Recommendation 6–2 The Social Security Act 1991 (Cth) should be amended to require that a ‘granny flat interest’ is expressed in writing for the purposes of calculating entitlement to the Age Pension.
6.81 Approximately 80% of all persons over Age Pension age receive either a full or part pension. When deciding to enter into an assets for care arrangement, an important consideration for most older Australians is, therefore, how that arrangement may affect their entitlement to the pension.
6.82 The principal place of residence for an older person is an exempt asset for the purposes of the Age Pension. As outlined above, a typical ‘assets for care’ arrangement involves an older person transferring title to their property, or proceeds from the sale of their property, or other assets, to a trusted person (or persons) in exchange for the trusted person promising to provide ongoing care, support and housing. Exceptions under social security law operate to ensure that older persons who enter into this type of arrangement will not lose their pension. This exception is framed as the ‘granny flat interest’. Accordingly, a key incentive for older people may be to ensure that their assets for care arrangement is deemed to be a ‘granny flat interest’ for the purposes of social security law.
6.83 Recommendation 6–2 seeks to assist the earlier Recommendation 6–1 by making it more likely that there will be some evidence of the assets for care agreement in writing in the event that a dispute is brought before a tribunal such as the Administrative Appeals Tribunal (AAT) (for social security) or the proposed state and territory tribunals. This would reduce some of the complexity and evidentiary issues that need to be addressed by an older person making a claim in the tribunal.
6.84 Recommendation 6–2 also seeks to address specific concerns raised by stakeholders that Centrelink policy is encouraging older people to enter into assets for care arrangements in a manner that may be disadvantageous. For example, the Law Council of Australia raised concerns that by ‘requiring older people to ensure that they are not registered on title when entering into these arrangements, the Department of Human Services policy can currently prevent older people from protecting themselves against elder abuse’.
6.85 The Older Persons Advocacy Network provided an example of the interactions between Centrelink’s pension rules and assets for care arrangements:
In 2010 Mr and Mrs P (P) then aged 75 and 73 respectively, received the age pension which was their only income. They owned their own home valued at $800K but found they could not afford to service the mortgage over their home. Balance owing to the Bank was about $230K. P entered into an oral agreement with their daughter and son in law (SIL) whereby P would contribute $500K from the sale proceeds of their home to the purchase of a new larger house, the title of which was to be put into the names of the daughter/SIL. In return for their financial contribution P would acquire a right of residence in the new house for life. The financial arrangement was never reduced to writing nor did P obtain any independent legal advice. Moreover P did not lodge a caveat on the title to protect their equitable interest in the house. P did, however, later on notify Centrelink of the financial arrangement they had entered into. Centrelink determined that their contribution of $500K in return for a right of residence for life was allowable in accordance with Centrelink’s granny flat rules. …
Some years later there was a falling out in the relationship between P and their daughter/SIL. P were told to vacate the house and that none of their contribution to the purchase price would be refunded. P’s daughter/SIL alleged that the contribution had been a gift.
6.86 In this example, had there been evidence in writing of the agreement between the parties, it would have been much more difficult for the daughter and son-in-law to have asserted that the money was a gift rather than an exchange as part of an assets for care arrangement.
Granny flat interests
6.87 Under the Social Security Act 1991 (Cth),a single person or couple can make gifts of up to $30,000 over a period of five years without it affecting the amount of government benefits they can receive. Any amount over the allowable amount will be assessed as a ‘deprived asset’ for five years from the date of the gift, which means it will be counted as the person’s asset. These are also known as ‘gifting’ rules. Therefore if an older person was to sell their home and give the proceeds to their children, the value of that gift would be counted as an asset of the older person for the purposes of calculating the older person’s entitlement to the Age Pension.
6.88 However, where a gift creates a ‘granny flat interest’ for the older person, the asset deprivation rules do not apply. A ‘granny flat interest’ is defined in the following terms:
(2) A person has a granny flat interest in the person’s principal home if:
(a) the residence that is the person’s principal home is a private residence; and
(b) the person has acquired for valuable consideration or has retained:
(i) a right to accommodation for life in the residence; or
(ii) a life interest in the residence.
6.89 Thus, a granny flat interest is created when a person pays for (or retains) a life interest or right to use certain accommodation for life in a residence that will be the person’s principal home. The use of the term ‘granny flat’ does not describe the type of dwelling—it describes the living arrangement. Family agreements or assets for care agreements are granny flat interests for the purposes of social security. Where a person establishes a granny flat interest, the value of it is generally the same as the amount paid for acquiring the property interest.
6.90 A key criterion of the granny flat interest is that the older person is not on the legal title to the property the subject of the assets for care arrangement. Seniors Rights Victoria expressed concern that the requirement was encouraging older persons to give up their right to be registered on title as a proprietor in order to access the ‘granny flat exemption’. A similar view was expressed by the Law Council of Australia.
