Aged care reform: complex changes to residential aged care

Transcription

1 IOOF AdviserConnect IOOF TechConnect Technical bulletin: Summer Aged care reform: complex changes to residential aged care By: William Truong, Technical Services Manager 8 Aged care reforms: Pre 1 July 2014 opportunity for clients By Damian Hearn, National Manager Technical Services 12 Legislation update November 2013 Aged care reform: complex changes to residential aged care By William Truong, Technical Services Manager Overview The Australian Government s aged care reform agenda, as detailed in its Living Longer. Living Better report has begun to take effect. The 10 year program, aims to build a better, fairer, more sustainable and more nationally consistent aged care system. There is a strong emphasis to make it easier for older Australians to stay in their home while they receive care and a removal of the distinction between low and high aged care services, along with a tighter means test to assess home care and residential care fees. This is likely to mean that part-pensioners and self-funded retirees may end up paying higher fees. With all the changes around the corner, one thing is clear the importance of seeking financial advice is reinforced. Retirees and their families will need advice to help navigate through a difficult and confusing system. The key message still remains, clients should plan ahead to ensure they can afford the desired level of care and take advantage of any strategic planning opportunities still remaining. With greater focus on receiving home care (as covered in last month s technical bulletin), the commencement of the advice journey for many clients is likely to begin much sooner as they receive care in their home and potentially transition into residential care. The rules surrounding home care and residential aged care are currently in transition and more changes are likely to be announced. For residential care, the new system and means testing changes will not take place until 1 July The following analysis are the changes from 1 July 2014 for residential aged care. In the following months we will release follow-up articles which provide greater details and their implications for financial advisers. The IOOF TechConnect team, Damian Hearn, Pam Roberts, Julie Steed, Martin Breckon, William Truong and Meg Rennie provides a comprehensive range of technical support tools for professional financial advisers. 1

2 Complex fee changes to residential care The demand for residential aged care is continuing to increase, despite the growing demand for at-home services. However, the financial uncertainty has made it difficult for providers to fund construction and development to meet this demand. From 1 July 2014 there will be some notable changes for individuals entering residential aged care, including a combined income and assets test to determine how much residents can be asked to pay for accommodation and care fees. The changes will include: 1 Removing the distinction between high and low care. 2 Changes to the level of care and extra-services. 3 Changes to the assessment of the principal former home. 4 New means testing for residential care. 5 Changes to accommodation costs. Grandfathering provisions apply for individuals who enter care prior to 1 July This is based on the proviso that continuation of care occurs and there is no break in care for a continuous period of more than 28 days. A client will continue on the current fee arrangements unless they have move to another residential care facility and they elect to be covered by the new arrangements. 1 Removing the distinction between high and low care. The legislation has been amended to remove the distinction between care recipients approved for low or high level residential care. Care recipients will continue to be assessed on their needs; however, the approval will not distinguish whether the person requires a low or high levels of residential care. The impacts of this change include: Individuals will be able to access the level of care that they need at their time of entry into residential care rather than being limited by their approval. There will no longer be different rules for providers of high care versus low care this will streamline the system for providers. Removing the distinction between the levels of aged care opens the way for everyone to pay this will likely mean that individuals entering the equivalent of today s nursing home (high care), who would ordinarily receive certain services free of charge, will now have to pay for those services. 2 Changes to the levels of care and extra services As the structure and the levels of aged care services change, there will be a move to uniform fees. This will mean that residents will be required to purchase additional amenities to suit their lifestyle preferences. Under the current arrangements there is limited scope for the care recipient to purchase additional services and amenities. From 1 July 2014 approved providers of residential care will continue to be able to offer care on a dedicated extra service basis. The arrangements relating to new applications and the granting of extra service status will remain largely the same. The key differences are: Providers will be able to apply for extra service status, not just for an entire service or distinct part of a service (as they can currently), but also for extra service status for one or more rooms within the service. This increases flexibility and also potentially provides a greater range of choice for the care recipient. The fees for extra service will be approved by the new Aged Care Pricing Commissioner, a role currently undertaken by the Department of Health and Ageing. 3 Changes to the assessment of the principal home For Centrelink purpose, the family home will continue to be an exempt asset for two years commencing from when the last spouse (if applicable) vacates the home. For aged care, the changes are as follows: a Means tested care fee (ongoing assessment): capped value of the former family home The value of the home will generally be assessed against the new means tested care fee (as shown below) to determine an individual s ability to pay for their care/accommodation fees. The value of the home is capped at $144,500 (2012 value and will be indexed). The principal residence will not be considered an asset and the capped value of the former family home will not apply if occupied by a protected person (such as a spouse which is consistent with the current rules). b Accommodation costs (initial entry point into care) The full value of the home will be included in working out the maximum permissible lump sum accommodation payment which is known as a refundable accommodation deposit (RAD). The principal residence will not be considered an asset within the calculation of the maximum permissible lump sum accommodation payment (RAD) if occupied by a protected person (such as a spouse which is consistent with the current rules). The existing strategy of keeping the home and renting it out whilst paying the accommodation payment via a daily payment may still be viable. This strategy will depend on the interest rate used within the calculation as well as other factors. This strategy will be discussed further in future reports. 2

