Older Australians embrace YIMBY trend to build granny flats amid tax changes

Retirees are driving a backyard building boom with intergenerational living the latest property hack. But those looking at granny flats need to know the rules.

A new property opportunity may be sitting in your backyard. Picture: iStock

Building in the backyard is now both encouraged by state governments and readily financed by the major banks.

And the biggest supporters of the YIMBY (Yes In My Backyard) movement is older Australians who are seeking new ways to optimise their property holdings.

The trend towards intergenerational living has been made more attractive thanks to key changes in tax rules.

The new conditions have triggered specialist projects from property developers and a new line of business for financial advisers, as housing prices rise.

“It’s getting more expensive for every generation and there is this opportunity for everyone in the family to move in together, with the older parents having the right to live there for the rest of their life,” financial adviser Nathan Fradley told The Australian’s The Money Puzzle podcast.

But he warned that modifying properties to cater for expanded families comes with some risk.

“There are very distinct rules here and you have to make sure you get them right,” Mr Fradley said.

Older Australians retrofitting their properties – and lifestyle – to create new multigenerational spaces remains the core activity in this area.

More than 350,000 older Australians are estimated to cohabit with their adult children.

In seeking to optimise property costs, the most common arrangement is where an elderly parent transfers the money raised from their home sale as a gift. In turn the host family agrees to provide a range of services to the older parents, such as home maintenance.

The informal nature of those arrangements came to the attention of the Board of Taxation back in 2020 and the laws around this area were later updated, primarily to ensure people were not taxed on non-commercial activities while the right of the older Australians to live out their lives in a chosen property was set in stone.

Key tax changes were concentrated on gifting property. In effect, new “granny flat interest rules” clarified that tax was not payable on assets transferred in the exchange.

In relation to zoning laws, the NSW state government introduced a policy in 2009 to simplify the process of enabling intergenerational home living.

Steadily other states followed suit. Between September 2022 and January 2024, state governments for Queensland, South Australia, Western Australia and Victoria reformed laws to allow homeowners access to better planning rules especially for so-called granny flats.

“Many families are looking at what do we need? How can we all benefit?” Mr Fradley said.

“They are also realising that, in fact, we can live together … that trend fell away for a period, but I see that is coming back now.”

He said there were Centrelink and Australian Taxation Office requirements, depending on the situation.

“Financially, the main issues are meeting the requirements of Centrelink, if that is relevant, or meeting the requirements for the ATO, which demands that everything is documented that it is not a commercial transaction,” Mr Fradley said.

“There are also some important requirements around either being of age, pension age, or requiring assistance from a disability perspective,” he said.

“We often find it makes a lot of sense if all the parties concerned live together for a trial.”

This is one area where professional advice is not just optional but crucial. Mr Fradley said it was important both sides got independent legal advice before any final arrangement was made.

“Everything should be put in writing with a clear view on how it will work and that the older people in the plan get the right to reside in the property forever,” he said.