NSW imposes land tax on free standing granny flats

On 12 August 2025, it handed down a decision in the Hussein v Chief Commissioner of State Revenue [2025] NSWCATAD 202 case which is likely to result in thousands of free-standing granny flats around NSW now being subject to land tax.

Decades ago, the NSW Parliament took the admirable step of providing that a home owner should not lose its principal place of residence (PPR) exemption if its land also contained a rented, granny flat. Until then, the PPR exemption only applied if income was not generated from the flat – as is usually the case when grandma does, in fact, occupy it.

In 2008, the Parliament sought to close a problem revealed by a landmark case and made provision for the “multiple occupancy” scenario. That amendment had the effect that the unimproved value of the home owner’s PPR remained exempt while the unimproved value of the remainder of the lot was potentially taxed. Only potentially, of course, because if the home owner did not own any other property, the residual value of the land for most dual occupancies, for example, would remain below the tax-free threshold. An “excluded residential occupancy”, the class of occupancy that a granny flat falls within, was not subject to the new rules for “multiple occupancy”. The problem was that the Parliament chose not to clarify the limit of what a “flat” actually is. Further, the legislation retained an old requirement that the concession only applied, in practice, to the class of “excluded residential occupancy” that are in a building that contains the owner’s PPR. In simple words, the granny flat had to be in a building that was used by the owner as their residence or as part of their residence.

To his credit, the NSW Chief Commissioner of State Revenue applied band aids to make the law work as intended. His guidance was that, in effect, a rented, free standing granny flat would not imperil exemption for any part of the site provided it was small and contained fewer rooms than the owner’s PPR.

However, the NCAT’s role is to interpret the law as it is written, irrespective of the merits of the Chief Commissioner’s approach. Certainly, it found convincingly in the Chief Commissioner’s favour in the case in question – the PPR building was smaller than the rented building and the exemption for the whole site was lost. The landowner in question could also have applied for another concession, a partial land value concession for its PPR, but had not done so.

It was the NCAT’s reasons for its decision that are the story of the case. Among other things, it found that the granny flat concession could technically apply to a free standing, six bedroom, multi level residence. Size hardly mattered – in effect, a “mansion” could qualify as a “flat”. But the NCAT could not overlook the legislative restriction that the concession only applied if the rented, free standing residential building also contained the owner’s PPR or part of it. Not only did the NCAT ignore the band aids and applied the written law instead, it urged the Chief Commissioner to update his published guidance because that did not reflect the law. As at the date of writing, the Chief Commissioner’s ruling, LT 082v3, retains the statement (with our highlighting):

“Where land is the site of two or more flats, one of which is the principal place of residence of the owner,……………………section 9C provides a proportionate concession for the flat used as a principal place of residence. However the land may be wholly exempt if there are only two flats and the PPR concession for excluded occupancies applies to the second flat.”

That statement, which alludes to total exemption, is surely applicable to so few cases now that it is misleading based on the NCAT’s decision.

Despite the decision, most affected home owners on lower value properties will not end up paying the tax. That is because for many, the unimproved value of their granny flat part will fall below the tax free threshold.

However, the tax-free threshold is now fixed at $1,075,000 and residential property values continue to grow well past that figure. Many home owners will only be safe from the tax after considerable effort and expense to prove a low value for their granny flat. They will need to submit plans, measurements and descriptions of the buildings’ features to the Chief Commissioner. The NSW Valuer General will then be required to apportion the value of the land based on the ratio of the floor space of their home to the floor space of the granny flat. In many cases, some part of the value of the property’s lawns, gardens, driveways and swimming pools will, in effect, be allocated to the granny flat even if the renter does not use them. It is easy to see disputes arising between home owners and the two relevant Government agencies.

Where the NCAT decision really will have an impact is for those home owners with such a granny flat who also hold investment properties in their own name. The tax-free threshold does not apply on a per property basis but just once to the owner’s entire land portfolio. Where their aggregated land values will exceed the tax-free threshold, many of these will have to pay land tax at the rate of 1.6% on the full unimproved land value allocated to the rented, free standing granny flat which they previously thought was exempt. They also may be assessed back for five years.

The NCAT’s judgement makes it difficult for the Chief Commissioner to maintain its old approach without causing public confusion. Taxing family home sites during a housing affordability crisis may well become a political issue. Keeping the tax could also encourage some homeowners to accept undeclared cash payments for granny flat rentals. If the value of affected rented, free standing granny flats is to remain exempt from land tax as previously thought, the NSW Parliament will need to replace the relevant current provisions with those that achieve that purpose.

Until that happens, many home owners with rented, free standing granny flats on their home site face NSW land tax.

For further information on NSW land tax and how this applies to your circumstances, please contact your usual Forvis Mazars advisor or alternatively our NSW land tax specialists, Stephen Baxter via the form below or +61 2 9922 1166.

Author: Stephen Baxter

Published: 01/09/2025

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