The nasty little tax surprise that could be lurking in your granny flat

Even in this case where commercial rent is charged for occupation of a granny flat, Wilson says it may be possible to argue, depending on the circumstances, that no partial exemption applies i.e. that the full exemption should apply. This is because the main residence exemption extends to adjacent land “to the extent that is used primarily for private or domestic purposes in association with the dwelling”. In this regard, the phrases “to the extent” and “primarily” may be wide enough to encompass the case where a granny flat is rented out at commercial rates for a limited period (at least in relation to the total ownership of the property) – especially if rented to family members. See also the Commissioner’s views in Taxation Determination TD 2000/15 and the views at para [12 070] of the Thomson Reuters CGT Handbook 2013-14 on this matter.

Other points to note about these “basic scenarios” include:

• In the situation where parent(s) move out of the main residence and let their children or a child and their spouse occupy the main residence as their home, then presumably the CGT main residence exemption will be available on any subsequent sale as it appears that the basic requirements for the exemption will still be met in this situation – provided the parent(s) remain the legal owners of the property. Alternatively, the “absence concession” in the tax law would appear to be available to validly preserve the exemption. Under this concession, a taxpayer can choose to treat a dwelling as their main residence (and therefore it would be exempt from CGT), even if they are absent from it. The concession applies indefinitely if the dwelling is not used to produce income, or for up to six years if it is used for income-producing purposes.
• If the land occupied by the separate granny flat is subdivided and sold (e.g. to the occupiers), then no CGT exemption will apply to any capital gain or loss made on the sale.
• Where a room in a dwelling is rented out at commercial rates (usually to a non-family member), the situation is clear that a partial exemption for income use will apply.

Tax issues are never far from property transactions, and granny flats are no exception. While for many people it may be relatively easy to build a granny flat, it may be worth getting some advice on likely tax consequences. Their popularity has become such that you can be sure the Tax Office is keeping an eye on developments (pun intended)!

[This article was amended at 4pm, January 16.]

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.