Deeming, deductibles and aged care fees for SMSF clients. Louise Biti Director Aged Care Steps 97618: _4

Transcription

1 aged care fees for Louise Biti Director Aged Care Steps 97618: _4

2 CONTENTS 1. Means-testing for aged care Assessment of account-based pensions (ABPs) Deciding which asset to liquidate Estate planning for couples... 9 Disclaimer Aged Care Steps Pty Ltd has used reasonable care and skill in compiling the content of this material. However, Aged Care Steps Pty Ltd makes no warranty as to the accuracy or completeness of any information in these materials. These materials are intended only as a guide to understanding the impacts on financial situations. No part of these materials is intended to be advice, whether legal or professional. All names, figures, solutions and scenarios are fictitious and have been established for training purposes only. You should not act solely on the basis of the information contained in these materials as parts may be generalised and the application of exercises, examples and case studies may apply differently to different people and circumstances. Further, as laws change frequently, all advisers, readers, viewers and users are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Rates and thresholds are current to 19 March Aged Care Steps is an authorised representative of Strategy Steps Pty Ltd, Australian Financial Services Licence No

3 1. Means-testing for aged care A means-test assessment applies to residents moving into aged care to determine: Whether they are required to pay full market rates for accommodation or will be provided concessions (with government subsidies) as a low-means resident Their extra contribution towards their daily cost of care (mean-tested fee). This assessment uses a formula to combine a portion of assessable income and a portion of assessable assets to calculate a daily measure of affordability the means-tested amount (MTA). This formula is shown below. Rates and thresholds adjust each six months in March and September and rates shown below are current to 19 March The rules for assessing income and assets pick up the same rules that are used for the Centrelink means-testing with the following differences: The former home is exempt if a spouse or other protected person lives in the home, otherwise it is assessable up to a capped value (currently $155,823.20). Amounts paid towards accommodation as a refundable accommodation deposit (RAD) or eoaccommodation bond (for pre 1 July 2014 residents) are included as an assessable asset Complying income streams purchased between 20 September 2004 and 19 September 2007 receive a full assets test exemption (not just 50%). Account-based pensions are assessed under the same rules that apply for the means-testing of age pensions but the grandfathering rules have a slight twist. 1

4 [Assessment of income is defined in Section of the Aged Care Act Assessment of assets is defined in Section 44-26A.] 2

5 2. Assessment of account-based pensions (ABPs) When determining assessable income for the MTA, account-based pensions (ABPs) may be assessed under deeming rules or be grandfathered under the deductible amount rules. Income assessment method ABP commenced on or after 1 Jan 2015 Owner received Centrelink/DVA means-tested payment or blind pension at 31 Dec 2014 and has continuously been eligible for a payment Owner received Centrelink/DVA means-tested payment or blind pension at 31 Dec 2014 but subsequently lost payment Client was a self-funded retiree on 31 Dec 2015 (or only qualified for a payment after that date) Client received death benefit as an automatic reversionary pension from a person who was grandfathered under deductible rules at date of death, and the reversionary client qualifies for means-tested income support or blind pension at date of reversion Client received death benefit as an automatic reversionary pension from a person who was grandfathered under deductible rules at date of death, but the reversionary client does not qualify for means-tested income support or blind pension at date of reversion Deeming Deductible amount rules Deeming Deeming Deductible amount rules Deeming The important twist to note, is that under aged care means-testing rules there is no grandfathering of existing ABPs for self-funded retirees. All ABPs held by a self-funded retiree are assessed under deeming rules regardless of the ABP commencement date. 3

6 3. Deciding which asset to liquidate As a general rule, ABPs may be more effective than non-super investments for generating retirement income. This is due to: Tax-free nature after age 60 Ability to nominate a reversionary beneficiary or bypass the estate using binding death benefit nominations Retention of deductible amount rules for grandfathered clients Flexibility to select regular income payments. However, some of these principles and priorities may change when a client is moving into residential aged care. Clients moving into aged care usually need to pay for their accommodation. This is quoted as a lump sum (refundable accommodation deposit RAD) which can be converted to a daily accommodation payment (DAP) at a set interest rate. Clients need to decide whether to liquidate assets to pay the RAD or to use assets to create cashflow to pay the DAP. When making this decision some of the issues to take into consideration include: Comparative returns of each investment and the DAP conversion interest rate Capital gains on any liquidated investments and other personal taxation, although some of this may be offset by the net medical expense tax offset (MMETO) until 30 June 2019 Flexibility and access to capital Personal preferences and expectations (including ability to manage investments) Taxation of any death benefits (including access to anti-detriment if available, although this is often not practical for self-managed superannuation funds) The future direction of interest rates The client s potential life expectancy and estate planning implications. Many of the advantages of an ABP that would be considered important for a client in early retirement years may be less relevant for a client who is moving into aged care. For example, clients in aged care are able to claim the net medical expense offset (NMETO) for fees paid to an aged care facility up to 30 June This can eliminate tax on non-super earnings to equate to the taxeffectiveness of superannuation earnings. Case study Errol Errol (single and aged 85) is moving into residential aged care. He has the following assets: Home - $750,000 Non superannuation investments - term deposits $50,000 and shares $250,000 4

