Written by Maureen Allan, Fatuma Akalo & Renato Manias
With an ageing generation of baby boomers, there is an increasing trend towards their adult children providing permanent accommodation and care by building a granny flat on their property or renovating their home to accommodate an elderly parent.
In providing this form of accommodation and care, this may impact the parent’s Age Pension entitlement and Mean Tested Amount (MTF) should they later decide to move into permanent residential care.
Social Security uses the term Granny Flat Right” (GFR) to assess the living situation where money or assets have been exchanged for a right to live in the property.
Where money or assets have not been exchanged, a (GFR) has not been established and will not impact on the individual’s Age Pension entitlement.
A GFR is created where:-
1.The parent moves into the home and gifts money
2.Pays for renovations in excess of the cost of those renovations
3.Buys new home in the child’s name and both move in
4.Transfer the title of the home to the child
Where the above criteria is satisfied, Centrelink will apply the following two tests that may impact an individual’s pension entitlements:
1.The Reasonableness Test
2.The Homeownership Test
The Reasonableness Test uses an actuarial ‘conversion factor’ to determine the amount a person of a certain age could gift to another for a life interest.
Reasonable value = Combined annual partnered pension rate x conversion factor.
Peter (80) pays $250,000 to convert his son’s property to suit his needs and pays $400,000 in cash for a life tenancy in the property.
Reasonable value = (34,819.20 x 9.41) = $327,649
As the amount he paid is greater than the reasonable value, the excess $72,351 will be treated as a deprived asset and the deemed amount will be included in his assessable income for Centrelink purposes for the next 5 years.
The Homeownership Test determines whether a granny flat interest recipient is a homeowner. The difference between the pension ‘homeowners’ and ‘non-homeowners’ asset value limits determines the amount. Currently this is $203,000 ($456,750 – $253,750).
Peter has paid $250,000 to convert his son’s house which is greater than the $203,000 allowance. He will be considered to be a home owner under the asset test.
Where a GFR recipient moves into residential permanent care within 5 years of establishing a GFR, the amount paid for the life tenancy may be considered a deprived asset if it can be established the move was anticipated within the time frame.
More than one GFR can be established where the parent lives with more than one child. To assess the impact on the parent’s Age Pension entitlement, the calculations are based on the home where the parent spends the most time. Where equal amounts of time are spent between the children, the higher contribution amounts should be used when calculating the Reasonable and Homeownership Tests.
Clients should consider seeking legal advice prior to entering a Granny Flat arrangement. Future problems may be avoided where parties can agree on:-
Protecting the rights of all parties
2. Estate equalisation
3. Avoiding family conflicts
Granny Flat arrangements may not be the key solution to solving the residential needs of our ageing population, however for many people it may offer the option to provide care for an ageing parent.
For further information on Granny Flats, or other Aged Care matters, please contact our office to speak to our Accredited Aged Care team.