3 4 New means testing for residential care The key components of the aged care fees include: a Basic daily care fee: All residents will be asked to pay a basic daily care fee, as currently the case. b Means tested care fee (MTCF): From 1 July 2014 a means tested care fee will include both an income and assets tests. The fee is subject to annual ($25,000 per annum indexed) and lifetime caps ($60,000 per annum indexed). Full pensioners should not pay any means tested care fee. c Accommodation costs: Accommodation costs may be paid as a RAD, a daily accommodation payment (DAP) or a combination of both. Overall it is envisaged that the new means testing arrangements are likely to mean that part-pensioners and self-funded retirees may end up paying higher fees. In contrast to today s system, asset rich but income poor individuals may pay more for their care fees, while asset poor, income rich individuals pay more for their accommodation (eg RAD). Currently only asset rich, income poor individuals generally pay for their accommodation. Aged care fees: more details Basic daily care fee The basic daily care fee continues to be paid as currently payable by all residents in residential care. The fee is up to $45.63 per day (as at 20 September 2013) and it is generally set at 85 per cent of the basic single age pension. Means tested care fee (currently called the income tested fee ) From 1 July 2014, the income tested fee will be known as the means tested care fee and can be calculated by the following steps: Step 1 Step 2 Step 3 Step 4 Calculate the means tested amount (MTA) Compare the MTA with the max accommodation supplement Determine if the annual cap has been exceeded, and Determine if the lifetime cap has been exceeded Means tested care fee: analysing the capping rules Applying the capping rules for the means tested care fee from 1 July 2014 is summarised as follows: An annual cap of $25,000 and a lifetime cap of $60,000 (2012 value) will apply to care fees. When the lifetime cap is reached, the individual doesn t pay a means tested care fee, however they ll still need to pay the basic daily care fee. The effect of capping applies during their time in any residential care and/or home care service. For the purposes of the caps, a year commences from the date on which an individual first enters care, either residential or home care, or an anniversary of that date. The lifetime cap continues to apply even if a care recipient spends time out of care. Where the approved provider charges a lower means tested care fee than the maximum allowed under the law (ie the care subsidy reduction), the annual and lifetime caps will still have been met once the accrued care subsidy reductions exceed the relevant amounts (refer to the example below for more details). The basic daily care fee (also known as the standard resident contribution), which will continue to apply post July 2014, does not count towards these caps. Example: Application of the annual cap in residential care Jodie enters residential care on 2 July 2014, which is her anniversary date for fee calculation purposes. Based on her care needs, Jodie is charged a means tested care fee of $74.63 per day, which means she ll have to pay $25,000 by 2 June From 3 June 2015, the care subsidy reduction will be set to zero and Jodie won t pay additional means tested care fees for the rest of that year, that is until 2 July If Jodie s provider only charged her $50 per day in means tested care fee instead of the $74.63 per day, her care subsidy reduction would still be set to zero from 3 June Jodie s provider would not be able to charge Jodie a means tested care fee for the period 3 June 2015 to 2 July

4 Step 1 Determining an individual s MTA is the addition of an income test plus an assets test. This is shown in the table below: MTA = Income-tested amount + Asset-tested amount = (total assessable income 1 total assessable income free area 2 )x 50% / The sum of the following divided by 364: 17.5% of assets above the asset free area ($40,500 3 ) up to the first asset threshold ($144,500 3 ). 1% of the assets above $144,500 to the first asset threshold ($353,500 3 ) 2% of assets above $353,500. Step 2 The MTA is then used to determine: the means tested care fee (MTCF) and the accommodation payments/ contributions. In this section we explain how the MTA is used to calculate the MTCF using this formula: MTCF = MTA maximum accommodation supplement (prescribed value of $50 per day as at July 2012) If the MTA is: Zero or less than zero, the MTCF is nil Greater than zero, the individual can be charged a MTCF. This is the lower of: the care cost 4 the MTA less the maximum accommodation supplement of $50 per day. Steps 3 and 4 In all cases, the MTCF is subject to the annual cap ($25,000, indexed) and lifetime caps ($60,000, indexed). 1 For members of couples, the total yearly assessable income should be divided by two. 2 Total assessable income free area is $22,701 (estimate as at 1 July 2014). 3 As at 1 July Sum of the basic subsidy amount and all primary supplements and this value will be particular to each individual. 4

