Taxpayers, who rent part of their home, must declare the rental income in their income tax return. Several deductions for the associated expenses can be claimed, such as part or all of the interest on the home loan, a portion of water bills and so on. However, if there is a decision to sell the dwelling the homeowner may not be entitled to the full main residence exemption from Capital Gains Tax (CGT), which means CGT has to be paid on part of any capital gain made.
Sometimes taxpayers rent part of their home or granny flat to their relatives. Under the current tax law, an owner of a house may have to pay CGT if there was a formal agreement. If the rental agreement was made with family members and they reside in the house the owner may also have to pay CGT. To prevent CGT liability, in many cases house owners choose to avoid establishing a rental or any other agreements with family members. Instead they have informal arrangements which are not put in writing. Such agreements do not have any legal power. This makes house owners vulnerable and leaves no protection if there is a breach of the oral agreement. Older people can become victims of such breaches. In worst cases they transfer the title of their home or other assets to an adult child in exchange for ongoing care of the house. If the relationship breaks down or the promise of care is not made, this informal agreement can disadvantage an older person. In some cases it can leave an older person without a place to live.
This year the Board of Taxation decided to review the tax treatment for granny flat arrangements and there might be some changes before the end of 2019.
The Government wants to review and make appropriate tax treatment of these arrangements. In particular, it will consider the interactions between the current tax laws and will consider the treatment of a granny flat. The Government wants to protect mainly elderly family members from abuse. The Government has asked the Board of Taxation to review the tax treatment of granny flat arrangements and recommend any changes that would encourage families to enter formal family agreements.
If you require any further information please contact one of our tax accountants on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment. Alternatively, please click here to submit an online enquiry form or call us.