6.91 The ALRC notes that the granny flat interest is not the only option for co-living recognised under social security law. For example, it is possible for an older person to invest in a property that will become their principal place of residence with their family and stay on title without losing their pension. However, these options are less well known and understood and the criteria for valuing the older person’s interest are not as generous or certain as the granny flat interest.
6.92 Accordingly, the ALRC agrees with stakeholders that the rules relating to the ‘granny flat interest’ may be encouraging older people to enter assets for care arrangements that result in the older person giving up legal title to property. Given this, the ALRC considers that the terms and conditions of the granny flat interest should be reformed.
Importance of reducing the interest to writing
6.93 Currently, there is no requirement for the ‘granny flat interest’ to be in writing. Nevertheless, Centrelink recommends that a legal document be drawn up by a solicitor and that the document should:
6.94 Notwithstanding this advice, as discussed above, older people may be reluctant to enter into formal, written family agreements because they trust their family, and expect that they will have no problems.
6.95 Accordingly, Centrelink may have a role in encouraging greater documentation of assets for care arrangements. This could be done in one of two ways:
developing a standard form to be executed to meet Centrelink eligibility for the granny flat interest; or
requiring written evidence of an agreement to enter into an assets for care in order to meet Centrelink eligibility for the granny flat interest.
6.96 A standard form signed by both the older person and the party to whom funds are provided or property transferred serves as evidence of the existence of a family agreement. Existing forms and templates for wills or appointing an enduring power of attorney in states such as New South Wales provide one model. Under this approach, the form could provide guidance to the parties to record the nature of the transaction and interest, as well as the obligations of the parties, but leave space for the parties to record the detail. This approach potentially accommodates the variety of ways in which a transfer of resources can be effected and the wide variance in the specific obligations agreed to by the parties.
6.97 However, as outlined above, the law of property is complex and in the absence of advice it would be relatively difficult for most families to fill in such a form in a manner that reflects not just the present intention of the parties but also what they would want or expect to happen if the arrangement broke down. The experience with will kits and standard forms for the appointment of enduring powers of attorney or guardians is illustrative of these problems. However, poorly completed forms could exacerbate the risks associated with a failed assets for care arrangement. Moreover, it imposes a significant hurdle to access an existing exemption from the gifting rules.
6.98 Alternatively, evidence of a written agreement might be required to demonstrate the existence of a granny flat interest. This approach is supported in academic writing, and by stakeholders. This option is less onerous—it simply requires some evidence in writing that both parties have agreed to put in place an assets for care arrangement. It would provide evidence that an arrangement was in place and that there was not simply a gift of a property (or proceeds) by the older person to the trusted party. As outlined above, the current construction of property law means that the argument by a trusted party that there was no assets for care arrangement but a simple gift creates significant evidentiary hurdles that may inhibit an older person from asserting their rights through civil litigation. These concerns were a significant feature of the problems of assets for care arrangements gone wrong outlined in submissions.
6.99 This approach would not, however, result in complete legal agreements in writing that set out clearly the rights and responsibilities of the parties and what specifically happens in the event of the arrangement ceasing to work for one or more of the parties. Accordingly, it would not be a panacea, but would reduce some of the risk of the arrangements without burdening the parties with a requirement to enter into formal contracts in order to access the granny flat interest under social security law. This can be complemented with education campaigns particularly around the availability of a model agreement prepared by Seniors Rights Victoria.
6.100 The ALRC notes that a requirement that there be written support of an assets for care agreement in order to be eligible as a granny flat interest would be a departure from other Centrelink practices. Centrelink recognises a variety of legal and equitable interests which are not supported by writing for the purposes of determining eligibility for government payments. The ALRC considers that such arrangements should not change as a consequence of Recommendation 6–2 and that, apart from granny flat interests, it should be possible for equitable interests that are not supported by writing to be recognised for the purposes of social security law. The recommendation is a specific and targeted requirement for some expression in writing because the breakdown of family agreements is a common form of financial elder abuse experienced and Centrelink’s granny flat interest exemptions appear to be driving the making of such agreements. In this context, the ALRC considers it appropriate to require additional formality before a granny flat interest can be established for the purposes of calculating social security entitlements. Submissions to the ALRC’s Discussion Paper were supportive of this approach.
6.101 The ALRC acknowledges that Recommendation 6–2 will require careful implementation to ensure that unintended consequences do not undermine the specific purpose of the recommendation. For example, allowances for verbal arrangements should be made where enforcing a requirement for evidence in writing would cause undue hardship to the Age Pension recipient. The interaction between ‘granny flat interests’ and other situations where equitable interests may arise will need to be carefully managed to ensure that the recommendation is not applied more broadly than is strictly necessary.
