Aged care and fee reduction strategies

Transcription

1 Aged care and fee reduction strategies TB 78 TECHNICAL SERVICES 20 SEPTEMBER 2017 ADVISER USE ONLY VERSION Summary Aged s are calculated based on a person s assets and income. Broadly, aged care treatment of assets and income is aligned with social security treatment, subject to a few exceptions relating to the former home and refundable accommodation deposit. There are a number of strategies that can be employed to help reduce aged s. This bulletin outlines the following strategies: Utilising superannuation and annuities Funeral investments and gifting for low means residents paying an accommodation contribution Family member securing loan to aged care resident against the former home Insurance bond in a privately controlled trust Use of special disability trust Superannuation and annuities There are a few different ways in which superannuation and annuities can help reduce aged s. The benefits can be achieved as a result of the Centrelink and DVA income testing of superannuation and annuities. This impacts the amount of accommodation payment / contribution as well as means tested s paid by a resident. Superannuation for those under age pension age This strategy is best used for residents who: are either: - under pension age, or - have a spouse under pension age; and pay a means tested, and have substantial financial investments. Centrelink and DVA assessment of income The success of this strategy hinges on whether the single person or couple are better off under the Centrelink and DVA income tests with their money in: financial assets, or in the superannuation of someone under age pension age. Assessment of financial investments Financial investments include bank accounts, term deposits, shares, managed funds and the superannuation of someone over age pension age. Centrelink and DVA income tests apply set rates (called deeming rates) to determine how much income a financial investment generates. Assessment of superannuation By contrast, superannuation that is in accumulation phase is exempt under the Centrelink and DVA income and assets tests if the owner is under age pension age. Age pension age is currently 65 and five years younger if they are a service pension age. From 1 July 2017, the age pension qualifying age will start to gradually increase from 65, so that by 1 July 2023, it would be 67. The strategy As such, taking money from financial investments and contributing it to superannuation for someone under age pension age will reduce Centrelink and DVA assessable assets and income. Accommodation contribution An accommodation contribution in the form of either a refundable accommodation contribution, daily accommodation contribution or a combination is paid by a low-means resident as identified through their means. Of importance, while the accommodation contribution is reassessed on a quarterly basis, if a resident s means increase, the person s status as a low means resident stays with them. This means that a low

2 means resident who has an increase of assets will not be forced to pay an accommodation payment, that is, the advertised refundable accommodation deposit (RAD) once their assets increase, rather a capped accommodation contribution based on their means. It is worth noting that restructuring assets into superannuation as a strategy has a shelf life until the person or their spouse (if applicable) reaches their pension age. Case study 1 reduction in accommodation contribution and means tested John (75) is married to Leila (63). Besides the family home, they have combined financial assets of $300,000 and non-financial assets of $30,000. John is going into aged care and has been advised that the advertised refundable accommodation deposit (RAD) for the facility is $400,000. Without any advice, John s share of the assets are $165,000. Prior to the RAD being paid, John s Age Pension will be $21, per annum paid at the couple separated by illness rate. With advice, if John s share of the combined assets could be brought down to $47,500, he would not be liable for an accommodation contribution nor an accommodation payment of $400,000 (RAD). One way this could be achieved is by making a contribution in Leila s superannuation account of up to or greater than $235,000. While Leila is under pension age, her superannuation balance will not be assessed. By making a $235,000 superannuation contribution, their assessable assets are brought down to $95,000. John is attributed with 50% of the remaining combined assets being $47,500. Upon Leila turning pension age when she reaches age 65 (she is born before 1 July 1952), superannuation assets will be assessed as an asset and John will in turn start to pay an accommodation contribution but capped to a lower of the means tested amount and the accommodation supplement payable to the facility. Another benefit of the strategy is that John s age pension will increase by $175 to $23, per annum. With restructuring, advice is given to Leila to make a $235,000 non-concessional contribution. The following table outlines the impact of the advice: Assessable assets Pre-advice Post-advice 330,000 95,000 Deemed income 8,499 1,137 Age pension 23,080 23,254 Cost of accommodation Liable for an accommodation payment of $400,000 RAD Nil Not liable for an accommodation contribution Worth noting, that some of the benefits are countered by the up to 15% tax on earnings on the contributed amount in Leila s super fund. Whether this strategy is undertaken may depend on whether the facility has a vacant bed for a low-means resident. For some clients, the need to occupy a bed in a particular facility may emotionally be more significant than any financial considerations. Rather than being required to pay an accommodation payment of up to $400,000 as a RAD or an equivalent daily accommodation payment (DAP), the strategy assisted in ensuring that no accommodation payment is payable while Leila is under pension age. Once Leila is over pension age, a daily accommodation contribution of up to $20,180 (maximum accommodation supplement of $55.44 per day * 364) per annum could be payable or a refundable accommodation contribution of up to $354,038 ((55.44*364)/5.70%). The usefulness of the strategy may also depend on the expected stay of the aged care resident given that on average, an aged care resident stays for 2 to 3.5 years. Earnings in accumulation phase of superannuation attract up to 15% tax whereas it may be nil outside of superannuation with the benefit of offsets, especially the Net Medical Expense Tax Offset (NMETO).

