Making the Most of Your Granny Flat Arrangements and CGT

Granny flats—also known as secondary or accessory dwellings—have surged in popularity across Australia. Whether built to accommodate ageing parents, adult children, or as an additional income stream through rental, granny flats offer flexibility and added value to your property.

But what many homeowners overlook are the tax implications, especially Capital Gains Tax (CGT), when constructing, renting, or eventually selling a property with a granny flat.

What Is Capital Gains Tax?

Capital Gains Tax is triggered when you sell a capital asset, such as property, for a profit. The taxable gain is the difference between your cost base (including construction and legal costs) and the sale price, minus any selling expenses.

While your main residence is generally exempt from CGT, adding a granny flat—especially if it's used for income-producing purposes—can affect this exemption.

How Granny Flats Can Trigger CGT

When you build a granny flat, it becomes part of your property’s capital asset. If the flat is used to generate rental income, the CGT exemption for your main residence may no longer fully apply.

Key considerations include:

• Construction and setup costs: These form part of your cost base and may include builder fees, council permits, and professional services.

• Use of the granny flat: If it’s rented out, that portion of the property may become taxable.

• Mixed-use implications: A property partly used to produce income (e.g., a rented granny flat) may be partially exempt from CGT.

Can You Reduce or Avoid CGT?

Yes, with strategic planning. You may still qualify for a partial CGT exemption if:

• The property, including the granny flat, is used primarily for residential purposes.

• You provide accommodation to family members under a formal but non-commercial agreement (such as free accommodation without rent).

• You maintain proper records of personal vs income-producing use.

In 2021, the ATO introduced granny flat arrangements that, when formalised (especially for family care), may avoid triggering CGT when ownership is transferred, provided no commercial rent is charged.

Income Tax on Rental Earnings

If you rent out the granny flat, rental income must be declared in your tax return and is subject to income tax. You may be able to claim deductions for:

• Depreciation of the structure

• Repairs and maintenance

• Council rates and utilities

• Property management fees (if any)

Be aware, however, that these deductions may increase your eventual CGT liability.

Record Keeping Is Crucial

To calculate your CGT accurately, keep detailed records of:

• Construction or renovation costs

• Legal and professional fees

• Rental income and expenses

• Periods of personal vs rental use

This documentation will support your position when the property is sold.

Seek Professional Advice

Granny flats can be a smart move, whether for family support or as a source of additional income, but they come with complex tax consequences. Getting it wrong can cost thousands.

The safest approach is to consult with a tax professional before making any decisions. At Dolman Bateman, we specialise in tax-effective property strategies and can help you understand your obligations and minimise your CGT exposure.

Need clarity on how a granny flat will impact your tax?

📞 Call us on (02) 9411 5422 or book a consultation below.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.