Centrelink elder abuse strategy for family agreements
6.102 The ALRC suggests that the elder abuse strategy in Recommendation 12–1 should specifically address the risk of elder abuse in the context of family agreements. In particular, the elder abuse strategy might include a number of initiatives such as:
producing informational material about family agreements, including a discussion of the legal and financial risks of entering into family agreements;
preparing and disseminating easy-to-understand guidance materials such as checklists setting out matters to consider when putting in place an assets for care agreement;
ensuring publicly available material relating to family agreements consistently, explicitly and prominently urges older people to seek independent legal advice prior to entering into family agreements;
ensuring all communications with older people relating to family agreements include information about the risks of such arrangements, checklists and a strongly worded statement urging the older person to seek independent legal and financial advice prior to entering into them;
additional community awareness raising; and
a review of Centrelink requirements and related messaging to reduce the risk of older persons remaining in abusive situations for fear of losing access to their pension entitlements.
An older person’s right to be on title
6.103 The law regarding assets for care arrangements is complex and it is important that information provided by Centrelink and the Department of Human Services is accurate and does not overstate the certainty of legal arrangements where the older person is not recorded on the legal title. All existing public material prepared by Centrelink and the Department of Human Services should be reviewed for accuracy as part of the elder abuse strategy.
6.104 In addition, the Department of Human Services should ensure that guidance material, such as the Guide to Social Security Law, clarifies that, while the ‘granny flat interest’ exemption only applies if the older person is not listed on title as a registered proprietor, there are other options. Those options should be specifically explained alongside the granny flat interest so that it is clear that there are alternatives for putting in place an intergenerational assets for care arrangement that enables the older person to be listed on title and continue to be eligible for the Age Pension.
Independent legal and financial advice and the elder abuse strategy
6.105 In an ideal world, older people would routinely access independent legal advice before entering into an assets for care arrangement. The ALRC suggests that Centrelink could strongly encourage older people to seek independent legal advice prior to entering into a family agreement. In particular, Centrelink should prominently incorporate this message both in direct communications and in publicly available material relating to granny flat exemptions.
Requirement to stay in the arrangement for at least five years
6.106 Social security law requires that the granny flat interest be maintained for at least five years. If the reason for leaving the assets for care arrangement before five years could have been anticipated at the time of making the arrangement, the funds used to establish the abandoned granny flat interest will retrospectively be considered an asset affecting the older person’s eligibility for the Age Pension. The ALRC understands that, where elder abuse occurs after a granny flat arrangement has commenced, it is likely to be viewed by Centrelink as an ‘unforeseen circumstance’, so the pension would not be affected.Caxton Legal Centre pointed out, however, that the five-year requirement could still be inadvertently forcing victims of elder abuse to endure ‘intolerable family dynamics’. A case study supplied by the Older Persons Advocacy Network is illustrative:
Marina is an 80-year old woman from a European background. She came to Australia with her husband in the early 1950s and they prospered. Marina worked in the business and was a driving force behind its success. When her husband died Marina was left reasonably financially secure and owned her own house in an expensive part of Canberra. Marina has a daughter living abroad and a son living in Canberra. Marina has no cognitive impairment and manages her own affairs; however in late 2011 Marina had a bad fall and broke her leg and her arm resulting in long stays in hospital. Marina’s son has four daughters who are now getting too old to share bedrooms and was looking to upsize his house and move to a ‘better’ area but needed additional finance to purchase such a property.
Marina’s recovery period was going to be long but she started to progress well physically. Being in hospital with the only visitors being her son and occasionally daughter in law and grandchildren she became isolated and started to lose confidence in her ability to live alone. When her son made her an offer to live with them, sell her house and invest in their new property under a granny flat arrangement with Centrelink, it seemed tempting. Marina had been groomed by her son over a long period of time to believe she could not manage living alone any longer. A property was found by her son with a flat attached, Marina was taken from hospital to look at the flat and returned to the hospital all within the space of a few hours. She had no opportunity to discuss a major financial decision or the suitability of the property with an independent person. Based on promises of the support the family would give her and her now complete loss of confidence in her ability to care for herself Marina agreed and invested in the son’s new property.
The arrangement was doomed from the start, the promised care and support never eventuated and the flat could not have been more unsuitable. By the time ADACAS [ACT Disability, Aged and Carers Advocacy Service] became involved Marina was locked in to the Centrelink granny flat arrangement for five years and a large sum of money was paid to the son to secure the granny flat interest. … The ADACAS advocate was able to support Marina and help her establish a new independent living arrangement. It could so easily have been a disaster for this client locked into isolation and despair for the last years of her life. This case highlights the hidden nature of financial abuse of older persons.