3 While we have focussed discussion on the accommodation contribution, this strategy could equally apply to reduction in means tested. For those under age pension age that are entering aged care, this strategy can be applied directly to themselves. Those over age pension age may have a spouse who is still under age pension age and hence may also benefit. For more information on the Centrelink and DVA income tests, please see TB45 Income test. Superannuation rules In moving the assets of a single person or couple from their financial investments to superannuation, you need to be wary of the rules governing superannuation. Some of these rules include: Contribution caps Annuities are considered to be income test friendly because a certain amount of income is disregarded under the income test immediately. Under the assets test, due to the reducing assessable asset value over time, there could also be potential gradual assets test advantages. This strategy is best used for residents who: Pay a means tested (income tested component); and Have either: - Substantial financial investments and can contribute to super; or - Super in accumulation phase and are over pension age; or - Financial investments and the deeming rates are high. Providing a TFN to the superannuation trustee Preservation Conditions of release Taxation in superannuation For more information on these topics, please refer to the following technical bulletins: TB10 Salary sacrifice contributions TB59 Superannuation member contributions TB64 Lump sum superannuation member benefits. Potential tax If you are looking to sell down shares or managed funds, or plan to contribute these investments to super, capital gains tax (CGT) may be realised. Similarly, if a withdrawal is made from the untaxed super fund of one spouse with the proceeds to be contributed to the younger spouse s superannuation, tax may be payable. For more information on these topics, please refer to the following technical bulletins: TB52 Capital gains tax and shares TB64 Lump sum superannuation member benefits. Annuities Use of annuities requires careful consideration in understanding their advantages and disadvantages. Centrelink and DVA assessment of income Much like the previous section, the success of this strategy hinges on whether the single person or couple are better off under the Centrelink and DVA income tests with their money in: financial assets, or an annuity. Assessment of financial investments The assessment of financial investments is covered in the Assessment of financial investments section on page 1. Please be aware that superannuation in accumulation phase for those over age pension age is a financial investment. Assessment of annuities Income test The Centrelink and DVA assessment of income from annuities is as follows: Actual annuity payment less deductible amount The deductible amount for annuities is: (Purchase price less commutations less RCV) Term of term annuity / life expectancy for lifetime annuity If the term of the annuity is less than 5 years, it is assessed as a financial investment unless the term was equal to or greater than the person s life expectancy.

4 For more information on the Centrelink and DVA income tests, please see Technical Bulletin 45 Income test. Assets test The original purchase price of the annuity is reduced by the deductible amount over the elapsed term. The formula to calculate the assessable asset value is: Purchase price (deductible amount * term elapsed) The term elapsed is the number of years that have elapsed since the income stream s commencement day. The number of years is rounded down to the nearest: half year, where the asset value is determined on a 6 monthly basis whole year when the asset value is determined annually The following table shows when the asset value is determined for an asset-tested income stream: If the annuity payments are paid once per income year more than once per income year Example then the asset value is determined once a year at the start of the contract year twice a year at the start of each 6 month period Glenda purchased a 6 year annuity for $120,000. She is paid annually. The following would be the assets treatment. Unfortunately, the current low returns on annuities and low deeming rates on financial investments means the strategy is less attractive at the moment. Example term annuity Zeuben, a widower (72), currently lives in a residential care facility. He pays a means tested care fee. He paid a $400,000 refundable accommodation deposit. His only other asset is $300,000 in a term deposit. Currently it is deemed and $8,997 is added to his Centrelink assessable income. He purchases a nil RCV term annuity with the $300,000 for a period of 10 years which pays a Consumer Price Indexed annual payment of $31,841, paid monthly. Assessed income Pre annuity With annuity 8,997 deemed 1,841 Assessed assets Pre annuity With annuity Account value of financial investments Reduced by deductible amount every six months Use of the annuity assists in reducing the income tested component of the means tested immediately. However, for the asset test component of the means tested, the benefit of the annuity s reducing assessable asset value takes time that is, no upfront benefit but a gradual benefit. & age pension Start of contract year Assessable asset value Pre annuity With annuity 1 120, , , , , ,000 The strategy Taking money from financial investments and commencing an annuity may reduce Centrelink and DVA assessable income. If the assessable income is reduced and the resident is paying a means tested it will be reduced as a result. Any Age pension payable to the resident or their spouse may also increase. 9,621 pa 8,460 pa Age Pension 20,940 pa 23,254 pa Annuity providers may have a different way to calculate purchase price for the purpose of calculating deductible amount eg Challenger CarePlus annuity. Investment returns of the annuity should be compared with other investment structures to ensure that it is an appropriate investment structure.