5 Example: calculation of MTA for residential care Peter enters a residential care facility on 1 August Peter s assets are valued at $1,344,500, which includes the capped value of Peter s former home ($144, value) Peter s annual assessable income is $65,000. Peter s MTCF is calculated as follows: Step 1 Income tested amount = 50% x ($65,000 $22,701)/ 364 = $58.10 per day (rounded to nearest cent) Asset tested amount = [17.5% x ($144,500 $40,500) = $18,200] + [1% x ($353,500 $144,500) = $2,090] + [2% x ($1,344,500 $353,500) = $19,820]. Total = $40,110 per annum or $ per day. Peter s MTA = $58.10 per day + $ per day = $ per day. Step 2 Peter s MTCF = $ $50 (max accommodation supplement) = $ As Peter s MTA is greater than the max accommodation supplement, Peter can be charged a means tested care fee. This is the lower of: the care cost of $85 per day (sum of the basic subsidy amount and all primary supplements), or the MTA less the maximum accommodation supplement of $ per day. Therefore, Peter s means tested care fee will be capped at $85 per day. Steps 3 and 4 In addition, the annual cap will mean that Peter pays no more than $25,000 (2012 value) in means tested care fee in a year. Hence, Peter will only need to pay the means tested care fee of $85 per day up to 26 April From 27 April to 31 July 2015, the government will pay on behalf of Peter. Peter will then need to recommence paying the means tested fee from 1 August Also a lifetime cap of $60,000 applies. Accommodation costs: an initial look The following rules do not change regarding lump sum accommodation costs: Providers will not be required to insure any RADs that they receive after 1 July Lump sum accommodation payments will continue to be guaranteed by the Government. A RAD will continue to be exempt for Centrelink purposes. However, the following changes to accommodation costs will apply: a Residents can pay for the cost of their accommodation through a RAD, or through a DAP, or a combination of both. This is similar to the current situation but with the following exceptions: A new 28 day cooling- off period will mean that residents will not be required to decide how they are going to pay their accommodation costs until they have actually entered care. This ensures that aged care providers will not be allowed to choose between care recipients on the basis of their choice as to how they pay for their accommodation. Until they make their choice, individuals need to pay via DAP. To make sure that consumers are able to make a real and informed choice about whether to pay by RAD or DAP, the Department of Health and Ageing, through a new aged-care financing authority, will provide written advice to consumers and their families about the maximum accommodation payments which they can be asked pay to the approved provider. Currently, nursing home residents (without extra service facilities) and with assets greater than $44,000 can be asked to pay a maximum accommodation charge of about $12,000 a year for the period they stay in the facility. However, under the new system, such residents may be asked to pay a large lump sum via a RAD or through a greater DAP. b While the value of the RAD continues to be exempt for Centrelink, it will however be added back when working out the new means tested amount (discussed previously). c Providers will no longer be permitted to deduct a monthly retention amount from RADs received after 1 July As aged care facilities cannot access a retention amount from the RAD. This may mean an increase of RAD requested by facilities. At present, facilities may retain a portion of the accommodation bond each year for up to five years. 5

