New CGT granny flat measures – the “non-commercial” requirement

The new CGT “granny flat measures” contained in new Div 137 of the ITAA 1997 provide that a CGT event does not happen on entering into, varying or terminating a granny flat arrangement provided certain conditions are met.

One of these conditions is that the arrangement cannot be of “a commercial nature”. Sadly, the legislation itself does not spell out what this means.

However, the Explanatory Memorandum to Treasury Laws Amendment (2021 Measures No. 4) Bill 2021 which introduced the new rules, provides that an arrangement requiring the holder of the granny flat interest to pay rent at a market rate to occupy the accommodation would, prima-facie, be of a commercial nature. On the other hand it provides that if the granny flat interest holder merely contributes to the costs of running the household this would suggest that the arrangement is not of a commercial nature.

Moreover, the Explanatory Memorandum to the Bill states (at para 3.43): “The amount of any consideration for the granny flat interest and how it is worked out could also be a factor in determining whether the granny flat arrangement is of a commercial nature”. 

This could potentially mean that a granny flat agreement could be of a commercial nature if the arrangement requires the granny flat interest owner to help purchases the residence or meet mortgage repayments as consideration for being granted the granny-flat interest. (And presumably this would not be an uncommon situation in heated city property markets at the moment.)

If this were to be the case, it seems to be a somewhat “self-defeating” outcome given the underlying social (and economic) purposes of Div 137.

Suffice to say, this issue will no doubt require further clarification such as by way of ATO rulings or guidelines.

(Note: These measures apply to CGT events associated with “creating, varying or terminating” a granny-flat arrangement that occur after 1 July 2021 that would otherwise trigger CGT but for this exclusion).

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