7 Account-based pension - $300,000 The ABP was purchased 18 years ago and is all taxable component. He draws the minimum income of $27,000 (9% drawdown rate) and has a deductible amount of $15,000. Errol has been asked to pay a RAD of $310,000 which can convert to $57.33 per day at a 6.75% interest rate. Errol needs to decide whether to liquidate assets and if so, which ones to liquidate. He does not wish to sell the home and plans to rent it for net income (after all expenses) of $26,250 per annum. So Errol leaves $10,000 of the RAD unpaid (for concessions on the home) and is considering the impact of cashing out his non-super investments against closing the ABP and using funds to pay the remaining RAD. The results over the first year are shown in the table below. The results in each option will depend on a number of variables. The assumptions used to compare these options are listed below. The actual results may vary if actual figures vary from the assumptions. The home has a growth rate of 3% over the year. Cash is assumed to earn 2% pa and the shares 4% pa income (fully franked) and 3% growth. Account-based pensions are assumed to have a growth rate of 7.00% per annum. Deeming rates of 2.00% on the first $48,000 of financial investments and 3.50% on the balance have been used. The rates and thresholds are current to 19 March Cash out nonsuper investments Cash out ABP Assets Home 750, ,000 RAD paid 300, ,000 Term deposits/shares - 300,000 Account-based pensions 300,000 - Total assets 1,350,000 1,350,000 Centrelink / DVA Financial investments - 300,000 Deemed income - 9,780 Income streams 12,000 - Assessable income 12,000 9,780 Assessable assets 300, ,000 Note: the rental income is not assessable income while some DAP is payable on unpaid RAD. 5

8 Income (per annum) Income (TD/shares) - 11,000 Rental income (net) 26,250 26,250 Account-based pension drawn 27,000 - Centrelink age pension 18,292 18,390 Total income 71,542 55,640 Aged care fees (per annum) Basic daily fee 17,210 17,210 Means-tested care fee 11,786 10,722 DAP on unpaid RAD Total aged care fees 29,671 28,607 Other expenses (per annum) Lifestyle expenses 5,000 5,000 Tax (including Medicare) 862 2,026 Total other expenses 5,862 7,026 Total expenses 35,533 35,633 Surplus cashflow 36,009 20,007 Projected net assets 1,401,564 1,400,007 It is always important to consider the full picture for a client and not just one aspect of finances or personal situation. This analysis just shows a one-year snapshot but in practice it is preferable to show movements in net assets over several years. Also note that cashflow is not the same as profit. Let s explore some of the normal assumptions for an ABP to review the impact for Errol. Assumption 1 - the ABP is more tax-effective than non-super investments The ABP for Errol is tax-free but in the second option, even if he retains the non-super investments a large amount of tax liability is offset by the net medical expenses (the $35,633 in fees). He will still pay Medicare and he will need to complete a tax return to claim the NMETO. Therefore, this assumption may not hold true for aged care clients (at least until 30 June 2019). 6

