Ernie and Trixie have a $2.2 million offer for their home and plans to build a granny flat at their son’s house. GAIL FREEMAN explains how tax concessions could help them provide equally for both children.

Retirees Ernie and Trixie have just had an offer of $2.2 million for their house.

“We have been wanting to sell it, but can’t decide whether we should look at building a granny flat since our son has just moved to Evans Head or whether there is something better we can do,” said Ernie.

I said: “That sounds exciting. I presume that the arrangement you will be entering with your son’s family is that you will provide them with funds and they will build a granny flat on their house for you.

“The first good thing to note is that a granny flat arrangement is capital gains tax free if you have either attained age pension age or you require assistance with day-to-day activities due to an ongoing disability. There is no need to be eligible for the disability support pension.

“I know you have two children. So, I would recommend you set up a formal agreement with your son for this granny flat and also ensure that in your wills or by gift, your daughter is treated equally.

“The law states that the granny flat arrangement must not be ‘commercial’. This means that no market rent is paid and that you would only contribute to household running expenses.

“The lawyer, preparing the agreement, would be able to advise on any other clauses required.”

Trixie said: “We have already had architectural plans drawn up and they are currently with the council and this granny flat will probably cost about $800,000. We believe that this will leave sufficient for our daughter to get an equal share.”

I told them there was another tax concession that could be helpful for them in this situation. That was the downsizer contribution.

“If you have owned your own home for more than 10 years and it satisfies the main-residence exemption rules and you are both over 55, you can contribute $300,000 each to superannuation as a downsizer contribution,” I said.

“The benefit of this is that the money is in your superannuation fund and is only being taxed at 15 per cent. If you were to leave it outside superannuation, any tax paid on the earnings will be at a higher rate.

“You will still have about $800,000 available for your daughter. You could get this to her now so that she can invest it how she wishes or you can invest it and leave it to her in your wills. Those matters can be discussed later.”

Trixie turned to Ernie and said: “That sounds amazing, Ernie. Do you agree that we should follow Gail’s advice and start the ball rolling for the downsizer contributions?”

Ernie agreed saying it would minimise their tax at the same time as ensuring equality for their two children.

I told them they’d have to make the downsizer contribution within 90 days of settlement money and, of course, there will be forms to fill in.

If you have any questions on downsizer contributions, granny flats or any other tax or superannuation-related matter contact the friendly team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

News all day, every day at CityNewsQBN.com.au.