6 A provider can only deduct: Amounts owing to the approved provider including interest and charges for any agreed optional amenities (such amounts are currently permitted to be deducted from accommodation bonds if agreed by both the individual and the provider). DAP if requested by the individual, can be deducted from the RAD. Consistent with current arrangements, care providers are entitled to any income derived from the RAD and can use the income for any purpose. d The amount of upfront bond charged for entry into an aged care facility currently varies across facilities and can be based on property market values in the area, market forces such as supply and demand, resident assets and bonds can be further subject to individual negotiation. The Government will introduce a new Aged Care Pricing Commissioner, who will be required to approve the level of RAD (or DAP) for each facility. While this will increase transparency and set more consistency for residents, it may lead to an overall increase in accommodation fees and the loss of ability to negotiate individual arrangements. This may have flow on effects to an individual s aged pension entitlements and care fees. e The Government contributes towards the cost of an individual s accommodation via the accommodation supplement. While the maximum accommodation supplement is a fixed amount subject to annual indexation, the amount payable by the Government in respect of this supplement will be influenced by three factors: the status of the building in which the residential care service is operated the service s supported resident ratio, and the financial means of the care recipient. Service status If the facility meets the criteria for a post 20 April 2012 newly built or significantly refurbished service, the approved provider will be eligible for the maximum amount of accommodation supplement applicable to the care recipient (based on the means of the care recipient). For example, the maximum rate of the accommodation supplement from 1 July 2014 will be $50 per day or $18,200 per annum (2012 value). Supported resident ratio A 25 per cent discount to the accommodation supplement rate is applied to services that do not have a supported resident ratio of 40 per cent or more. Financial means The actual amount of accommodation supplement that the approved provider receives from the Government, in respect of a care recipient will depend on the financial means of the care recipient. Accommodation costs: Accommodation contribution or payment? In this section we explain how the MTA is used to calculate the accommodation contribution or payment. The income and assets of an individual will determine how they can be asked to meet their accommodation costs. This is determined in the following manner. i If, based on the individual s MTA the Government considers the individual can meet their accommodation costs (that is, if their means test amount is equal or greater than the maximum accommodation supplement), the approved provider can ask the care recipient to pay an accommodation payment. Accommodation payment = MTA maximum accommodation supplement 5 > = 0 Also, if an individual does not provide sufficient information to the provider, they may be charged an accommodation payment (rather than an accommodation contribution). ii If, the individual s MTA is lesser than the maximum accommodation supplement, the approved provider can ask the individual to pay an accommodation contribution. Accommodation Contribution = MTA max accommodation supplement 6 < 0 Both an accommodation payment and an accommodation contribution can be paid as a RAD, a DAP or a combination of both. However, an approved provider cannot influence how an individual chooses to pay their accommodation cost. Note that the RAD may be paid up to six months after the date of entry. 5 Estimated to be $50 per day (2012 value). It is understood that this Accommodation payment is fixed upon assessment of entry to the facility. 6 Estimated to be $50 per day (2012 value). It is understood that this Accommodation contribution may vary over time according on an individual s MTA and the max accommodation supplement. However, they cannot be asked to pay an Accommodation payment even if their MTA increases over time. 6

7 What is the maximum amount of accommodation payment? The Government determines the maximum amount of accommodation payment. It is expected to be $85 per day (July 2014) via DAP or $468,787 (calculated as $85 x 364 divide by 6.60% the current interest charge) via a RAD. On application from an approved provider, the Aged Care Pricing Commissioner may approve a higher amount of accommodation payment in accordance with the Fees and Payments Principles. However, in no circumstances can the amount of accommodation payment charged be more than the amount specified in the accommodation agreement, nor can an approved provider accept an offer from an individual that is higher than the amount specified in the agreement. Example calculation of accommodation payment Referring to the previous example, Peter s means tested amount is $ As this is greater than $50, an accommodation payment is payable (in addition to the means tested care fee that we saw in the previous example). If the provider was restricted to charging the standard maximum amount of $85 per day for the accommodation payment, then Peter s accommodation payment would be the lesser of $85 per day and the agreement amount (for example: $65 per day as a DAP or $358,484 as a RAD). The accommodation payment can be paid as a RAD, a DAP or a combination of both. How is the maximum amount of RAD calculated? If an individual commits to paying a RAD within 28 days of entry to a service, then the provider can only accept the payment if it leaves the care recipient with assets at least equal to the minimum permissible asset value. The minimum permissible asset value is equivalent to 2.25 times the basic age pension amount (currently $44,000). While the maximum amount of RAD is limited by the minimum permissible asset value it is not clear, at this stage, how the maximum amount is translated from a RAD to a DAP. We can infer, that it is based on the prevailing rate for interest on unpaid amounts. Important note: For purposes of determining assessable assets above, the value of the principal residence, if not occupied by a protected person, is not capped. Rather its full value will be included as an asset. Example calculation of maximum refundable accommodation deposit Henry is entering into residential aged care on August His wife, Penny, will remain living in their home valued at $500,000. His assessable assets total $385,000 (this excludes the value of the home, as Penny lives there). His assessable income is $65,000. Calculation of means tested amount (MTA): Income tested amount = 50% x ($65,000 $22,701)/364 = $58.10 per day Asset tested amount = [17.5% x ($144,500 $40,500) = $18,200] + [1% x ($353,500 $144,500) = $2,090] + [2% x ($385,000 $353,500) = $630] Total = $20,920 per annum or $57.47 per day Henry s MTA = $58.10 per day + $57.47 per day = $ per day If Henry and his provider negotiates that he is to pay an accommodation payment via a DAP of $85 per day and if the prevailing interest rate for unpaid amounts (periodic payments) is 6.60 per cent, the RAD equivalent for Henry s DAP will be $468,787 ($85 x 364/6.60%). As Henry must be left with $44,000, the maximum he can be asked to pay as a RAD will be $341,000 ($385,000 $44,000). From our understanding, if Henry chooses to accept entry into this facility and pay the maximum allowable deposit, the difference between what he is required to pay ($468,787) and what he can pay as a RAD deposit ($341,000), which is $127,787, will have to be paid as extra daily payments on top of his RAD of $341,000. Daily payment = (unpaid RAD x Max permissible interest rate)/364 Daily payment = ($127,787 x 6.60%)/364 Daily payment = $23.17 per day This scenario may likely apply to clients with high income but low assets, who want to enter into a care facility but due to market forces must pay an additional DAP in addition to their RAD. Conclusion The changing landscape of residential aged care and home care heightens the need for clients to seek financial advice so that they can plan ahead to ensure they can afford the desired level of care and take advantage of any strategic planning opportunities still remaining. With greater focus on receiving home care, the commencement of the advice journey for many clients is likely to begin much sooner as they receive care from their home and potentially transition into residential care. 7

