Moving in with family or building a granny flat

Moving in with family isn’t one thing. For some people, it’s the spare room at a daughter’s place. For others, it’s a self-contained flat in the backyard, a converted garage, or a renovated part of the family home with its own entrance. Some families sell two homes and buy one bigger home together. Sometimes it goes the other way, and an adult child moves in with a parent.

Each option has a different mix of privacy, cost and closeness. A shared house can mean company and help on hand, but less privacy for everyone. A separate flat can give both households their own front door while keeping family close. Buying together can free up money, but it ties everyone’s finances together.

Living with family can work beautifully. It can also put strain on relationships that were fine at a distance. Thinking it through honestly at the start, and writing down what’s agreed, gives it a much better chance.

• A room in a family member’s home
• A renovated or extended part of the house
• A granny flat (secondary dwelling) on the family’s land
• Buying a home together
• A family member moving in with you

If a parent pays for the right to live in a family member’s home for life, Services Australia may treat it as a “granny flat interest”. Despite the name, it doesn’t have to be a separate flat. It can be a room or part of the main house, or a separate self-contained building. What matters is that it becomes the parent’s main home, they don’t own the property, and the right to live there lasts for life.

A granny flat interest can be paid for in several ways: by transferring the title of the parent’s own home, by paying to build a granny flat or change the family home, by putting money towards a home bought in someone else’s name, or by handing over other money or assets.

Why it matters: normally, giving away money or assets above the gifting limits ($10,000 in a financial year, and $30,000 over five financial years) means the extra is still counted as an asset for the pension for five years. A properly set up granny flat interest is treated differently. Under Services Australia’s rules, the amount isn’t treated as a gift if the parent transfers the title to their home and keeps a lifetime right to live there, pays to build a granny flat on someone else’s land, pays to convert someone else’s home, or buys a property in someone else’s name.

If instead the parent hands over a lump sum towards existing accommodation, where nothing is built or changed, or gives extra assets on top of one of those arrangements, Services Australia uses a “reasonableness test”. It works out a reasonable amount based on the parent’s age. Anything paid above that may be treated as a gift. There’s no single dollar figure, so ask the Financial Information Service (FIS) to work it out.

How much is paid also affects whether the parent is treated as a homeowner. If the amount is more than a set figure, called the “extra allowable amount”, they’re treated as a homeowner and can’t get Rent Assistance. If it’s that amount or less, they’re treated as a non-homeowner, the amount paid counts in the assets test, and they may be able to get Rent Assistance if they pay enough rent. The figure is indexed, so check the current amount with Services Australia.

Plans change. Under Services Australia’s rules, if the parent leaves within five years of setting up the granny flat interest, the reason matters.

If the reason was something that could have been expected when the arrangement was made, the gifting rules apply, and the money may be treated as a gift from the day the parent leaves. If the reason was unexpected, such as a sudden illness (including one that means moving into aged care), a breakdown in family relationships, elder abuse, or damage that makes the property unlivable, the gifting rules may not apply.

There’s no gift if the parent’s partner still lives there, or if the money is paid back. Short absences, such as a hospital stay or a holiday, don’t end the arrangement: a parent can generally be away for up to 12 months, or up to two years if the property is lost or damaged.

Leaving can also affect how assets are looked at for aged care fees later. This is one of the questions to take to FIS before signing anything.

Since 1 July 2021, creating, changing or ending a granny flat arrangement isn’t a capital gains tax (CGT) event, as long as the arrangement meets the ATO’s conditions. Before this, families could be caught by CGT just for setting one up.

The ATO’s conditions, in plain terms: the property owners are individuals; the person with the right to live there has reached Age Pension age, or has a disability that means they need help with most day-to-day activities and is likely to last at least 12 months; the agreement is written and legally binding; it isn’t commercial; and it gives a right to live there for life.

It doesn’t have to be family. The ATO says it can be with family or friends. Charging market rent would make it commercial, but chipping in for bills like electricity and water is unlikely to.

