Margaret is 74. She sells her three-bedroom house for $750,000, gives $400,000 to her son so he can build a self-contained flat at the back of his place, and moves in. Everyone’s happy. Two years later her son’s marriage ends, the house has to be sold, and Margaret is left asking two questions: where do I live now, and what happens to my pension?
The answer depends almost entirely on how the arrangement was set up in the first place. Centrelink has a specific set of rules for this, called a granny flat interest, and done properly it can protect both your pension and your money. Done on a handshake, it can go badly wrong.
What a granny flat interest actually is
Despite the name, it has nothing to do with the type of building. Services Australia describes a granny flat interest as paying for the right to live in a specific home for life, in a property that belongs to someone else. It can be a separate flat in the backyard, a room in your daughter’s house, or even the home you used to own.
To count, the home must be your principal home, and it can’t be owned by you, your partner, or a trust or company you control. The right lasts for your lifetime only and isn’t part of your estate when you die.
You usually create one in one of these ways:
- transferring ownership of your home to a family member but keeping a lifelong right to live there (or in another property)
- paying to build a granny flat on someone else’s property
- paying to convert someone else’s home to suit your needs
- buying a property in someone else’s name and keeping a right to live there for life
- handing over money or other assets in exchange for a lifelong right to live in their home
Services Australia sets all this out on its granny flat interest page for Age Pension, and it recommends getting financial and legal advice before you go ahead.
Homeowner or non-homeowner? That’s the big question
Once you’ve sold your house and moved into someone else’s, you might assume Centrelink now treats you as a renter. Not necessarily. How much you paid for the granny flat interest decides whether you’re assessed as a homeowner or a non-homeowner, and that affects which assets test limit applies to you and whether you can get Rent Assistance.
The test works like this. Non-homeowners get a higher assets test limit than homeowners. The gap between the two is called the extra allowable amount. Centrelink compares what you paid for the granny flat interest (your entry contribution) with that gap.
From 20 September 2026, the full-pension assets limit for a single homeowner is $333,000 and for a single non-homeowner it’s $600,000. For couples it’s $499,000 and $766,000 combined. So the extra allowable amount is $267,000 in both cases. These figures are reviewed regularly, so check the current numbers on the Age Pension assets test page.
| Your entry contribution | How Centrelink treats you |
|---|---|
| More than the extra allowable amount | Assessed as a homeowner. The amount you paid is not counted in the assets test. No Rent Assistance. |
| Equal to or less than the extra allowable amount | Assessed as a non-homeowner. The amount you paid is counted in the assets test. Rent Assistance possible if you pay enough rent. |
In Margaret’s case, her $400,000 contribution is well above $267,000, so she’d be treated as a homeowner and the $400,000 wouldn’t count as an asset. That’s often a good outcome. It works a lot like the family home exemption we explained in our piece on the assets test and the family home.
The reasonableness test, and why paying too much can count as gifting
Here’s where it gets trickier. If you hand over more than your granny flat interest is “worth”, Centrelink can treat the extra as a gift. Gifts above the free area count as deprived assets for five years. The free area is $10,000 in a financial year and $30,000 over five financial years, per the Services Australia gifting rules.
To work out what an interest is worth, Centrelink uses the reasonableness test. It applies when you’ve transferred extra assets, or when you’ve paid a lump sum towards accommodation that already exists at someone else’s place, with no building or renovation involved.
The calculation, set out in the Department of Social Services Social Security Guide, multiplies the annual combined partnered pension rate (as at the date the interest is created) by an age-based conversion factor. The older you are, the lower the factor, because a life interest is worth less when you have fewer years left to use it. For couples, the younger partner’s age is used.
The good news: Centrelink says it won’t treat you as having paid too much if you’re transferring the title of your home and keeping a lifetime right to live there, paying to build a granny flat, paying to convert someone’s home for your needs, or buying a property in someone else’s name. In those cases the whole amount is generally accepted as the value of the interest. The reasonableness test bites mainly when cash changes hands for a room in an existing house.
If you’re anywhere near the line, talk to Services Australia’s free Financial Information Service before money moves. A financial planner can also run the reasonableness numbers for you.
Get it in writing. Really.