8 Aged care reforms: Pre 1 July 2014 opportunity for clients By Damian Hearn, National Manager Technical Services The level of adviser interest in the aged care reforms that apply from 1 July 2014 has been significant. Even though the reforms aim to build a better, fairer, more sustainable and more nationally consistent aged care system, amid all of these changes, the importance of financial advice remains clear to help clients navigate through a difficult and confusing system. Clients should plan ahead to ensure they can afford the desired level of care and to take advantage of any strategic opportunities still remaining. This is especially important for high net worth individuals entering into an aged care facility prior to 1 July 2014, as grandfathering provision apply. This means the opportunity exists to lock in existing fee arrangements whilst accessing the benefits of investing into an investment bond within a discretionary family trust. The impact of the 1 July 2014 changes and namely the means tested income fee is outlined within the case study of Ann. Case Study Ann (82) recently sold her home and will move into a low-level aged care facility. She is not entitled to any age pension due to her husband passing away 18 months ago and the recovery of the share market. Ann had been asked to pay an accommodation bond of $350,000 which leaves net proceeds of $1.15 million from the sale of her home to be invested into a term deposit. Her assets and income are outlined within the following table. Her family asked whether or not it would be more advantageous to defer her entry into an aged care facility to after 1 July 2014 in order to be assessed under the new rules. Assets and income position Investments Capital Income Cash 1 $1,150,000 $40,250 Shares 2 $850,000 $34,000 Accommodation bond $350,000 Total $2,350,000 $74,250 Aged care fees current rules Current position Basic daily care fee $45.63 Income tested fee 3 $51.46 Total fees $97.09 Total care fees $35,437 Annual income $74,250 Net income $38,813 1 Rate of return 3.5 per cent per annum 2 Rate of return of 4 per cent per annum 3 Income tested fee: = (Total assessable income total assessable income free area) x 5/12 = ($69,301^ $24,346.40) x 5/12 = $18,731 per annum or $51.46 per day* ^ Total assessable income for calculation of the income test daily fee is $69,301 which is her age pension of $0, deemed income of $69,301 from her financial investments and no other adjustment since she does not receive a part age pension entitlement. * The daily rate is derived from the annual rate, based on a year containing 26 fortnights of 14 days each. 8