5 Exist costs at point of death should be considered, e.g. tax impacts, amount that is payable to estate / beneficiary. Insurance bond inside a discretionary trust An insurance bond owned directly by the individual is a financial investment and is deemed under the income test. As a result, directly owned insurance bonds do not assist in reducing assessable income. However, an insurance bond held in a privately controlled discretionary trust as per social security rules is assessed under the private trust rules. This means that only the income of the trust is assessed. If there are no withdrawals from the insurance bond, then holding the insurance bond through the trust could assist in reducing assessable income. This strategy operates by moving money from financial investments and placing them in an investment bond owned by a discretionary trust to reduce Centrelink and DVA assessable income. Residents subject to pre 1 July 2014 rules and home care recipients This strategy is attractive to residents whose income is in excess of the aged care income tested fee threshold. As the income tested fee is calculated only on a person s income, using this strategy could assist with reducing income and therefore the income tested fee. Therefore, this strategy may still be relevant for residents under the pre 1 July 2014 rules as well as Home Care recipients. 30%, no CGT discount, as well as any establishment and ongoing costs. Investment bonds are internally taxed at 30% and are not eligible for a CGT discount. This must be compared to the personal tax position of the aged care resident who sometimes don t actually pay tax due personal income tax offsets (Seniors and Pensioners Tax Offset and Net Medical Expenses Tax Offset (NMETO)) and the 50% CGT discount. Furthermore, for those with relatively high assets, the success of this strategy is reduced as those with sufficient funds to invest into the strategy are often reaching the means tested annual cap. As a result there is no reduction in means tested by reducing assessable income. While case by case analysis is required, this strategy may be appropriate for those: with taxable income above $37,000 and where the person has a tax liability even after NMETO with income above the relevant means tested amount income free area AND assets below approximately $1,606,000 (singles) or $3,212,000 (couples combined) Case study reduction in means tested by holding an insurance bond through a discretionary trust Lorena (80) is single and she will be going into an aged care facility. She currently receives an assessable defined benefit pension of $25,316, consisting entirely of untaxed element. Upon selling her home and after paying the RAD of $500,000, she has $400,000 in financial investments. The strategy, whereby she establishes a controlled discretionary trust and purchases an insurance bond of $350,000, assists Lorena as follows: Residents subject to rules which apply from 1 July 2014 Before restructuring Post restructuring Age s changes have made the success of this strategy limited to a very narrow band of individuals. Given that a resident s assets and income are taken into account, the strategy only assists with reducing assessable income. If a resident s income is in excess of the aged care income free area and the resident s means tested s are within the annual cap, then each $1 reduction in income assists with reducing the means tested by 50 cents. This benefit has to be weighed up with the internal rate of tax in the insurance bond of up to Age Pension 6,657 12,343 20,793 17,942 Tax Insurance bond internal tax Establishment and ongoing costs Not applicable 2,625 2 Not applicable ~ 2,500 Benefits ~ 3,739

