In Australia, Granny Flats are becoming an increasingly popular investment and versatile asset to add to existing homes. As families change over time and parents get older, Granny Flats provide an ideal lifestyle for parents who want to avoid overcrowded and expensive aged care facilities and instead be close to family and their grandchildren. When planning to build a Granny Flat on your property, it is beneficial to know what the tax implications are for your family. In this article, we dive into what you need to know about Granny Flat tax in 2021 and reveal some handy tips.
Rental Income and Granny Flat Taxation
Granny Flats are a fantastic option for older parents who may need additional care and supervision. In many circumstances, the child whose property the Granny Flat is being built on may charge their parents rent, which could be taxable.
If the rent is set at a market rate or commercial level, then this income is taxable, and any expenses relating to the Granny Flat such as the interest on loans to construct the Granny Flat or a proportion of household bills. This also means that where deductions are more than the income, this creates a tax loss that can be offset against the child’s total income.
If the rent charged to the elderly parents is set at a nominal level, this is still taxable but deductions are capped to the level of the rent received so that no loss can be claimed.
Capital Gains Tax (CGT) on Granny Flats
In normal circumstances, the main residence you live in is usually exempt from capital gains tax when you sell it. However, if you choose to build a Granny Flat in your backyard, there is a possibility that a portion of the profit you make when you sell your home will be liable for CGT. There are a few factors that come into play;
- Earning taxable rental income from the Granny Flat. If you are earning a taxable rental income, then in the future when you sell the property it is likely a capital gains tax calculation will apply, with the amount depending on the portion of land taken up by the Granny Flat.
- What area the Granny Flat takes up on your land. The amount of CGT you need to pay is generally determined by looking at your property’s sale profit and determining the portion of your land that has been generating income, and therefore CGT applies to a portion of the profit made.
- When the Granny Flat was built. If you have owned your property for 5 years but only built a Granny Flat 2 years ago, then CGT will not apply to the first 3 years.
- Purpose or use of the Granny Flat. In some circumstances, if you can demonstrate that the Granny Flat on your property was not used to generate income but instead was an important part of the overall household’s lifestyle, then the residence exemption may also apply to the Granny Flat.
Granny Flat Agreements and Tax
When planning on building a Granny Flat on a child’s property, in many cases the senior parents will sell their existing home to pay cash to the child for the Granny Flat construction or transfer the ownership of their home to their child, in exchange for the exclusive use of the Granny Flat for life. These details take the form of a legal written agreement and brings social security benefits as it usually means your parents pension is unaffected. However, this particular cash sum paid by the ageing parents does currently carry a capital gains tax liability, which will need to be paid by the child.
In potentially exciting news, there were a range of announcements beneficial to Granny Flat buyers made in the Federal Budget late last year. The Federal Government announced plans to provide an incentive to support investment in seniors’ housing. Expected to commence from the 1st July 2021, and provided that the legislation passes through parliament, where there is a formal Granny Flat Agreement in place for ageing parents or disabled family members, a homeowner would be eligible for a capital gains tax (CGT) exemption on their Granny Flat. Commercial rent agreements would not be eligible for the exemption for their Granny Flat.
This proposed legislation could benefit the estimated 4 million Australians with a disability, along with 3.9 million pensioners around the country. For more information regarding formal written agreements and Granny Flat arrangements.
It is recommended that you speak with your accountant or tax expert for more detailed information about Granny Flat Tax in 2021.
Cubitt’s have over 25 years’ experience building Granny Flats and home extensions throughout NSW and the ACT. Our longevity has allowed us to handpick the best tradesmen in the industry to deliver quality workmanship while securing high-quality materials from world-class suppliers at affordable prices for our customers. Cubitt’s is unlike most other builders. We offer Custom Granny Flats designed to your individual style and needs, such as upgraded cladding or brickwork to match your main house, cathedral ceilings, adding wheelchair access and more.
The team at Cubitt’s is passionate about helping clients to build the perfect future for their family, and providing a stress-free experience from start to finish. We provide every customer with a dedicated point of contact to keep them updated throughout the entire design and construction journey, and are proud of our award-winning customer service team – we do not use chatbots or automated messages.
Speak with an experienced sales and design consultant about building the perfect future for your family, by calling 1300 721 150.
References:
Granny flats are the big winner in senior housing measures
Granny flats CGT exemptions
Granny flat grant and tax exemption
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