New Capital Gains Tax Exemptions On Granny Flats: What You Need To Know

Considering adding a self-contained dwelling?

If you are considering building a self-contained dwelling on your property, then you are not alone. Demand for new granny flat builds in Sydney and around Australia has surged in recent years, with homeowners looking to accommodate ageing family members and older children, create a separate office or hobby space, or generate passive rental income.

It is also a helpful solution to the burgeoning housing affordability crisis, felt most acutely by older and vulnerable people.

But if you have been held back by concerns about Capital Gains Tax (CGT) implications, the Federal Government’s Budget 2020 may offer welcome news.

From 1 July 2021, pending passage of the legislation, the Government will provide targeted exemption from CGT for granny flat arrangements where there is a formal written granny flat agreement providing accommodation for older Australians or people with permanent disabilities.

So what’s changed?

Under current legislation, CGT is usually payable on the capital value added by a granny flat addition when the flat is leased under a commercial arrangement. Even if the tenant is an elderly family member or a person with a permanent disability.

This actively discourages the creation of legally enforceable formal agreements (such as a lease), leaving all parties – and vulnerable people in particular – open to potential estate disputes down the track.

The aim of the new rule is to encourage the use of a formal written agreement in all situations, to protect older and vulnerable persons occupying granny flats.

The new legislation will enable CGT exemption on the basis that specific criteria are met.

The exemption will only be granted where there is a formal written agreement in place for arrangements with older Australians or those living with a disability.

The exemption will only apply to agreements that are entered into because of family relationships or other personal ties and will not apply to commercial rental arrangements

Under these circumstances, you will not have to pay CGT on increased value attributed to the granny flat addition.

Value-add now, and into the future

As a certified professional valuer with years of experience, I can attest to the role granny flats can play in significantly increasing the value of a property.

Generally speaking, on completion of the build, you can expect your properties value to increase in line with the constructions cost of the flat. However over time, there is genuine potential for further capital gains as demand continues to grow for dual occupancy properties.

I’m interested. Where to from here?

It’s essential to get qualified advice upfront. As part of your project research we recommend the following initial steps:

• Checking your local planning guidelines. In NSW, new housing affordability planning legislation introduced in 2009 permits all residential homeowners meeting certain criteria to build a granny flat on their property without traditional council approval. Complying development approvals can be granted in just ten days.
• Talking to your accountant. A qualified accountant can provide specific advice for your situation and confirm your eligibility for the new exemption.
• Seek legal advice when establishing the formal agreement. This will ensure the agreement is legally binding, equitable for all parties involved and also satisfies the legal conditions for the exemption.
• Engage a reputable API certified property valuer. If your accountant advises you to obtain a CGT valuation, ensure you engage only a reputable, experienced property valuer with an appropriate certification.

Peter Craig AAPI CPV
Director