A wave of planning changes across Australia is reducing the barriers to building and renting out granny flats, also known as secondary dwellings. Victoria has already removed occupancy restrictions on who can rent one, and the Australian Capital Territory is weighing its biggest change yet: an automatic right to build one in every backyard. Not every property will turn a profit.
For decades, the granny flat played a narrow role in Australian housing. It housed an ageing parent close to family, gave visiting relatives somewhere to stay, or added value to a property without the owner having to move.
That is changing. In the Australian Capital Territory (ACT), Victoria and New South Wales (NSW), governments are making it easier to add a second dwelling behind an existing home. The policy goal is broader housing supply, but for homeowners and investors the practical effect is simpler: unused backyard space can increasingly become a separate rental property.
The biggest changes are not really about cutting construction costs. They are about reducing planning delays, removing restrictions on who can live in the dwelling, and making the approval process more predictable.
That distinction matters. A granny flat, known formally as a secondary dwelling, can be a strong investment in the right circumstances. It is not automatically profitable.
Victoria has already changed the rental equation
Victoria is currently the clearest example of how planning reform can make granny flats more attractive.
Since December 2023, a small second dwelling of 60 square metres or less has generally not required a planning permit in Victoria, provided the property is not affected by overlays such as flooding or environmental controls. A building permit is still required.
The dwelling must sit on the same lot as the existing home, stay connected to the main property, and meet building requirements. It cannot be subdivided or sold separately.
The major change for investors is flexibility. A Victorian granny flat can be rented to anyone, rather than being limited to relatives or family arrangements. That turns the dwelling from a private family asset into a potential source of rental income.
Further changes in 2025 relaxed some design requirements and folded small second dwelling approvals into VicSmart, Victoria's fast-track planning assessment pathway.
Canberra could be the next major shift
The Australian Capital Territory is considering the broadest granny flat reform yet proposed in Australia.
The Planning (Missing Middle Housing) Amendment Bill 2026 proposes giving every single-dwelling Crown lease an automatic entitlement to add a secondary residence in the backyard.
Under the proposed system, adding that second dwelling would move into an exempt development pathway rather than requiring a full development application. The proposed benefits include faster approvals, more predictable planning outcomes, greater flexibility for homeowners, and the ability to rent the secondary dwelling on the open market.
The proposed dwellings would generally range from 40 to 90 square metres, with one secondary residence allowed per block.
However, the key point is timing. The proposal is not yet law. As at 20 August 2026, it had gone through a committee inquiry but had not been debated or passed by the ACT Legislative Assembly.
For homeowners with room to build, the proposed changes could be worth acting on quickly once the bill passes, but relying on legislation before it clears parliament carries obvious timing risk.
New South Wales has an established pathway, but fewer freedoms
New South Wales has allowed secondary dwellings through its complying development pathway for longer than Victoria or the ACT.
Under the State Environmental Planning Policy (Housing) 2021, known as the Housing SEPP, secondary dwellings in residential zones are generally capped at 60 square metres, with larger allowances in some rural areas.
The advantages are familiar: a streamlined approval pathway, no full development application in qualifying cases, and clear statewide rules.
But NSW also has limitations. A property with a secondary dwelling cannot be subdivided into separate titles, meaning the granny flat cannot later be sold as its own standalone property. It remains attached to the main property.
For investors, that means the value comes from rental income and any uplift in the overall property's value, not from creating a separate, saleable asset.
The numbers: when does a granny flat actually make sense?
The biggest question for many homeowners is not whether they can build a granny flat. It is whether they should.
A simple example shows why the economics can look attractive. A granny flat costing $175,000 to build, rented at $600 a week, generates $31,200 a year in rental income before expenses. That is a gross rental return of about 18% on the construction cost.
That figure looks compelling, but it does not tell the whole story. A real calculation needs to account for construction finance costs, maintenance, insurance, vacancy periods, council charges, tax treatment, depreciation, and the value of the backyard space that is lost.
The strongest opportunities are usually where the property already has strong rental demand, suitable access, enough land, existing services, and a location where tenants value smaller, independent housing.
A granny flat may make sense for homeowners who have unused backyard space, live in an area with strong rental demand, want extra income without selling, have suitable access and services, and can fund construction comfortably.
It is likely to be less attractive where the block is difficult to build on, construction costs are unusually high, the backyard has real lifestyle value to the household, local rents do not support the investment, or planning restrictions create delays.
The policy changes remove some barriers, but they do not remove the need for a careful feasibility check.
The tax exemption that does not apply to standard rentals
One area of confusion is Australia's granny flat tax exemption.
The Australian Taxation Office (ATO) introduced a capital gains tax exemption for certain granny flat arrangements from 1 July 2021.
It applies to a specific situation: a written, non-commercial agreement that gives an eligible person, such as an older family member or someone requiring care, a right to live in the property for life.
It does not apply to a standard rental arrangement. A granny flat rented to a tenant at market rates is generally treated like any other investment property, with normal tax rules applying.
Five things to check before building
Planning rules are only one part of the decision. Before committing to a granny flat, check these five things.
What this means for you
The granny flat is shifting from a family accommodation solution toward a mainstream housing and investment option.
Victoria has already moved furthest, allowing many small second dwellings to be built with fewer planning barriers and rented to anyone. The ACT may follow with an even bigger change, though its bill still needs to pass. NSW has the longest-running pathway, but its rules leave less room to create a separate, saleable asset.
If you are weighing up a granny flat, treat it as a property decision, not just a construction project. Check the current rules with your council, get a realistic construction quote, and compare the expected rental income against what else you could do with that capital and that land, before you commit.
Sources
A second home in the backyard, minus the wait, Exempt projects, automatic granny flat allowances part of proposed 'missing middle' law changes, Small second homes, Stronger standards and faster approvals for single homes and small second homes, Secondary dwellings, Secondary dwelling size limits, Granny flat arrangements and CGT