6 1. Financial investment & insurance bond earnings rate at 2.5%. Medicare levy is based on Medicare levy thresholds for 2016/ Insurance bond internal tax rate at 30%. As can be seen from the above case study, the age pension has increased by $5,686. This is because the financial assets have decreased by $350,000 as the insurance bond owned by the private trust is no longer deemed. This has resulted in the deemed income decreasing from $12,247 to $875. As the client is income tested for the age pension, for each $1 of reduced income, Lorena gets an increase of 50 cents. As deemed income has decreased by $11,372, conversely age pension has increased by $5,686. Furthermore, the income tested component of the means tested amount works under a similar mechanism. However, the reduced deemed income is countered by the additional age pension which results in a smaller reduction in the means tested compared to the increase of age pension due to restructuring. From a tax perspective, with the benefit of Seniors Australian and Pensioners Tax Offset and Net Medical Expense Tax Offset, Lorena is only liable for a Medicare Levy. However, where the insurance bond strategy is used, the assumed internal product tax of approximately $2,625 is an additional tax and is a disadvantage. However, as evident, the use of the insurance bond in Lorena s situation has an overall benefit of approximately $3,587. The injection of funds into the family trust should be reflected as a gift rather than a loan from an accounting and legal perspective. As the strategy is dependent on not withdrawing from the insurance bond, from a cashflow perspective, sufficient cash reserve should be held outside the discretionary trust. Estate planning considerations with succession planning relating to control of the private trust. Ensuring the private trust is structured correctly. Otherwise deprivation could apply, negating any benefit of the strategy. Internal taxation of the investment bond at 30% and no CGT discount compared to personal taxation. Any tax implications of transferring assets into the private trust. Reducing accommodation contribution by gifting and investing in funeral based investments If an aged care resident s means tested amount at entry is below the maximum accommodation supplement (currently $55.44 per day), then the person is liable for an accommodation contribution payable either as a daily accommodation contribution, refundable accommodation contribution or a combination of both. The accommodation contribution is reassessed on a quarterly basis. Lower assets and/or income can assist with reducing the accommodation contribution. Case study reduction in the accommodation contribution Theo (80) is a member of a couple, married to Gretel (75) and he will going into an aged care facility. Their combined assets are the following: Home valued at $500,000 Car and contents at $10,000 Cash in the bank of $130,000 As the home is resided in by his spouse, it is exempt. Theo s share of the combined assets are $70,000. His accommodation contribution without any restructuring would be $10.82 per day or $3,948 per annum. If Theo and Gretel were to gift $10,000 in a financial year and they were to purchase a funeral bond of $12,750 each, their combined assets would decrease to $104,500. With the reduction of assets, the accommodation contribution decreases from $3,948 per annum to $2.28 per day or $833 per annum. Restructuring assets to purchase funeral bonds and gifting within allowable limits has helped to reduce the accommodation contribution by $3,115 per annum. Financial capacity and desirability of the person in gifting assets. Gifts from family members structured as a loan against the former home There are situations where the aged care resident does not have liquid assets to pay a RAD. This means that the resident would need to pay DAP on the unpaid RAD from private savings or have the DAP deducted from any RAD they may have paid. DAP is currently charged at the rate of 5.70%. In some situations, the wider family group may have the means to pay the RAD on behalf of the resident. Where this is done, the benefit to the aged care resident is the

7 saving in a lower DAP and thereby saving 5.70% interest. It is worth noting though that a RAD is an assessable asset for means tested purposes. Where the aged care resident is gifted assets from someone in the family group, this would have an effect of increased assets for means tested purposes. Benefit $400,000 as a gift from John $400,000 as a loan from John $5,909 pa $3,647 pa $2,262 pa A strategy to consider is to restructure the gift as a loan and formalise the arrangement through paperwork. Let s look at a case study to illustrate the difference. Case study a loan arrangement rather than a gift to decrease means tested s Norma (80) is a single person entering into an aged care facility. Her assets consist of the home she currently lives in worth $450,000 as well as car and contents of $10,000. As no protected person lives in the home, it is assessed as an asset but capped to $162,815 from an aged care perspective. Due to Norma s assets being $172,815, she is liable for an accommodation payment, payable as either a RAD, DAP or a combination of both. She has been quoted a RAD of $400,000. Her children who are acting on her behalf want to keep the family home until Norma is alive as they still like to bring her back to the home from time to time and also her grandchild will be living in the home. As a result, she does not have liquid assets to pay the $400,000 RAD. Given Norma will not be renting out the home, she also does not have sufficient cashflow to pay the unpaid RAD as a DAP. One of her children, John, has sufficient assets to pay $400,000 RAD. If John was to simply gift the $400,000, then Norma s assessable aged care assets are $572,815 ($400,000 + $172,815). If on the other hand, John is to reflect the $400,000 as a loan to Norma and secures it against the former home, then the aged care assessment of the former home is the net value, being $50,000 ($450,000 - $400,000). This means that her aged care assessable assets are now $460,000 a reduction of $112,815 ($572,815 - $460,000). Through restructuring John s payment as a loan rather than a gift, and assessable assets having decreased, one would expect a reduction in the means tested. The following table summarises the position. The cost associated with formalising the loan arrangement. While legal representation is strictly not required to document the arrangement, it is recommended due to estate planning considerations RADs are refundable to the estate. Where one child gifts the assets to the aged care resident to pay for the RAD, if the will does not mandate that amount to go to the donor, then they may not receive sufficient consideration from the estate. As a result, a loan arrangement can also be used as an estate planning tool to ensure that the donor receives the RAD payment back from the estate Use of a special disability trust A special disability trust may be funded with a bequest or superannuation death benefit, within 3 years of the amount being received by the principal beneficiary or their partner. This is the exception to the general rule that a principal beneficiary or their partner cannot transfer funds to a special disability trust in order to qualify for or increase entitlements to income support. This strategy could apply to a person with a severe disability in anticipation that they will enter residential aged care or an existing aged care resident. The benefits of the strategy may include: Increase in income support Reduced aged s The principal beneficiary of a special disability trust must have a severe disability. A person who has reached 16 years of age, has a severe disability if: they have a level of impairment that would qualify the person for Disability Support Pension or who is already receiving DVA invalidity service pension or DVA invalidity Income Support Supplement; and they have a disability that would, if the person had a sole carer, qualify the carer for Carer Payment or Carer Allowance or the person is living in an institution, hostel or group home in which care is provided for people with disabilities, and for which funding is provided (wholly or partly) under an agreement between the Commonwealth and state/territory governments; and as a result of the disability, the person has no likelihood of working for more than 7 hours a week for a wage that is at or above the minimum wage.

