Granny flats and the Age Pension meet more often than families expect. A parent sells their home, gives part of the money to a son or daughter, and moves into a flat behind their house. Everyone is happy. Then Centrelink asks what the money was, the tax office asks what the arrangement was, and a sibling asks why they were not told.
The granny flat interest
If you pay for a right to live in someone else’s property for life, Services Australia can treat that as a granny flat interest rather than a gift. How it is assessed depends on how much you paid. Pay more than a set amount and you are treated as a homeowner, with the interest treated like a home. Pay that amount or less and you are a non-homeowner, and what you paid counts as an asset. Pay too much for what you receive and part of it can be treated as a gift. The set amount is $267,000 from 1 July 2026, and it changes each 1 July.
The capital gains tax exemption
Since 1 July 2021, creating a formal granny flat arrangement does not trigger capital gains tax for the owner. The arrangement has to be in writing, legally binding and not commercial, so no market rent. The person moving in has to have reached Age Pension age or have a lasting disability, and has a right to live there for life. They do not have to be family.
Two widows each sell a home for $700,000 and give $350,000 to a daughter towards a flat at the back of her house.
Margaret agrees it over a cup of tea. When the daughter separates four years later, there is no record of what the money was for, and the flat goes with the house.
Joan has a written agreement giving her a right to live there for life, signed and witnessed. Services Australia assesses it as a granny flat interest, the tax office treats it as exempt, and her other children know exactly what was given and why.
What to talk about first
- What happens if the house is sold, or the relationship ends.
- What happens if care is needed and the flat no longer works.
- How the money is treated in the will, so the other children are not surprised.
- Who pays for upkeep, and whether that makes it commercial.
Nicholas Lockhart
General information only. No advice is given.
Source: ATO, Granny flat arrangements and CGT (updated 22 June 2026); Social Security Guide 4.6.4.70, Granny flats; Services Australia, granny flat interest thresholds from 1 July 2026.