Granny flat arrangements in Queensland: protecting everyone involved

What can go wrong without a written agreement

The typical scenario: a parent sells their home, contributes $400,000 to a child's property or an extension, and moves in. There is no document. Five years later the child separates, becomes ill, is made bankrupt, or the relationship inside the household breaks down. The parent has no title, no lease and no clear right to repayment, and the contribution can be treated as a gift.

• The child's separation or divorce puts the property into a family law pool
• A creditor or trustee in bankruptcy claims against the property
• The child dies first and the property passes under their will to someone else
• Siblings later dispute whether the money was a gift, a loan or an advance on inheritance
• The older person needs residential aged care and the money cannot be recovered

What a proper granny flat agreement covers

The point of the document is to record exactly what was paid, what right was received in return, and what happens when circumstances change. It does not have to be adversarial — it is usually the thing that keeps the family out of court later.

• The amount contributed and its source
• The exact right granted — a life interest, a right to reside, a registered lease or a loan secured by mortgage
• Who pays rates, insurance, utilities, repairs and any body corporate levies
• What happens if the older person needs aged care, or dies
• What happens if the owner wants to sell, separates, or dies first
• A repayment or refund formula, including whether it is indexed or shares in capital growth
• How disputes are handled before anyone goes to court

Centrelink and the pension

Social security law has a specific granny flat interest concept. Where the arrangement genuinely creates a right to accommodation for life, the amount paid may be exempt from the gifting (deprivation) rules that would otherwise reduce a pension for five years. But the reasonableness test and the way the interest is documented both matter, and getting it wrong can cost pension entitlements.

Advice should be co-ordinated: the legal document, the Centrelink position and any tax consequences for the property owner need to be considered together, not in sequence.

Tax and title consequences for the owner

For the property owner, granting a formal right can raise capital gains tax and main residence exemption questions, and transfer duty may apply depending on what interest is granted and how it is structured. There are specific CGT rules for granny flat interests created under a written agreement with an older or disabled person. Your accountant should see the draft before it is signed.

Line it up with the wills

A granny flat arrangement changes the estate plan of everyone in it. The owner's will should deal with what happens to the right to reside if they die first, and the older person's will should account for the fact that their capital is now tied up in someone else's house. Updating both at the same time avoids a family provision claim later.

Frequently asked questions