The fact that we are living longer is of course a great thing, but it also means some people have found their previous retirement planning has turned out not to suit today’s financial needs. Not only is having enough superannuation, and long-term income sources an issue, there are also considerations around being cared for, or caring for others, to navigate. Many homeowners are now trying to put clever strategies in place that solve these challenges, however, understanding how they impact on your asset pool, pension entitlements and income is crucial.

One of the more common solutions to income shortfalls in retirement is adding a granny flat or a studio to your current home. This can be rented out to provide an additional income source via a tenant, serve as a temporary home for a friend or family member in times of need (such as saving for a house deposit), or be the preferred solution to aged care for an elderly relative. The intended purpose of the addition and the subsequent income it generates, can impact on a homeowner’s financial circumstances and there is legislation in place around to address this issue. Specifics change from state to state, so it’s important to check your state government’s legislation, but for the most part, the nation is aligned and approvals for construction of a secondary dwelling on a property have become much easier. Before you make any changes to your living arrangements or income, you should always check how it might affect your finances with Centrelink first .


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How Building a Granny Flat Might Affect Your Pension

Centrelink provides an exemption for your ‘principal home and 2 acres of land’, when assessing your assets for the age pension, however, any other real estate you own is not exempt. If you own another property that you do not live in (permanently) and you rent it out for income, this is included in your assets test. This means then, that if you decided to construct a granny flat at your principal place of residence, your decisions around its construction are important. It’s context to your primary residence may be relevant, and who lives in it is taken into consideration by Centrelink. If you are constructing the granny flat to accommodate family, then even though it is a separate dwelling, and not your primary residence, it will not be a part of your assets test, as granny flats rented out to a near relative (parent, child or sibling) are exempt – hooray!

However, if you are constructing it to accommodate a tenant who is not a near relative – to generate an income stream – the granny flat would be classified as a sperate dwelling and therefore included in your assets test (and your income test – but more on that later).


How Renting a Granny Flat Might Affect Your Pension

As well as the assets test, pension eligibility is determined by the income test and ‘real estate income from things like rental properties, or boarders and lodgers’ is definitely on the list. However, there are nuances within that definition. If your intention for the construction of the granny flat is to boost your income, then there are considerations around who your tenants may be, that can affect your pension. According to the age pension income assessment criteria, ‘regular payments from a close relative’ (parent, child or sibling), are classified under exemptions. So, for example, if you construct a separate self-contained dwelling on your property and your parent, child or sibling moves in and pays you rent, this income is exempt under that definition. The occupation by a close relative also exempts the dwelling from being assessed as an asset, as mentioned previously.

If, however, this isn’t an option for you and you need to rent it out to someone who isn’t a close relative – a cousin, a friend, or a stranger for example – the granny flat becomes assessable against your pension. It will be considered an asset in your assets test and the rent generated from it included as income.

So, in summary, the ideal scenario is for you to build a separate self-contained dwelling and move a close, rent paying relative in. This is the only scenario that will allow you to boost your income and not have your age pension affected. As long as your family pays their rent.


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The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions. Click here for full Terms of Use.