Centrelink may accept a granny flat interest that isn’t written down. But it recommends a legal document that confirms your right to live in the home for life, says whether you’ll pay rent or contribute to upkeep, and says how the owner will compensate you if they want you to give up the interest.
There’s a second, very practical reason to formalise it: tax. Since 1 July 2021, the ATO’s CGT exemption for granny flat arrangements means capital gains tax doesn’t apply when a granny flat arrangement is created, varied or terminated. Without it, your son or daughter could face a CGT bill simply for granting you the right to live in their property.
To qualify for the exemption:
- the property owners must be individuals (not a company or trust)
- the person with the granny flat interest must have reached Age Pension age, or need help with day-to-day activities because of a disability likely to last at least 12 months
- the arrangement must be in writing, show that the parties intend to be legally bound, and not be commercial in nature
The ATO suggests the agreement name all the parties, including everyone with an ownership interest, and spell out when it can be varied or ended and what happens if it is. The parties don’t have to be related. Note the exemption only covers the arrangement itself. If you sell shares to fund the build, that sale is taxed under normal rules.
Our view: paying a lawyer to draw up a proper agreement is cheap insurance compared with the six-figure sums usually involved, and it protects the adult children as much as the parent.
What happens if the family arrangement breaks down
This is the part nobody wants to think about, and it’s exactly the scenario in our opening example.
Services Australia reviews a granny flat interest if you leave within five years. If the reason you left was something you could have expected when you set it up, the gifting rules apply, which could leave part of your money counted as a deprived asset even though you no longer have it or the home. If the reason was unexpected, the gifting rules may not apply. Centrelink lists sudden illness, family relationship breakdown, elder abuse and property damage as examples of unexpected reasons.
You can also be away temporarily during those five years for up to 12 months, or up to two years if the property was lost or damaged.
If the owner sells, they can’t simply take your interest away. Centrelink says they can make your right to live there a condition of sale, transfer your interest to another property, or pay you money or assets in return for giving it up. That last option is where a written agreement matters most. Without one, you’re relying on goodwill at the exact moment goodwill is in short supply.
The ATO’s own examples show how a well-drafted agreement handles this: parents hand over $500,000 for a lifetime right to live in their daughter’s unit, and the agreement says the money is repaid if they have to leave because of ill health, a relationship breakdown, or a sale.
Informal family money arrangements that go sour are a well-known pathway to financial abuse. We cover the warning signs in our guide to elder financial abuse.
Is a granny flat right for you?
For many families it’s a genuinely good setup: company, help close by, and money that might otherwise sit in a house you can’t maintain. But it’s a big, hard-to-reverse decision. If you’re still weighing it up against other options, our comparison of retirement villages and ageing in place is a useful next read.
Before you sign anything, we’d suggest:
- call Centrelink on your regular payment line and ask how the plan would be assessed
- book a session with the Financial Information Service
- get your own lawyer, separate from the family member’s, to draft or review the agreement
- make sure an enduring power of attorney is in place and that you trust the person named
FAQ
Do I need a written agreement for Centrelink to recognise a granny flat interest?
Not always. Services Australia may accept an unwritten arrangement, but it recommends a legal document as proof of what was agreed. You’ll need a written, legally binding agreement to get the ATO’s CGT exemption.
Will I lose my pension if I give my house to my children and keep living there?
Not necessarily. Transferring your home’s title while keeping a lifetime right to live there is a recognised way to create a granny flat interest. Whether you’re assessed as a homeowner depends on the value of the interest compared with the extra allowable amount ($267,000 from 20 September 2026).
Can I get Rent Assistance in a granny flat?
Only if you’re assessed as a non-homeowner, which happens when your entry contribution is equal to or less than the extra allowable amount, and you pay enough rent to qualify.
What if I have to move into aged care within five years?
Centrelink will review the interest. If the move was something you could have expected when you set up the arrangement, the gifting rules apply. If it was unexpected, such as a sudden illness, they may not. Tell Centrelink as soon as your situation changes.
This article is general information only and isn’t legal, financial or tax advice. Pension rules and thresholds change regularly, so check the official Services Australia and ATO pages linked above and get advice about your own circumstances before acting.