9 Alternative strategy Gift into a discretionary trust and invest into an investment bond This strategy may be suitable for high net worth clients looking to preserve capital while minimising the income-tested fee. Ann can reduce her income tested fee by $46.07 per annum (as shown in the following table) even though she is not receiving a part age pension. Ann has the opportunity to gift $1.15 million into a discretionary trust and the available funds will be invested into an investment bond. Under the source test, the assets of the discretionary trust are attributed to Ann under the asset tests while the trust distributions are counted under the income test. However, the investment bond does not distribute income and therefore the trust has no distributable income. This means there is no income assessment for the calculation of income tested fee for the investment bond contained within the family trust. Important: The Centrelink assessment of the trust under the source test means the value of the assets within the family trust will be attributed to Ann for an indefinite period of time. This means the standard five year rule for gifting of assets does not apply. If Ann invested into an investment bond in her own name, the investment bond will be classified as a financial investment and deeming will apply. Aged care fees current rules Ann s aged care fees will decrease (as shown in the following table) by $46.07 per day to $51.02 per day (or from $35,437 to $18,620 per annum). Current position Alternative strategy Cost saving Basic daily care fee $45.63 $45.63 $0 Income tested fee $51.46 $ $46.07 Total fees $97.09 $51.02 $46.07 Total care fees $35,437 $18,620 $16,817 Annual income $74,250 $34,000 $40,250 Net income $38,813 $15,380 $23,433 Note: comparison does not take into account tax and other cost consideration involved in the undertaking of this strategy. From 1 July 2014, all residents will still be asked to pay a basic daily care fee, as currently the case. In contrast, the income tested fee will change to a means tested care fee taking into account both an income and assets test. This new fee will have an annual cap of $25,000 (indexed) and a lifetime cap of $60,000 (indexed). For full age pensioners, they should not pay any means tested care fee, however for high net worth individuals (such as Ann), in most cases the annual cap of $25,000 (or $68.68 per day 5 ) will apply. One other fundamental change to the accommodation bonds and charges will be replaced by a refundable accommodation deposit (RAD), a daily accommodation payment (DAP) or a combination of both. The RAD will be exempt for Centrelink purposes, however it will be considered an asset when determining the clients means tested care fee. Revisiting Ann Gift into a discretionary trust and invest into an investment bond If Ann entered into an aged care facility prior to 1 July 2014, she could access the grandfathering 6 provision and the secure the benefits of the alternative strategy gift into a discretionary trust and invest into an investment bond. Assuming she entered into care prior to July 2014, could she still invest into the investment bond after July 2014 However, assuming that Ann enters into an aged care facility at 1 July 2014 she will pay a RAD of $350,000 (which is the same amount as the accommodation bond under pre 1 July 2014 rules). She will be worse off by $63.29 per day. 4 Income tested fee: = (Total assessable income total assessable income free area) x 5/12 = ($29,051^ $24,346.40) x 5/12 = $1,960 per annum or $5.39 per day* ^ Total assessable income for calculation of the income test daily fee is $29,051 which is her age pension of $0, deemed income of $29,051 from her financial investments and no other adjustment since she does not receive a part age pension entitlement. * The daily rate is derived from the annual rate, based on a year containing 26 fortnights of 14 days each. 5 $25,000 divided by Grandfathering provisions apply for individuals who enter care prior to 1 July This is based on the proviso that continuation of care occurs and there is no break in care for a continuous period of more than 28 days. A client will continue on the current fee arrangements unless they have move to another residential care facility and they elect to be covered by the new arrangements. 9

10 Calculating Ann s means tested care fee Ann will pay the means tested care fee based on the cost of care 7 of $85 per day which is capped at a maximum of $25,000 per annum (or $68.68 per day) 8. The calculation of the means tested care fee is outlined in the following table: Step 1 Calculate the means tested amount = income tested amount + asset tested amount = $ $ = $ per day Where the income tested amount is as follows: = (Total assessable income total assessable income free area) x 50% / 364 = ($29,051 9 $22,701) x 50% 364 Where the asset tested amount is calculated as the sum of the following divided by 364: 17.5 per cent of assets above the asset free area up of $40,500 to $144,500 1 per cent of assets above $144,500 to $353,500 2 per cent of assets above $353,500 In Ann s case, the specific calculation is the sum of sum of the following divided by 364: ($144,500 $40,500) x 17.50% ($353,500 $144,500) x 1% ($2,350, $353,500) x 2% Step 2 Determine the means tested care fee (MTCF) If the means tested amount of $ is: Zero or less than zero, the MTCF is $0. Greater than zero, the individual can be charged a means tested care fee. This is the lower of: the care cost of $85; or the means tested amount of $ less the maximum accommodation supplement of $50 per day. For Ann, the means tested care fee of $85 per day applies. Step 3 Determine if the annual cap has been exceeded Since Ann s means tested care fee is $85 per day, then the maximum cap of $25,000 per annum applies. Ann will pay $85 per day from 1 July 2014 until 22 April 2015 when the $25,000 per annum cap is reached. Step 4 Determine if the lifetime cap has been exceeded Ann will reach her lifetime cap of $60,000 (indexed) within an estimated 2.4 years after entering the resident aged care facility. 7 Sum of the basic subsidy amount and all primary supplements and this value will be particular to each individual. 8 $25,000 divided by Total assessable income for calculation of the income test daily fee is $29,051 which is her age pension of $0, deemed income of $29,051 from her financial investments and no other adjustment since she does not receive a part age pension entitlement. 10 Inclusive of $350,000 refundable accommodation deposit paid by Ann for her accommodation costs. 10

