With more older Australians looking to downsize and younger generations eager to get a foot on the property ladder, building a granny flat or a second dwelling in your backyard has become an increasingly popular and affordable solution.

In 2023, a CoreLogic analysis of residential properties in Sydney, Melbourne, and Brisbane identified more than 655,000 sites suitable for constructing a granny flat. ^I  The demand has grown so much that numerous businesses now offer modular buildings as an alternative to designing and constructing a custom build.

Before taking the leap, be sure to check local council regulations, restrictions, and permit costs. Rules vary between councils and typically include limitations on size and location.

Granny flat tax implications

It’s also important to know there are potential tax implications – particularly capital gains tax (CGT).

While a granny flat may be considered a secondary dwelling on a property, eligibility for a CGT exemption requires a written agreement granting someone the right to occupy the property for life. ⁱⁱ This agreement can be made with any party, including family or friends, and will be exempt from CGT provided the person with the ‘granny flat interest’ has reached pension age or requires assistance with daily activities due to a disability.

Granny flat or investment property?

There are important differences between a granny flat arrangement, building a secondary dwelling on your property as an investment, and renting out a room in your home.

A second dwelling on your property used for short- or long-term rental purposes is considered a commercial arrangement. The rent you receive is assessable income and is taxed at your marginal rate.

As with most income-producing activities, you are entitled to claim the usual expense deductions against the rental income.

Granny flat arrangements, on the other hand, must not be commercial in nature.

Capital gains

Capital gains tax (CGT) can be a key consideration when setting up a granny flat arrangement. If you don’t follow the rules, you may face an unexpected tax bill when you eventually sell your home.

Generally, a granny flat arrangement is exempt from CGT, provided it is not commercial in nature.

This means that if the person living in the granny flat makes payments at market rates—such as rent—CGT will apply. However, if they only contribute to ongoing household costs, such as electricity and water, the ATO is unlikely to consider it a commercial arrangement.

To qualify for the CGT exemption, the property owner must be an individual, at least one person must hold an eligible granny flat interest in the property, and both parties must have entered into a written and binding granny flat arrangement.

The CGT exemption applies only to the creation, variation, or termination of a granny flat arrangement.

Other CGT events unrelated to the arrangement remain subject to standard CGT rules. For example, if a property previously used for a granny flat arrangement is later sold, it will still be assessed under the normal CGT rules.

Tips for a successful arrangement

While adding another dwelling to your property may increase its value, it’s essential to bring all parties together to discuss potential future scenarios before signing the written agreement. This helps prevent issues further down the track.

The agreement should outline who is involved, the circumstances under which it can be varied or terminated, and what happens if such a situation arises.

It’s also wise to discuss how any disputes or financial conflicts will be resolved and to seek professional legal advice before signing.

If you or someone you know is considering a granny flat arrangement, our expert financial advisers can help you understand the tax rules, key considerations, and how it fits with your financial situation and goals.

i Untapped granny flat potential in largest capitals could boost housing supply | CoreLogic Australia

ii Granny flat arrangements and CGT | Australian Taxation Office

The Australian Taxation Office (ATO) has kicked off 2025 by announcing its key focus areas for small businesses. In this Tax Alert March 2025, the ATO has also signalled a tougher stance on super guarantee (SG) compliance and GST fraud. Here’s a roundup of the latest tax news.

The regulator has announced its key small business tax issues for this financial year. The three main areas the ATO is focusing on are:

• Deductions and concessions, including non-commercial losses and small business CGT concessions.
• Incorrect use of business income, such as using business money and assets for personal benefit.
• Businesses operating outside the system, particularly GST registration and undeclared income in taxi, limousine, and ride-sourcing services.

The ATO plans to review and publish quarterly focus themes to help small businesses identify and address issues in these areas.

GST fraud warning

The ATO-led Serious Financial Crime Taskforce is warning businesses against attempting to cheat the tax and super system through GST fraud, stating that it is actively monitoring for potentially fraudulent activities. ⁱ

New information shared between government agencies reveals that some businesses are using complex financial arrangements to disguise transactions to obtain larger GST refunds.

These arrangements include:

• False invoicing between related entities.
• Deliberately misaligning GST accounting methods across a group.
• Duplicating GST credit claims.
• Claiming GST credits for fake purchases.

Tax penalties increase

The cost of penalty units imposed by the ATO for failing to meet tax obligations has increased again, rising from $313 to $330 per unit. ⁱⁱ

The new rate applies to infringements occurring on or after 7 November 2024. For example, the penalty for failing to keep or retain tax records as required is 20 penalty units (20 × $330 = $6,600).

Other penalties apply to:

• Missed or late super guarantee (SG) payments.
• Individual and corporate SMSF trustees.
• GST obligations when buying or selling new residential properties.

GST and fuel tax credit time limits

The ATO is encouraging businesses eligible for GST and fuel tax credits to claim their credits within four years of the due date of the earliest Business Activity Statement (BAS) where a claim could have been made.