6.107 As part of a broader elder abuse strategy, Centrelink should consider specifically listing elder abuse as a circumstance which would allow an older person to leave a granny flat arrangement within five years. This could be supported by greater awareness raising and community education about what constitutes ‘unforeseen circumstances’ for the purposes of the application of the ‘gifting rules’ and granny flat exemption.
6.108 The direct contact principle discussed in Chapter 12 could also apply to granny flat arrangements. The requirement to advise Centrelink staff of the existence of a granny flat arrangement provides an opportunity to have contact with the older person. Direct contact could enable Centrelink to confirm that the person is entering the arrangement willingly; is aware of the criteria required to show a granny flat interest and the exceptions where elder abuse arises; and advise the older person of the free financial counselling service offered by Centrelink.
National Commission of Audit, ‘Age Pension’ in The Report of the National Commission of Audit [9.1]. Fewer than 20% of people aged 65 years receive no pension. This figure applies only to older Australians who meet the residency requirements for social security. The Australian Bureau of Statistics reported that, in 2012, 2,278,215 people received income through the Age Pension, which was an increase of 57,831 people from the same point in time in 2011: Australian Bureau of Statistics, National Regional Profile, 2008 to 2012, Cat 1379.0.555.001.
Seniors Rights Victoria, Submission 383; R McCullagh, Submission 24.
Law Council of Australia, Submission 61.
Older Persons Advocacy Network, Submission 43.
With a maximum of $10,000 in any single year. Social Security Act 1991 (Cth) s 1118.
See, eg, Department of Human Services, Gifting <www.humanservices.gov.au>.
Social Security Act 1991 (Cth) ss 12C(2), (3).
See ch 12.
Social Security Act 1991 (Cth) ss 1118(1)(c)(i)–(iii). Where there is a ‘special reason’, the granny flat interest can be valued at a different amount from that which was paid. Examples of special reasons include circumstances where the older person transfers the title to their home as well as additional assets, or where an older person pays for the construction of premises as well as additional interests. In these circumstances a reasonableness test is applied. Department of Social Services, Guide to Social Security Law (2014) [126.96.36.199].
Seniors Rights Victoria, Submission 383.
Law Council of Australia, Submission 61.
For example, it is possible for a person receiving the age pension to undertake the following transaction without affecting their entitlement to the pension: the Age Pension recipient could sell their house for $500,000 and contribute those funds towards the purchase of a $1,000,000 home with another person provided that they have a 50% interest as tenants in common registered on the legal title to the property.
‘Security of tenure’ here refers to the existence of a right to accommodation for life or a life interest.
Department of Human Services, Granny Flat Right or Interest <www.humanservices.gov.au>.
See also British Columbia Law Institute et al, Private Care Agreements between Older Adults and Friends or Family Members (The Institute, 2002) 9.
Law Council of Australia, Submission 351.
COTA, Submission 354. They also suggested this be introduced with a requirement for legal advice.
Webb and Somes, above n 12, 47; Aviva Freilich, Pnina Levine, Ben Travia, Eileen Webb, Security of Tenure for the Ageing Population in Western Australia: Does Current Housing Legislation Support Seniors’ Ongoing Housing Needs? (November 2014) 134 <www.cotawa.org.au>.
See, eg, COTA, Submission 354; WA Police, Submission 190; Eastern Community Legal Centre, Submission 177; Caxton Legal Centre, Submission 174; Office of the Public Guardian (Qld), Submission 173; Townsville Community Legal Service Inc, Submission 141; Hervey Bay Seniors Legal and Support Service, Submission 75; National Seniors Australia, Submission 57.
See, eg, Seniors Rights Service, Submission 169; Queensland Law Society, Submission 159; TASC National, Submission 91; Advocare Inc (WA), Submission 86.
For example, in determining the rate of income support payment entitlement, Centrelink will take into account a person’s involvement in a private trust or company and their share of income and assets: Department of Human Services (Cth), Private Trusts and Private Companies <www.humanservices.gov.au>. For the purposes of determining whether a private trust exists, Centrelink will take into account non-express trusts where the usual documents setting up a trust are absent: Department of Social Services, Guide to Social Security Law (2014) [188.8.131.52].
See, eg, National Older Persons Legal Services Network, Submission 363; COTA, Submission 354; Law Council of Australia, Submission 351; L Barratt, Submission 325.
Department of Human Services, above n 108. Thus, where a person leaves an assets for care arrangement due to ‘unforeseen circumstances’ within 5 years, the exemption would continue to apply.
Department of Human Services (Cth), Advice Correspondence (11 November 2016).
Caxton Legal Centre, Submission 174.
Older Persons Advocacy Network, Submission 43.
This approach was supported by stakeholders. See, eg, Justice Connect Seniors Law, Submission 362.