When an older parent transfers funds to an adult child in exchange for the right to live on the property for the rest of their life, the arrangement is often made in good faith and with none of the formality the law requires. The consequences of that informality can be severe, and they fall on every member of the family.
The arrangement is common enough to have acquired a name in both law and policy. An older person — usually a parent — sells their own home, transfers the proceeds or a substantial portion of them to an adult child, and moves into a self-contained area of the child’s property or a separate dwelling on the same land. In exchange, the older person receives the right to live there for the rest of their life. No rent. No lease. A right of occupation, resting on whatever the parties have recorded — or have not recorded — between themselves.
Services Australia, which administers the age pension, calls this a granny flat interest. The legal framework that governs it, the consequences of getting it wrong, and the work required to get it right, are the subject of this article.
What Services Australia looks for
The age pension is means-tested. Assets above a certain threshold reduce the pension; assets above a higher threshold eliminate it. When an older person transfers a large sum to an adult child, the obvious question for Services Australia is whether that transfer should count as an asset for the purposes of the pension assessment — because if it does, the older person may have just disqualified themselves from a pension they need.
The granny flat interest rules are an exception to the general deprivation provisions. Properly documented, a transfer made in exchange for a genuine lifetime right of occupation is treated as the purchase of that right, not as a gift or a disposal of assets. The value of the right is assessed under a formula that takes into account the amount paid and the older person’s life expectancy. What remains above the assessed value of the right is counted as an asset. What falls within it is not treated as a deprivation.
The word that matters is “properly”. Services Australia requires the arrangement to be genuine — meaning the right of occupation must actually exist, the older person must actually reside there, and the terms must be recorded in writing. An informal understanding, a verbal promise, or a transaction documented only in a bank transfer record does not satisfy the requirement. The consequence is that the full amount transferred is assessed as a deprivation of assets, potentially triggering a five-year restriction on certain pension payments and reducing or eliminating pension entitlement from the date of the transfer.
For an older person who has transferred the proceeds of their home sale — often the whole of their liquid wealth — this is not a theoretical risk. It is the difference between a secure pension and no pension at all.
A properly drafted granny flat agreement is the only document that survives the conversations that produced it — and the only document that protects the older person if those conversations are later disputed.
What a proper agreement records
A granny flat agreement is a contract. Like any contract, its value depends on what it actually says. A properly drafted agreement records five things.
First, what was paid. The amount contributed by the older person, the date of transfer, and how it was applied — whether to the purchase of the property, the construction of the separate dwelling, a mortgage reduction, or some combination. The amount paid matters not only for the Services Australia assessment but for every subsequent question about what the older person is entitled to if circumstances change.
Second, what was promised in return. The right of occupation — its scope, its location on the property, what it includes (parking, access to shared spaces, the garden), and whether it is exclusive or shared. The duration: for the rest of the older person’s life, or until an earlier event. The conditions under which it can be exercised.
Third, what happens if the older person needs aged care. This is the scenario most commonly left unaddressed, and it is the one most likely to produce a dispute. If the older person’s health deteriorates and they require residential aged care, the right of occupation they were promised is no longer usable. The agreement must address whether the older person receives a lump sum, a payment stream, or some other form of compensation for the right they gave up. Without a recorded answer, the adult child and the older person — or the older person’s family — must negotiate this at an already difficult time, without any document to anchor the discussion.
Fourth, what happens if the property is sold. The adult child may want to sell the property at some point: to upgrade, to move for work, to access equity. What happens to the older person’s right of occupation if the property is sold? Is it extinguished on payment of a sum? Does it attach to the replacement property? Does the older person have any right to consent to a sale or to veto one? Each question has a range of possible answers, and the agreement must contain one of them.
