Understanding Granny Flat Interests: Centrelink Compliance and Legal Protection

KEY TAKE-OUTS:

• A granny flat interest is more than a living arrangement. It is a financial transaction that can affect your entitlement to an Aged Care Pension.
• Without a formal agreement, money paid for the granny flat could be treated as a gift and trigger Centrelink’s rules against the deprivation of assets.
• Proper legal advice ensures that your rights are protected and your Aged Care Pension is preserved.

 

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As housing affordability and cost-of-living pressures continue to affect families across Australia, more older Australians are considering moving in with their adult children and often funding the construction of a granny flat or self-contained accommodation on their adult child’s property.

While these arrangements can provide significant emotional and financial benefits to the parent and child alike, it is essential that the arrangement is structured carefully, with special regard to Centrelink rules, property rights, and estate planning objectives.

 

What is a Granny Flat Interest?

In Centrelink terms, a “granny flat interest” arises when an older person transfers money or assets to another person in exchange for a lifetime right to live in a property they do not legally own. In property law terms, this is known as a “life estate”.

The arrangement often includes funding the construction of a separate dwelling on property owned by the adult child or transferring title or funds to access long-term accommodation.

Crucially, the granny flat interest must be granted in all or part of a private residence that is not owned by the older person and the older person must consider it their principal home.

The granny flat interest does not have to be in a separate dwelling and can also be granted in the main home on the land.

 

How Centrelink Assesses Granny Flat Interests

Centrelink will assess whether the amount paid by the older person is “reasonable” for what they receive.

If the payment or assets transferred are considered reasonable, then the older person will not be considered to have deprived their assets for the purposes of the assets test.

The concept of “deprived assets” is often referred to in the context of “the gifting rules”, whereby a person who is in receipt of the Aged Care Pension is only permitted to gift up to $10,000 per financial year or a total of $30,000 over a rolling five-year period, without affecting their entitlements.

If the payment for the granny flat interest exceeds the value of the life interest, the excess may be treated as a deprived asset or gift and will reduce the entitlement of the older person to the Aged Care Pension.

Centrelink applies a “reasonableness test” for some situations, such as when extra assets are transferred or money is paid on top of the cost to construct the granny flat. The reasonableness test calculates the notional value of a life interest using a formula based on life expectancy.

The formula is:

Reasonableness Test Amount = Combined Annual Maximum Partnered Pension Rate × Conversion Factor

The conversion factor corresponds to the age of the older person at their next birthday (or the younger partner’s age if in a couple) and is based on actuarial life expectancy tables.

For example:

Mary, aged 70, pays $850,000 for a granny flat to be built at her son’s property. The granny flat costs $250,000 to construct.

a) The combined annual maximum partnered pension rate as of September 2025 is $46,202.

b) The conversion factor at age 70 is 17.36.

c) The test amount is $46,202 x 17.36 = $802,066.72.

d) The greater of the test amount and the construction cost is $802,066.72.

e) Excess (gifted): $850,000 – $802,066.72 = $47,933.28

For the purposes of Mary’s asset test, the sum of $47,933.28 will be considered a deprived asset (gifted asset) for five years.

 

Legal Considerations: Why you need an agreement

A granny flat arrangement should be well documented in a formal written agreement between the older person and the adult child that clearly sets out:

 

• The amount paid for the granny flat interest.

• The right for the older person to reside in the property for life.

• A consideration of what happens if the relationship breaks down or the property is sold.

• Protections if the older person needs to move into aged care.

 

A properly drafted agreement not only satisfies Centrelink’s requirements but also reduces the risk of future family disputes.

In our practice, we’ve seen the difference that clear legal documentation makes in preserving relationships and ensuring that all parties, especially the older person, are protected.

 

Granny Flats as part of transparent Estate Planning

Granny flat interests can be a valuable tool for families seeking co-living arrangements that support independence and care for the older person. However, they must also be carefully integrated into the broader estate plan of the older person and the adult child.

 

By aligning the granny flat arrangement with your Will, you can help avoid misunderstandings among siblings and other beneficiaries. Transparent arrangements lead to fewer disputes and can help maintain family harmony long after your lifetime.

 

When you need professional advice

Granny flat arrangements offer an opportunity to combine care, security of accommodation, and financial support in one solution, but only if done correctly.

Kaisha Gambell regularly advises families on how to structure these arrangements in a way that:

• Complies with Centrelink’s requirements;
• Protects all parties legally; and
• Fits into a transparent and effective estate plan.

If you or a loved one is considering a granny flat arrangement, contact us for professional advice and legal documentation to give you peace of mind.

Schedule an Appointment Now

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