Once the time limit passes, you are no longer eligible to claim the credits. Lodging an amendment to an original assessment or requesting a private ruling does not count as making a claim.

Old credits can still be claimed in your next BAS (provided it is within the eligibility period) by:

• Lodging a revised BAS for the original period via ATO Online Services, or
• Lodging a valid objection within the time limit to preserve your entitlement to the credits.

Change to myGovID

The Australian Government’s digital ID app, myGovID, which is used to access government services, has been renamed myID.

The app provides secure access to government services using your existing login details (including your email address), with the identity strength remaining unchanged. Existing app users should find the app automatically updated on their smart device, or it can be manually updated via the Apple App Store or Google Play.

The ATO is warning users that scammers are attempting to take advantage of the name change. Any message or email asking you to set up a new myID or reconfirm your details is a scam.

By taking proactive measures, staying informed, and seeking professional financial advice, you can navigate the evolving landscape of personal and business tax compliance with confidence. Our financial advisers can work with you to understand your tax situation and safeguard your financial wellbeing.

Sources

i Taskforce issues GST fraud warning to dishonest businesses | Australian Taxation Office

ii Penalty units | Australian Taxation Office

iii Our SG compliance results are here | Australian Taxation Office

Employers need to ensure that payroll systems reflect recent legislative changes, while the ATO is highlighting deduction opportunities available to some small businesses. Here is your roundup of the latest tax news.

Update employer obligations

The ATO is reminding employers to stay on top of legislative changes affecting payroll systems.

The Super Guarantee rate increased on 1 July 2024 to 11.5 per cent of ordinary time earnings, so all payments (starting with those for the July to September quarter) to super accounts for eligible workers must reflect the new rate. ⁱ

Individual income tax rate thresholds and tax tables also changed on 1 July 2024, so you may need to check calculations for your Pay As You Go Withholding obligations.

Claims for energy expenses

Many small businesses are eligible for a bonus 20 per cent tax deduction for new assets (or improvements to existing assets) that support more efficient energy usage.

The Small Business Energy Incentive applies to eligible assets first used or installed and ready for use between 1 July 2023 and 30 June 2024. ⁱⁱ

Eligible expenditure on external training courses for employees incurred between 29 March 2022 and 30 June 2024 could also qualify for a 20 per cent bonus tax deduction under the Small Business Skills and Training Boost. ⁱⁱⁱ

Pay less capital gains tax (CGT)

While a business can reduce capital gains made during a tax year by offsetting them with capital losses from the same or previous income years, not all capital losses are eligible. ^iv

Capital losses carried forward from previous years need to be used first, with losses from collectables (such as artwork and antiques) only permitted to offset capital gains from collectables.

Losses from personal use assets (such as boats or furniture), CGT-exempt assets (such as cars and motorcycles), paying personal services income to yourself through an entity you set up, and leases producing income (such as commercial rental property) are ineligible as offsets.

Fuel tax credit rates change

Before claiming fuel tax credits in your next Business Activity Statement (BAS), check that you are using the latest rates, as they have changed twice in the new financial year. ^v

On 1 July 2024, the rate for heavy vehicles travelling on public roads changed due to an increase in the road user charge. The rate changed again on 5 August 2024 due to a change in fuel excise indexation.

Different rates apply based on when you acquired fuel for your business use, so ensure you use the correct rate. If you are unsure, try the ATO’s online Fuel Tax Credit Calculator to work out the amount to report in your BAS.

Records essential for rental expense claims

Rental property investors without correct documentation to substantiate their expense deductions may find their claims declared invalid. ^vi

The ATO is warning investors they need all receipts, invoices, and bank statements plus details of how deductions were calculated and apportioned for a valid claim.

Lodging a ‘nil’ BAS

While taxpayers registered for GST automatically receive a BAS and are required to lodge and pay in full by the due date, businesses with nothing to report are still required to lodge.

If you have paused your business, you are required to lodge a ‘nil’ BAS by the due date either online or via the ATO’s automated phone service. ^vii

By taking proactive measures, staying informed, and seeking professional financial advice, you can navigate the evolving landscape of personal and business tax compliance with confidence. Our financial advisers can work with you to understand your tax situation and safeguard your financial wellbeing.

Sources

i How much super to pay | Australian Taxation Office (ato.gov.au)

ii Small business energy incentive | Australian Taxation Office (ato.gov.au)

iii Small business skills and training boost | Australian Taxation Office (ato.gov.au)

iv Pay less capital gains tax (CGT) | Australian Taxation Office (ato.gov.au)

v From 1 July 2024 to 30 June 2025 | Australian Taxation Office (ato.gov.au)

vi ATO warning to rental property owners: don’t let your tax return be a ‘fixer-upper’ | Australian Taxation Office

vii Cancelling your GST registration | Australian Taxation Office (ato.gov.au)