Inlaws will be living in granny flat in IP- what are the tax implications

[bespoke]

I have an IP on a corner block that has a run down granny flat at the rear. It is completly seperate from the main house and has its own entry from the street.

My in laws have had some really bad luck and are in a hopeless financial
position. We have offered them the use of this granny flat for as long as they want (probably for the rest of their lives, could be as long as 25 years) but they have to pay for the reno themselves and pay our council rates of $2k/year as "rent".

The long winded version of their situation is here:
http://www.somersoft.com/forums/showthread.php?t=56515


The reno would probably cost them about 30k as FIL is disabled and the granny flat will need to be converted for him with an internal ramp and a disabled bathroom and landscaping to suit him.

We had decided to do a basic reno at a cost of probably <15k and then could rent out for $250/week. But we would probably have to wait a year or two before this happens. I'm not sure of the value of the granny flat at the moment, how much of the purchase price of the whole property it was, probably no more than 10%.

What I need to know now is, if the in laws pay for the reno and upgrade to it, how does that affect our ability to claim the property in the tax return because without the granny flats income, it will be slightly negatively geared.

Should I get a valuation done before work comences to ascertain the % value of the granny flat to the whole property?

Will the taxation dept consider the granny flat to be bringing in $250/week even though the in laws paid for the upgrade and we are only getting $2k per year for the council rates? The place is un rentable without the work being done to it.

I dont know if this has any bearing on it but the in laws emigrated here 3 months ago on an elderly parent visa and will be getting a UK pension. They arn't entitled to any Australian government assistance, so I doubt if we can claim any sort of exemption (if it exists) for housing elderly parents at our expense.

I will run this by my accountant but I thought someone here may have some ideas or have been down this path themselves.

 

[HTO]

how did this all turn out? im curious to know as im in a similar position

 

[Rob G.]

We have offered them the use of this granny flat for as long as they want (probably for the rest of their lives, could be as long as 25 years) but they have to pay for the reno themselves and pay our council rates of $2k/year as "rent".

The reno would probably cost them about 30k as FIL is disabled and the granny flat will need to be converted for him with an internal ramp and a disabled bathroom and landscaping to suit him.

.....

What I need to know now is, if the in laws pay for the reno and upgrade to it, how does that affect our ability to claim the property in the tax return because without the granny flats income, it will be slightly negatively geared.

You need to talk to a solicitor as well as an accountant.

At first appearance on such brief facts ...

Your arrangement appears not to be to generate your assessable income, but more a non-commercial family arrangement.

Therefore, you would likely not be claiming any deductions.

The reno costs probably would not be added to the CGT cost base because they are not incurred by you or else are recouped from your relatives.

When you start renting commercially, you might be able to claim depreciation on the buidling improvements.

From a property law point of view, your relatives could be regarded as financial dependants and they could possibly make a claim on your estate if you die.

They could possibly argue that they own part of the property via a resulting or constructive trust after adding so much capital improvements to it.

They might even claim adverse possession after a number of years of rent-free occupation under certain circumstances.

I am sure your relatives are great friends, but forced domestic arrangements can often sour ... especially over money and verbal agreements.

Much of this can be avoided by many methods.

Go see a solicitor first for options to protect your interests, and talk to an accountant about the options from a commercial point of view if you are really keen to try to get tax benefits.

Cheers,

Rob

 

[bespoke]

OH, dont go there!!!!!!

Hi,

Warning - long post

I havn't been on this forum for well over 12 months so I'm surprised to find a message in my in box. Anyway alot has happened since I posted this question.

This plan of the inlaws moving into the granny flat has had several incarnations. Firstly we were going to fix this up first before the main house as the main house was so so but livable but the granny flat HAD to be fixed - and then rent out. The front house was going to be rented out as is. Then the inlaws threw their hat into the ring and hubbie felt sorry for them and offered it to them and declared that the front house would have to be renoed first to get better tenants, seeing as his parents would have to be living there.

So inlaws agree to paying for reno of granny flat for life long tenancy and I start renoing front house. Half way through front house reno (and at the point of no return and having to go the whole hog) inlaws declare that they never agreed to spend any more than about 10K (the amount depended on what MIL was feeling like on any particular day, sometimes it was no money that they were paying) and that WE would have to pay for the granny flat reno.
Well as we had just spent a hell of alot more on the front house than we wanted to and would run out of money, we could no longer afford to pay for all the reno on the granny flat. Then they decided that it wouldnt suit their needs anyway (like they have much of a choice other than renting at full market rates whilst on the pension for the rest of their lives).

So I finished the front house reno and the granny flat has sat empty ever since.

During this time the inlaws moved in with SIL and her hubbie and family and everything is rosie for a few months.

Then MIL stats making hints about the granny flat again. Hubbie has the you-know-whats with them but, as always, feels obligated as a dutiful son to pursue their occupancy of the granny flat - YET AGAIN. Only now MIL wants us to foot the whole bill. I have said to hubbie, after us offering and them accepting the granny flat about 4 times (then rejecting) and also offering to build a brand new granny flat on our block (3/4 acre)- 3 times (also accepted then rejected), that I am done with them and this granny flat business.

So now I am literally just starting today to pursue the reno on the GF to be rented out to help with the mortgage on this property.

The inlaws situation is now that they are now living (renting) with my SIL who has now split from her husband (she is 38) and will (with almost 100% certainty) live with her for the rest of their lives. I dont know how they expect to pay full market rent when they cant get rent assistance but hey thats their problem.

As you can see, I'm not too pleased with them as they have probably cost us in excess of 30k in lost rent on the granny flat and about 40k on doing a reno to the front house that could have been put off for a few years. We made financial decisions based on them occupying the GF, ones we would not have made otherwise and it has cost us ALOT both in money, anguish and arguments. The other half better not revisit this GF business again or I will hit the roof.

Sorry for the rant, and it doesnt answer the question like you wanted. I do thank anyone who has given an answer to the original question however.