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My situation involves a granny flat interest and possible capital gains tax implications.
In late 2017 my parents gave me 300k as a bank transfer for a deposit on a house with a granny flat attached. No legal documents were drawn up with reference to the transaction at the time and none have been drawn up since.
The bank was told the money was a gift and not expected to be paid back. Their name is not on the title and they have no legal right over the property.
When applying for the pension a few months ago they told centrelink of this transaction and to avoid any deprivation of assets penalties for giving away such a large sum of money prior to applying for a pension they ticked the box stating the money was given for a granny flat interest, my name and address was given and they now reside in the property with myself and wife.
The pension was approved and we are having a great old time with our inter-generational living arrangement.
My question is “have I activated a capital gains tax event by accepting this money and my parents telling centrelink it was for a granny flat interest?”
Centrelink did not require a formal document to this effect and no document was ever drawn up. They simply live here and no rent is charged. I am concerned after reading an article by Noel Whittacker over the weekend and from reading about the reforms that are hopefully coming to prevent elder abuse in these situations.
Much of what I have read states that CGT is activated once an agreement is signed, but when I read the tax law itself it is more vague and could I guess apply in my case. With no formal agreement in place in your opinion will the ATO come after me at tax time for a capital gains on the 300k as they believe a transaction took place just by my parents telling centrelink they have a right to reside in the property?
There is no hiding from the tax man and I have no doubt centrelink would send this information across.
- Have you come across this situation before and had a good or bad outcome?
- Very concerned about this as this could mean a life altering tax bill coming my way.
- Any advice re the intricacies of this are of tax law would be much appreciated.
Answer
Relax, it is all good. Now to the why:
Firstly, you did not give them a right, you could kick them out tomorrow. So no asset was created, receiving cash is not a transaction that is subject to CGT – there has to be something given in return.
Here is the legislation relating to CGT event D1 https://www.ato.gov.au/law/view/document?DocID=PAC%2F19970038%2F104-35&PiT=99991231235958
You have to create a right for it to be triggered. See from the legislation:
- CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.
To create a right they would have to have something that is enforceable in court. I guess as I am not a solicitor, I shouldn’t tell you what is and isn’t enforceable in court. If you are concerned that the legislation refers to an equitable right that would be the case that your parents could say that they have an equitable right in the land because they contributed to the purchase price. That is still a right to the land not a right to occupy.
The problem with granny flat interests is that they create an asset other than the property itself therefore no cost base. The equitable right that could have been created by your parents contributing to the purchase price of the property is an interest in the property itself so all safely covered by your main residence exemption or market value rules.
The point being there can be a cost base, the purchase of the property. If they are, at equity, considered to be part owner of the property then so be it. The funds were simply used to buy themselves a home so Centrelink is fine with that and that home is then just covered by all your main residence exemptions.
Here is a link to an article I wrote on the matter https://bantacsfinancialsolutions.com.au/Jblog/granny-flat-rights/ yes the matter is being reviewed http://srr.ministers.treasury.gov.au/media-release/047-2018/ but with a mind to treating this problem as an unintended outcome of the legislation and correcting it.
Even if the worse happens and they start to force children to give parents a right to occupy then you can simply get around the CGT problem by giving them joint tenancy in the home instead, as explained in the article.
