Moving in with your adult children? How a granny flat agreement can protect you.

granny flat agreement

Are you and your family thinking about a granny flat arrangement? A well-drafted agreement can help you protect your interests, avoid misunderstandings and minimise the potential for elder abuse.


  1. if you’re currently receiving or applying for an Age Pension, Centrelink will require a granny flat agreement in writing as part of their assessment; and
  2. recent legislative changes mean your agreement will not trigger Capital Gains Tax.

How granny flat agreements work

As people age, they often no longer want to live alone in their own home, nor do they want to go into a retirement facility. One common solution is to live with family. This might mean building a granny flat on your adult children’s land or moving into the guest wing or spare bedroom. Sometimes, the older generation will transfer their house to their children, with the understanding that they will continue to live there as well.

As part of the arrangement, adult children can provide some care for their elderly parents, whether that’s running errands or doing the heavy lifting around the house. On their side, having grandma or grandpa at home when the kids finish school can be a huge help.

However, if money or assets are changing hands, it’s important to make sure everyone understands their legal position.  As many granny flat agreements are informal, they do not protect your rights and interests, as well as you, hope.

Here are some things you might not know.

A granny flat agreement doesn’t give you a property right

A granny flat agreement establishes a ‘granny flat interest’, otherwise known as a tenancy or life interest. It buys you a right to reside on the property, often with the understanding that you will receive care from the property owners (usually your adult child) as part of the arrangement.

However, the person who is paying for the right to occupy part of the property does not acquire rights over the property itself.

This is different from a co-ownership agreement. In a co-ownership scenario, you might give a friend $200,000 in return for 50% of the property. You now co-own the property in 50:50 shares. In a granny flat scenario, you are giving them $200,000 for the right to occupy their guest wing for the rest of your life, however at no point in time will you become the legal owner of any part of that property.

Granny flat agreements only bind the parties to the agreement

If you and your parent (or adult child) sign the granny flat agreement, you are both bound by it. However, third parties are not.

We are aware of a case where a father had given his life savings to an adult son to live in his house, gone on an extended holiday, and come back to find that his son sold the property. That father has no right to force the buyer(an innocent third party), to return the house. However, a proper written granny flat arrangement would have given him a personal right to receive compensation from his son (unfortunately, in this particular case, the parties did not have a formal written agreement).

Similarly, if the son had gone bankrupt, the trustee in bankruptcy is not bound by the granny flat agreement. They may sell the house and distribute the proceeds in accordance with bankruptcy law.

The Family Court is also not bound by the agreement. If you apply to the court for financial orders relating to the division of property, the court may order that the marital home be sold and the proceeds divided even if there is a granny flat agreement.

However, a well-written granny flat agreement gives the parents a personal right that is enforceable against the child to recoup their funds if any of these scenarios were to occur.

These are further examples of why it is vital that you document the agreement. It is tempting to assume that, because the agreement is between family members, there’s no need for formality. However, this leaves the door open for elder abuse and financial exploitation.

How granny flat agreements affect your finances

Recent changes to the law mean that a written granny flat agreement may put you in a better financial position than if you keep it informal.

Granny flat agreements may affect your ability to get the Age Pension

If you (or your relative) is intending to receive the Age Pension, be aware that Centrelink will want to see a written granny flat arrangement.

Everyone’s circumstances are different, however, for some older Australians, a granny flat agreement can leave them better off than downsizing or buying into another property.

Centrelink requires that such an agreement is formalised in writing. This is so that wealthy older Australians cannot just ‘gift’ their house and other assets to adult children in order to claim that they have no assets and are eligible for the Age Pension.

If you are entering into a Granny Flat Arrangement, Centrelink will want to see that:

  1. the agreement is documented in writing; and
  2. the amount paid is reasonable in the circumstances.

Whether the amount paid for your granny flat interest is reasonable will vary depending on whether you’re building a separate dwelling, your age, and what level of care it is proposed your children will provide. If Centrelink considers that you have transferred more than the value of the granny flat right, your entitlement to the Age Pension may be affected.

Granny flat interests are exempt from CGT

One significant reason that people have historically chosen to keep the arrangement informal is that granny flat interests could trigger a CGT event.

The Government has since recognised that informal granny flat arrangements leave elderly people vulnerable to abuse. Having gifted away most of their money, and with no formal property rights to their new home, they can find themselves in a very precarious position.

Accordingly, as of 1 July 2021, a granny flat arrangement is no longer a CGT event. You can document your arrangement so that it clearly sets out the amount of money to be paid, and the rights and obligations of each party, without worrying that there will be tax consequences.

If you’re planning a granny flat agreement and want advice on how that will affect your entitlement to the Age Pension, or on any other aspect of the agreement, get in touch. The Murdoch Lawyers Future Planning team can help you make sure your agreement protects your interests.

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