Granny flats have previously been subject to capital gains tax for a variety of reasons where a formal arrangement is entered. Mainly, this has been due to granny flats being considered as a separate dwelling where the exemption can only cover one dwelling. The risk of this tax liability has made many families hesitant to enter arrangements where they may be exposed to this tax risk.

Recent announcements in relation to the federal budget have indicated that a targeted CGT exemption will be available for granny flats. This exemption will apply to the creation, variation, or termination of a formal written arrangement for a relative that is elderly or living with a disability.

This is welcome news for multigenerational households that intend to have an elderly relative or relatives living with a disability who wish to live adjacent to the family dwelling in a separate building or ‘granny flat.’

The exemption will only apply in circumstances where a formal agreement has been reached between the relatives and family members. Namely, this can be achieved by entering a formal agreement, contract, or other tenancy agreement by the family members.

A Deed of Family Arrangement is another formal agreement that may be considered by families where a granny flat is constructed. A Deed of Family Arrangement can be prepared to re-distribute a deceased estate in a new or alternate manner to a will so long as all the beneficiaries of the estate are agreeable to the new manner of distribution. The Deed itself is a document which sets out the agreement terms as reached between parties. It can be also be used to resolve a dispute or disagreement in relation to a deceased estate without having to go to court.

The exemption is expected to apply from July 2021. It should be noted that the exemption is not set to apply to commercial rental arrangements. It will apply only to arrangements between family members.