The exemption covers the arrangement itself. If the family home is sold later, the normal CGT rules apply to the sale, and the ATO says the arrangement doesn’t affect the owner’s main residence exemption. An accountant or tax adviser can explain how this works for your family.

Services Australia recommends getting financial and legal advice before creating a granny flat interest, and a legal document setting out the arrangement. Even when no money changes hands, a written agreement helps everyone know where they stand.

It’s usual, and wise, for the parent to get advice from their own lawyer, separate from the family member’s. That protects everyone, including the family member, if questions are asked later. Free legal help may be available: in Queensland, through Legal Aid Queensland or a community legal centre; in NSW, through LawAccess NSW on 1300 888 529, Legal Aid NSW or Seniors Rights Service.

Things a family agreement often covers:

• What the parent is paying or transferring, and what they get in return
• The right to live there for life, and which part of the home is theirs
• Any rent, board or share of bills and upkeep
• What care or help, if any, family will provide, and what happens if care needs grow
• What happens if the parent moves into aged care, or the arrangement ends for another reason
• What happens if the home is sold, or the owner separates, divorces, dies or goes bankrupt
• How the parent would be paid back or compensated if they have to leave
• How disagreements will be sorted out

The hardest moments in family arrangements tend to come later: when care needs grow beyond what family can give, when a marriage breaks down, when the owner needs to sell, or when the parent’s money is tied up in a house they no longer live in.

Without a written agreement, a parent who paid towards a home in someone else’s name can find it hard to get money back. If the home is owned by an adult child and they separate, die or face debts, the parent’s contribution can be caught up in it. That’s why the agreement should say what happens in each of these cases, and why it helps to think about the wills too.

If the parent later needs to move into an aged care home, they may need money for the room. Whether any of their contribution can be returned, and how the move affects their pension and aged care fees, depends on the agreement and on Services Australia’s rules. FIS can explain the effect on payments, and a lawyer can explain the effect of the agreement.

Elder abuse, including financial abuse, does happen in families, often without anyone intending it at the start. A clear written agreement, with the parent getting their own legal advice, is one of the strongest protections. If you’re worried about yourself or someone else, call the free elder abuse phone line on 1800 ELDERHelp (1800 353 374).

In Queensland, the planning rules call a granny flat a secondary dwelling: a home used with, but smaller than, the main house on the same lot. It can be attached or separate. Since September 2022, it no longer has to be lived in by members of the main household, so it can be rented to anyone. A new granny flat generally needs building approval, and you need to check with your local council whether development approval is also needed. Size, setbacks and other rules are set by each council’s planning scheme, so they vary.

In NSW, secondary dwellings are covered by the State Environmental Planning Policy (Housing) 2021. They’re generally allowed in residential zones, and possibly in other zones under a council’s local plan. The granny flat can be no more than 60 m², or a larger area if another planning instrument allows it, and only the main house and the granny flat can be on the land. The land can’t be subdivided to separate them. On a lot of at least 450 m² that meets the standards, a granny flat may be approved as complying development by a council or a private certifier. Otherwise, it needs a development application to council.

In both states, check with your council before you start, and get the approvals in writing. A granny flat built without approval can cause problems with insurance, selling and safety.

The money and the paperwork matter, but what makes most family arrangements work, or not, is how people get along day to day.

It helps to talk about the small things before they become big things. Who cooks? Can the grandchildren drop in whenever they like? What about visitors, noise, pets and the TV? How much help is the parent expecting, and how much can the family really give, now and in five years?

Agree to check in regularly, perhaps every few months, about how it’s going. And keep outside support in the picture. A family member who is also a carer can get help through Carer Gateway on 1800 422 737, and the parent can still get help at home through My Aged Care on 1800 200 422. Living with family doesn’t mean family has to do everything.

• Agree on privacy: knocking, shared spaces, visitors
• Be clear about money for bills, food and upkeep
• Be honest about how much care family can give
• Keep the parent’s own friends and activities going
• Set a regular time to talk about how it’s working