Government funded granny flats - what you need to know

Granny flats could be tax exempt in some cases under proposals introduced in this year’s Federal budget, providing another incentive to hire construction workers and take advantage of a $25,000 government grant.

Treasurer Josh Frydenberg and housing minister Michael Sukkar said capital gains tax may not have to be paid on granny flats, where there is a written formal agreement with relatives who are older or are living with a disability.

“Tax consequences can be a key impediment to families creating formal and legally enforceable granny flat arrangements,” the ministers said in a joint statement.

“When faced with a potentially significant capital gains tax liability, families may opt for informal arrangements which can leave open the risk of financial abuse and exploitation, for example, following a family or relationship breakdown.”

Build an asset and clear a tax hurdle

Granny flats generally increase a property’s value. When it’s sold along with the primary residence, capital gains tax would have to be paid on the value the granny flat contributes. This can represent tens or hundreds of thousands of dollars, in many cases. 

The revised policy decision means homeowners can build a granny flat on their existing property, rent it to their family or people they have “personal ties” with, and potentially not have to pay capital gains tax on the profit from its sale.

The government, acting on a review of granny flat arrangements commissioned by the Board of Taxation, claims this tax is a key hurdle preventing granny flats from being built, and that it hinders pensioners from moving into smaller places.

“There are around 3.9 million pensioners and around 4 million Australians with a disability who would be eligible for this exemption under this change,” the ministers said.

The rule change will also encourage family members to put the arrangement in writing, defining the rights and responsibilities of both landlord and tenant, and helping to legally protect pensioners living in the granny flats.

The capital gains tax exemption won’t apply to commercial renting arrangements and it is expected to take effect from 1 July 2021 -- provided the legislation clears parliament. 

Another carrot to renovate

Building a granny flat is the kind of large-scale renovation that could qualify for a grant under the government’s $680 million Homebuilder subsidy. 

The grant offers $25,000 to eligible homeowners who spend from $150,000 to $750,000 on renovations. And according to an analysis by CoreLogic, construction of an average two-bedroom granny flat costs about $200,000 -- right in the range’s sweet spot.

“This (policy announcement) will boost the construction industry, stimulate demand for new housing and support tradies’ jobs at a time when the economy needs it most,” the ministers said.

But there’s other criteria that needs to be addressed in order to qualify for the $25,000 grant. To be eligible, an individual applying for the grant has to earn less than $125,000, while a couple would have to earn less than $200,000 combined. 

Then there’s some parameters on the property being developed. The grant is not available for the development of a home on land worth more than $750,000. And homes being renovated can’t be worth more than $1.5 million before construction.

Construction contracts signed from 4 June until 31 December are eligible for the government’s Homebuilder grant. A condition of the grant is that construction must commence within three months of the contract date.

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