9 Assumption 2 deductible amount rules are more effective than deeming Many older ABPs have a large gap between the deductible amount and the income drawing. In some cases you may be able to recommend a reduction in income drawn but the opportunity no longer exists to commute and restart the ABP to reset the deductible amount. This would trigger a switch to deeming rules. In Errol s situation the ABP has assessable income for age pension and aged care purposes of $12,000. If he was assessed under deeming it would have an assessment of up to $10,500 at current deeming rates. In Errol s case it would be deemed at $9,780 as he would be left with no other financial investments. For Errol, the deeming rules would be more beneficial on his ABP than the deductible amount rules. He is drawing only the required minimum so we cannot reduce the amount drawn. If he cashes out the ABP he slightly increases his age pension entitlement and reduces his aged care fees (the meanstested care fee) compared to cashing out the non-super investments. A benefit to him of $1,162. The relative difference will improve if the deeming rates continue to fall. Therefore, this assumption also may not hold true for aged care clients. Note: Errol could also commute the ABP and roll the balance over to start a new ABP under the deeming rules but this may require extra administration and fees. Assumption 3 the ABP provides a steady and regular income stream This is true, but for clients like Errol, the income received from rent on his former home and the age pension are already sufficient to cover his aged care fees and personal expenses. He may not need the additional income into his bank account. The required drawing on the account-based pension creates a much higher level of surplus cashflow for Errol. Therefore, this assumption hold less relevance for aged care clients. Errol s outcome So was it better for Errol to liquidate the account-based pension or the non-super investments? With the assumptions used liquidating the non-super investments came out slightly ahead when looking at total net assets at the end of the year. This is because the ABP was assumed to produce a higher return than the cash investments and a tax difference. However, one factor that this analysis has not yet captured is the impact of tax on any death benefit. Errol does not have any financial dependants. If his children inherit the non-super investments there may be some capital gains tax to pay. If the children inherit the ABP it is all taxable component and tax of up to $51,000 ($300,000 x 17%) may be payable. If the super fund pays an anti-detriment benefit this may offset some of the tax on the death benefit but this is often complicated and not available for an SMSF. Therefore it may be preferable for Errol to cash out the ABP while he is still alive and can access the full value tax-free. 7

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11 4. Estate planning for couples When one member of a couple passes away the remaining partner becomes a single person. Their Centrelink/DVA entitlements and aged care fees are reassessed using the single rates and thresholds. If like so many couples, the full assets of a couple are then assessed to that single person, this can cause a significant reduction in age pension and increase in aged care fees. If the remaining partner loses their age pension (even just temporarily) as a result of this inheritance and reassessment any ABPs they hold or inherit will shift to deeming rules. Case study Mick & Suzie Mick is moving into aged care and his wife Suzie will continue to live in their home. He has been asked to pay a RAD of $300,000 which can be converted to a DAP at 6.75% per annum. All assets are jointly owned. As a couple, they receive a combined age pension of $25,177 and Mick pays fees of $19,694 for his care. An additional $20,250 in fees is payable if they chose not to pay the RAD but chose to pay a full DAP instead. 9

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13 However, what happens if Suzie dies and Mick inherits all assets? As a single person he loses the age pension and his fees increase to $31,285. When he lost the age pension he also lost the grandfathering on the ABPs. They reverted to deeming rules. This is a significant cost to Mick. Overall his care is still affordable but he will need to draw down estate assets to meet his obligations. Some forward planning may have helped to reduce this impact. Mick is only just over the assets test threshold. They could have planned ahead and reduced assessable assets (eg funeral bonds, gifting within allowable limits, home renovations) to keep him below the asset cut-off for a single person. This may have allowed him to retain some age pension and the deductible amount rules on the ABPs. If they had reduced the assessable assets by just $10,000 before Suzie died (or within the 14 days he has to notify Centrelink) he would have received $1,253 in age pension, retained the deductible amount rules and reduced his aged care fees to $30,440 plus accommodation costs. When calculating aged care fees it is the assessable assets that generally have more of an impact that the assessable income. Perhaps Suzie and Mick had an opportunity to revisit estate plans before she died. Assume they each had an equal amount in ABPs with the same deductible amounts and other assets were split equally. If Suzie had then changed the instructions in her will to direct all assets to their children, Errol would 11

14 be left with the house (which remains exempt for age pension purposes for at least a further two years and is capped at $155, for aged care fees) and only half the assets. He does not have a need for further assets and this strategy allowed him to receive $15,172 per annum age pension, keep the deductible amount rules and pay only $22,668 in daily care fees. He still has enough assets to continue to pay the DAP or to pay his full RAD. The estate planning restructure may have been able to go further. It may have been possible to transfer all assets into Suzie s name. In some states it may be possible to convert the home to tenants in common (in equal shares) without triggering stamp duty. This would have allowed her to divert most of their combined assets to the children and minimise the impact for Mick. However, if using an Enduring Power of Attorney for Mick to make these changes it is important to ensure the fiduciary duty to him is not abused. How the accommodation was to be funded also needed to be taken into consideration. 12