This is a story of succession planning gone wrong – or at least not gone totally right.
I have yet to meet a farming family who did not aspire to the achievement of an orderly and planned succession of ownership from one generation to another. A recent discussion with a client highlights an area in which care must be taken and which, in this case, there were unforeseen issues. This information is provided, with the consent of our client, as a lesson to others considering a similar process.
The matter involved a couple who had been farming the family property all of their lives and who were arranging to hand over to a son and his family, having reached a logical milestone in their early 60’s.
The farming stock and assets, which had been held in partnership with the son, and the land and buildings, including residences (which were held as trust interests), were all to be handed over, effective from 30 June 2005. There was a settlement of all debts pursuant to an agreement with the son. It was also agreed that the parents would continue to reside in their house on the property, as the son and his family were already happily in occupation of a second residence nearby on the property
As with many retirees, it was expected that the financial burden of retirement years would be lessened, ultimately, by the receipt of an age pension. Due to the holding of other assets, it was some time before the parents would be considered eligible for a full pension, but after a prescribed period, the application for that full pension was lodged.
In assessing the application for a full pension, Centrelink included, in the category of "gifts", a value attributed to the right of occupation of the house because it considered the house to be a "granny flat" for the purpose of the Centrelink calculations. The term "granny flat" as far as Centrelink was concerned was considerably broader than the usual notion that a "granny flat" is a self-contained unit attached to a home enabling the residents to be closer to family, to help them if required. In this case, a house in which the couple would continue to live independently, albeit not in their ownership, was said to be a "granny flat".
The "granny flat" interest was accordingly assessed as representing a gift of some $102,000. This had the effect of significantly diminishing the fortnightly pension amount received. It appears that it is likely to have that effect for the rest of their lives.
There may well be a number of things that might have been done to avoid this situation with the benefit of hindsight. It is not possible to give comprehensive advice without knowing all the circumstances at the time, but there might have been other lawful arrangements that could have been entered into in relation to the parent’s residence. Arrangements put in place afterwards however are likely to be viewed as a sham, intended only to get around the Centrelink decision.
The unforeseen consequences of this matter caught everyone by surprise leaving the parents with the choice of the reduced pension or an appeal against the Centrelink decision. Obtaining legal advice at the planning stages of this process may well have produced a better result.