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Is the amount paid for a Granny Flat right reasonable?
Article published on: 30-03-2023
Joe (72) is an Age Pensioner who has lived on his four hectare property for the last 35 years. The property has no potential to generate income. The property is an exempt asset for Joe’s Age Pension, as he meets the extended land use test. Joe intends to transfer the title of the property to his daughter in exchange for a granny flat right (a life interest) to reside in the daughter’s home. Will the reasonableness test apply to this arrangement?
Answer
Yes, the reasonableness test will apply. Despite Joe’s four hectare property being exempt under the extended land use test and not assessed for the Age Pension under the granny flat provisions, he has transferred more than what is considered to be his principal home under Social Security. In this case, Joe has transferred additional assets (ie land exceeding two hectares). The reasonableness test will apply to determine whether the amount Joe transferred for the life interest to reside in his daughter’s house was reasonable, and subsequently whether deprivation will apply.
Background
A granny flat arrangement occurs when a person transfers cash or other assets to another person, in return for a legal right to occupy a dwelling. In some cases, the reasonableness test may apply to determine whether the amount paid for the granny flat right is reasonable, otherwise gifting and deprivation may apply. An example of when the reasonableness test applies is where a person transfers the title of their principal home AND transfers additional assets.
Extended land use test
Generally, the home and up to two hectares of adjacent land can be exempt for social security purposes, provided the adjacent land is used primarily for private and domestic purposes in association with the dwelling-house. Under the extended land use test, a person can have the area of land adjacent to the principal home that is more than two hectares (which is held on one title), exempt from the assets test provided they:
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are making effective use of the land (ie using the land to it’s potential to generate an income where possible), but if the land cannot be used to produce income this test is satisfied
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have reached pension age
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are in receipt of the Age Pension or Carer Payment, and
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have continuously lived in a principal home on the property for at least 20 years immediately prior to the date of assessment.
By transferring the four hectare property in exchange for a life interest to reside in his daughter’s house, Joe has transferred more than his principal home and the reasonableness test therefore applies.
Reasonableness test formula
The formula multiplies the maximum combined annual rate of Age Pension payable to a couple (at the time the granny flat right is created) by an age-based conversion factor. This couple rate is used regardless of whether the person is single or a member of a couple.
Reasonableness test amount = combined annual partnered pension rate* x conversion factor
*$41,704 at 20 March 2023. Includes Basic Rate of pension, Pension Supplement and Clean Energy Supplement.
The conversion factor is based on the client’s age next birthday (or age next birthday of the youngest member of a couple).
Joe’s reasonable amount is $41,704 x 15.01 = $625,977.04.
If the value of the property that Joe transfers is more than this amount, the excess would be considered a gift and deprivation will apply if it exceeds the gifting limits (ie $10,000 per financial year or $30,000 over a five financial year rolling period). If a deprived asset results, it is counted as an asset and deemed under the income test for five years from the date of transfer.
For more detailed information, please refer to our Guide to Granny Flat Rights. This adviser article explains granny flat rights, including the test of reasonableness and the age-based conversion factors.
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