Fifth, what happens if either party dies. If the older person dies, the agreement ends, and whatever they contributed remains with the adult child — unless the agreement says otherwise. If the adult child dies first, the property may pass to the child’s estate or to a surviving spouse, and the older person’s right of occupation becomes a matter for whoever inherits the property. Without a recorded provision, the older person has no contractual right against a new owner. A properly drafted agreement addresses both scenarios.
Why informal arrangements produce formal disputes
The arrangements that produce the worst outcomes are not the adversarial ones. They are the ones entered into between family members who trust each other completely, on the assumption that trust is sufficient and that nothing needs to be written down.
Trust is not a legal instrument. It does not bind the parties’ children, spouses, or creditors. It does not survive a death, a separation, or a change of heart. The informal arrangement that seemed settled when the older parent moved in becomes unsettled the moment any of those events occur, and at that point the only question is what was written down.
Two types of formal dispute arise with particular frequency from undocumented granny flat arrangements.
The first is a Family Provision claim. Where the older person has died and their estate is small — because they transferred most of their wealth to the adult child — other members of the family may apply under the Succession Act 2006 (NSW) for provision from what remains. The adult child who received the transferred funds is not necessarily required to return them to the estate to satisfy such a claim, but the existence of the arrangement, and the question of whether adequate provision for the deceased’s dependants was made, will feature directly in the proceedings. A properly documented arrangement, showing a genuine exchange rather than a gift, limits but does not eliminate that exposure.
The second is a section 66G application. Where the older person’s right of occupation is disputed — because the adult child’s circumstances have changed, or because the adult child has died and the surviving spouse wants to sell, or simply because the relationship has broken down — the older person may need to apply to the NSW Supreme Court under section 66G of the Conveyancing Act 1919 (NSW) to protect or realise their interest. That application is expensive, takes time, and produces a result that a properly drafted agreement would have provided at the outset.
The connection between informal granny flat arrangements and Supreme Court litigation is not abstract. It is the pattern the firm sees when matters come to us after the arrangement has already broken down.
When to involve a lawyer, and on whose behalf
The right time to document a granny flat arrangement is before the money is transferred and before the older person moves in. Once the transfer is made, the leverage that each party has to negotiate the terms of the arrangement diminishes, and whatever is subsequently written down is vulnerable to the argument that it does not reflect what was genuinely agreed.
The firm acts on granny flat matters for the older parent, for the adult child, or for both parties jointly where the arrangement is agreed and uncontentious. Where a single matter is uncontested, a joint retainer is often the most efficient approach — one set of instructions, one document, one cost. Both parties sign the same agreement, and both know exactly what it says.
Where there is any prospect that the parties’ interests may diverge — where the contribution is large, where there are other adult children who are not party to the arrangement, where the adult child’s relationship is not entirely stable, or where the older person has doubts — each side should have independent legal advice. In those circumstances the firm acts for one party only. The other party retains a separate solicitor. Both lawyers review the same proposed agreement, and each advises their client whether it is in their interest to sign it.
The granny flat agreement is also not a standalone document. It sits alongside the older person’s will, powers of attorney, and enduring guardianship appointment, all of which need to reflect the arrangement. If the older person’s will leaves their estate equally to their children but they have already transferred the bulk of their wealth to one of them, the will and the arrangement need to be understood together. If the older person loses capacity, the person holding their enduring power of attorney will need to act under the agreement on their behalf. Both documents need to exist, and both need to be current.
What this means for you
A granny flat arrangement is a significant financial transaction, typically the largest transfer of wealth an older person will make in their lifetime. The fact that it is made within a family, and on the basis of goodwill, does not reduce the legal complexity; it often increases it, because the parties are less likely to apply the scrutiny they would apply to a transaction with a stranger. A proper agreement takes a few weeks to draft and execute. The matters that arise from the absence of one — Family Provision claims, Supreme Court applications, contested estates — take years and cost multiples of what the agreement would have cost. The choice between the two is made at the beginning, not the end.
If you are dealing with a granny flat arrangement and would like to speak with one of our experienced lawyers, make an enquiry.