Paying tax on the Granny Flat

There has been an explosion of Granny Flats in my suburb over the past 12 months and I think the majority of them are not for Nana. What are the consequences of renting out the Granny Flat on your taxable income?

Any part of your home rented out including the granny flat should be declared as income. Conversely, any expenditure in gaining that income such as electricity/gas/water, can be included as an income deduction. The ATO says “As a general guide, you should apportion expense on a floor-area basis plus a reasonable amount based on access to common areas” i.e. if your home area takes up 250 sqm and your Granny Flat 60 sqm, you can apportion (60/310) 19% of shared costs to the granny flat.

But what happens if you actually have Nanna living in the Granny Flat? Payments from relatives for ‘board’ are not income tax assessable and you cannot claim any expenses as deductions. Just make sure that Nana does some baby-sitting to make up for the cheap rent.

Be mindful though, if you enter into a formal agreement with a relative to say, pay for the principal & interest payment on the loan you used to build the granny flat, this might be considered a commercial arrangement and therefore income tax assessable.

If you rent out your Granny Flat, further consideration is needed to any future capital gains when you sell your house as this may affect the Main Residence Exemption for capital gains tax. 

Tax on your Granny Flat can get complicated. Please speak to your tax professionals before building one or give us a call at LJC Accounting.