11 Comprehensive analysis increased aged care cost post 1 July 2014 entry The following table outlines the increased aged care fees post 1 July Overall, using the alternative strategy and entering into care prior to 1 July 2014 can result in a reduction in Ann s aged care fees of $63.29 per day. Current position Alternative strategy (A) Aged care cost saving Post 1 July 2014 fees (B) Cost difference (A B) Basic daily care fee $45.63 $45.63 $0 $45.63 $0 Income tested fee $51.46 $ $ $63.29 Means tested fee $68.68 Total fees $97.09 $51.02 $46.07 $ $63.29 Total care fees $35,437 $18,620 $16,817 $41,723 $21,129 Annual income $74,250 $34,000 $40,250 $34,000 Net income $38,813 $15,380 $23,433 -$7, High net worth individuals like Ann will be subject to the means tested care fee albeit it is capped at $25,000 per annum, but once the $60,000 lifetime cap is reached (expected at 2.4 years after entry), no means tested care fee will be payable by Ann. Note: for entry into care prior to 1 July 2014, it would take Ann years to reach the lifetime cap for the means tested care fee of $60,000 (ie $60,000 / ($5.39 per day x 364)) Important: The use of the alternative strategy will still be relevant for clients accessing at-home care due to the income tested care fee which applies. Annual caps of $5,000 ($13.74 per day at 2014 value) for part-pensioners and $10,000 ($27.47 per day at 2014 value) for self-funded retirees will apply to the income tested care fee for those receiving higher levels of care Conclusion The opportunity which exists for high net worth individuals who enter into an aged care facility prior to 1 July 2014 to access the benefits of gifting into a discretionary trust and then invest into an investment bond should be investigated. Other strategies which focus on reducing the amount of income counted under the income tested fee calculation should be investigated prior to 1 July The aged care reforms that apply from 1 July 2014 are quite complicated and will necessitate adviser education and training. Advisers should also be aware that further clarification will be forthcoming in certain areas and the finalisation of thresholds and rates will occur prior to 30 June Advisers should consider the costs, issues and complexity of this strategy. Most importantly, the estate planning considerations need to be taken into account and how the capital will be passed onto the next generation. 11 Income tested fee: = (Total assessable income total assessable income free area) x 5/12 = ($29,051^ $24,346.40) x 5/12 = $1,960 per annum or $5.39 per day* ^ Total assessable income for calculation of the income test daily fee is $29,051 which is her age pension of $0, deemed income of $29,051 from her financial investments and no other adjustment since she does not receive a part age pension entitlement. * The daily rate is derived from the annual rate, based on a year containing 26 fortnights of 14 days each. 12 Will be funded from other capital 11

12 Legislation update November 2013 The following legislation had passed through Parliament: Legislation Purpose of Act Assent date Tax and Superannuation Laws Amendment (2013 measures no. 2) Act 2013 Tax Laws Amendment (2012 Measures No.6) Act 2012 Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Act 2013 Tax and Super Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 Tax Laws Amendment (2013 Measures No. 3) Act 2013 Medicare Levy Amendment (Disability Care Australia) Act 2013 Tax and Superannuation Laws Amendment (2012 Measures No.1) Superannuation Legislation Amendment (Reform of Self-Managed Superannuation Funds Supervisory Levy Arrangements) Act 2013 Tax Laws Amendment (2013 Measures No. 2) Act 2013 Superannuation Legislation Amendment (New Zealand Arrangement) Act 2012 This Act reduces the co-contribution from 2012/13 year onwards and consolidation of multiple superannuation accounts. This Act: Implements better targets for the net medical expenses tax offset by means testing the threshold above which a taxpayer may claim the offset and the rate of reimbursement from 1 July Removes the concessional treatment of 'in-house' fringe benefits that are purchased through salary sacrificing. This Act replaces the penalty tax for excess concessional contributions made from 1 July 2013 with tax to be paid at an individual s marginal tax rate plus an interest charge. This Act implements the following changes: Increases the concessional contribution cap to $35,000 for clients aged 60 and over for 2013/14 and later years for those aged 50 and over. Make technical changes to ensure the low income superannuation contribution operates effectively. Reduces the tax concession for concessionally taxed superannuation contributions of very high income earners by 15 per cent. Moving financial advisers who provide tax advice into the tax agents licensing regime. This Act increases the Medicare levy by 0.5 per cent to 2 per cent from 1 July Requires employers to report on payslips when superannuation contributions are actually made to an employee s fund. Despite the requirement for this measure to commence from 1 July 2013, regulations to give effect to this legislation are not yet finalised a new commencement date will be advised in due course. The Act proposes to increase the maximum levy payable by a trustee of a SMSF for an income year from $200 to $300 effective from the 2013/14 financial year. The Act also proposes that the levy payable is due and payable on a day specified in the regulations. This Act: Removes the 50 per cent discount on capital gains tax for taxable Australian property accrued after 8 May 2012 by foreign and temporary resident individuals. Requires certain large entities to pay Pay-As-You-Go instalments monthly rather than quarterly or annually. This Act introduces a voluntary scheme for Australians and New Zealanders to permit them to transfer their superannuation savings between Australia and New Zealand with a proposed commencement date of 1 July Received Royal Assent in 28 May May December