8 Before establishing a special disability trust, the beneficiary should be assessed by the Department of Human Services to determine whether they are eligible to be a beneficiary of a special disability trust. That said, aged care residents usually satisfy the criteria to be assessed as an eligible beneficiary. The primary purpose of a special disability trust is to provide for the care and accommodation needs of the principal beneficiary. Trust funds may be used to pay for the costs of reasonable care and accommodation for the principal beneficiary. Reasonable care needs include: RAD $300,000 They receive advice to transfer the bequest to a special disability trust. Joe is assessed by the Department of Human Services as an eligible principal beneficiary of a special disability trust. Within 3 years of receiving the bequest, Andree may transfer either the whole or part of the bequest to a special disability trust for Joe. If Andree transfers the $500,000 bequest to a special disability trust for Joe, the amount will be exempt from the assets test and no income will be assessed. The following table outlines the impact of the advice on their Age pension entitlements and means tested : Daily s for residential care (in Australia) Any additional itemised fees charged by an approved aged care provider in relation to the principal beneficiary s care and accommodation in residential care Reasonable accommodation needs include: Payment of a refundable accommodation deposit (RAD) or daily accommodation payment (DAP) Any itemised fees which specifically relate to the accommodation of the principal beneficiary residing in a residential care service If the trust is assessed as being a special disability trust, a new determination is made of the principal beneficiary s rate of income support. In calculating the new rate, the trust income and assets may be exempt which can result in a rate increase to the person. Age pension (couple, combined) Establishment and ongoing costs Before restructuring Post restructuring 13,008 46,159 5,553 1,513 Not applicable ~ 3,500 Benefits ~ 33,691 Means test assessment of special disability trust Asset test All assessable trust assets up to $657,250 (indexed each 1 July) are exempt from the social security assets test. The amount of assessable assets above the limit is included in the principal beneficiary s assessable assets. Income test No income or distribution from a special disability trust is assessable under the social security income test. Example Joe is an aged care resident. His wife, Andree receives a bequest of $500,000 from her late mother s estate. The couple s assets are as follows: Funding a special disability trust with the bequest has increased the couple s age pension entitlements and reduced their means tested, resulting in a net benefit to the couple of $33,691 in the first year. The trust funds can be used to pay for aged s, private health insurance cover and discretionary expenses for the benefit of the principal beneficiary of up to $11,750 per financial year. Costs of establishing and maintaining a special disability trust Financial reporting requirements of a special disability trust Home $600,000 Contents $10,000 Financial investments $800,000 (includes $500,000 bequest)

9 ANZ Wealth materials ANZ Wealth have many documents and tools that can be used to understand, and develop strategies around, aged care. These are available on the Adviser Advantage website and include: Technical Bulletin 10 Salary sacrifice contributions Technical Bulletin 31 Superannuation income streams Technical Bulletin 52 Capital gains tax and shares Technical Bulletin 54 Lump sum superannuation member benefits Technical Bulletin 59 Superannuation member contributions Technical Bulletin 74 Introduction to aged care Technical Bulletin 75 Residential care Technical Bulletin 77 Aged care and the former home Technical Calculator 02 Aged care and pension calculator Technical Factsheet 03 Aged care and special residences fact sheet. This Technical Bulletin has been produced by ANZ Wealth Technical Services and is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation or needs. Before making a recommendation based on this publication, consider its appropriateness based on the client s objectives, financial situation and needs. ANZ Wealth Technical Services is not a registered tax agent under the Tax Agent Services Act Your client should refer to a registered tax agent before relying on information in this publication that may impact their tax obligations, liabilities or entitlements.