However, it’s not without its complexities, and it’s essential to do your homework and consult with professionals.
Remember, while this strategy could be beneficial, it’s also important to be transparent and not attempt to circumvent the rules in a way that could be considered deceptive by Centrelink. As with any financial decision, especially one that involves family and significant assets, proceed with caution, clear communication, and expert advice.
We’d love to hear from you, our YourLifeChoices readers. Have you considered building a granny flat for this purpose, or do you know someone who has? Share your experiences and thoughts in the comments below, and discuss with fellow readers the pros and cons of this intriguing financial strategy.
Disclaimer: The information provided in this article is for general informational purposes only and should not be considered financial advice. Every financial situation is unique, and readers are encouraged to conduct their own research and consult with a qualified financial professional before making any financial decisions or taking action based on the content of this article.
Also read: ‘Bank of Mum and Dad’ increasingly used for mortgage repayments, living expenses
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