13 Legislation Purpose of Act Assent date Tax Laws Amendment (2012 Measures No.5) Act 2012 Social Security and Other Legislation Amendment (Income Support Bonus) Act 2012 Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012 Fair Work Amendment Act 2012 Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 Social Security Legislation Amendment (Fair Incentives to Work) Act 2012 Social Security Amendment (Supporting more Australians into work) Act 2013 This Act phases out the mature age worker tax offset from 1 July 2012 for taxpayers born on or after 1 July This Act creates a new Income Support Bonus to be paid to recipients of ABSTUDY Living Allowance, Austudy, Newstart Allowance, Parenting Payment, Sickness Allowance, Special Benefit, Youth Allowance, Transitional Farm Family Relief Payment, and Exceptional Circumstances Payment. This Act implements the unclaimed monies measures announced in the 2012/13 Mid-Year Economic and Fiscal Outlook. It brings forward the time at which money is recognised under the relevant law as lost or unclaimed, helping to reunite people with their money earlier and will protect superannuation account balances transferred to the Tax Office from erosion by fees and charges. The Act will for the first time enable the payment of interest on unclaimed moneys paid. This Act amends the process for selecting superannuation funds as default funds in modern awards. This Act represents the third tranche of the Stronger Super legislation and implements the remaining measures relating to MySuper, as well as introduces data collection and publication powers for APRA and disclosure requirements for trustees. This Act represents the first tranche of the Stronger Super legislation and defines a MySuper product. It limits a super fund to offering only one MySuper product. It sets out various rules in relation to payment of contributions and the fees that can be charged. This Act amends the Social Security Act 1991 to: Double the maximum reserve threshold for liquid assets to $5,000 for single people without dependents and $10,000 for others from 1 July Clarify the definition of termination payment for the purposes of the income maintenance period to ensure it includes any payments connected with the termination of a person s employment. This Act increases the income free area from $62 per fortnight to $100 per fortnight from 20 March 2014 for recipients of Newstart allowance, Widow allowance, Partner allowance, Parenting payment (partnered) and Sickness allowance. 10 December March December December December November October

14 Bills currently before Parliament include the following: Legislation Purpose of bills/laws Status of legislation The Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 Clean Energy (Income Tax Rates and Other Amendments) Bill 2013 The Bill proposes to remove the minerals resource rent tax (MRRT) with effect from 1 July The Bill includes amendments to discontinue or re-phase several measures intended to be funded by the MRRT as follows: re-phasing of the change in rate of the superannuation guarantee charge percentage repeal of the low income superannuation contribution from 1 July 2013, and repeal of the income support bonus and the school kids bonus from royal assent of the legislation. Repeals the personal income tax cuts that were legislated to commence on 1 July 2015, and repeals the associated amendments to the low-income tax offset. Introduced to House of Representatives on 12 November Introduced to House of Representatives on 12 November For more information on the IOOF TechConnect team or IOOF AdviserConnect services, please speak to your business development or relationship manager, go to or call adviser services: For IOOF Pursuit please call For Portfolio Administrator or AssetLink please call For Spectrum Super please call This document is for financial adviser use only it is not to be distributed to clients. Issued by IOOF Investment Management Limited (IIML) ABN AFSL IIML is a company within the IOOF group of companies consisting of IOOF Holdings Limited ABN and its related bodies corporate, and is not a registered Tax Agent. Examples contained in this communication are for illustrative purposes only and are based on the assumptions disclosed and the continuance of present laws and our interpretation of them. Whilst every effort has been made to ensure that this information is accurate, current and complete, neither IIML nor its related bodies corporate within the IOOF Group give any warranty of accuracy, reliability or completeness, nor accept any responsibility for any errors or omissions and shall not be liable for any loss or damage in connection with, any use of or reliance on, the information provided. PLA