Planning for aged care. Natasha Panagis Technical Specialist Aged Care Steps. Planning for aged care Natasha Panagis

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1 Planning for aged care Natasha Panagis Technical Specialist Aged Care Steps Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206

2 CONTENTS. Residential care fees The accommodation payment Means-tested amount (MTA) Means-tested care fee (MTF) The treatment of the former home Trudy s calculations... 2 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 9 March 206. Aged Care Steps is an authorised representative of Strategy Steps Pty Ltd, Australian Financial Services Licence No Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 2

3 . Residential care fees This section provides an overview of the fees for clients who enter aged care on or after July 204. Clients who entered before that date will be grandfathered under the old rules unless they are moving services and choose to be assessed under the new rules when they move. The grandfathered rules for pre July 204 residents are not covered in this paper. The fees payable by a permanent resident in aged care are divided into four categories: You can see here the fees match up to expense categories the person would have needed to pay in private residences. In contrast to home care, which can be an additional expense for a client, the fees for residential care generally replace many of the personal expenses that a client was paying when they lived in their own home. TIP The fees that can be charged to a resident and the rules around how the resident can be charged are heavily regulated by the government under the Aged Care Act 997. You can refer to this Act at: It is important to note that the accommodation payment can vary from service to service. It is set by the service provider based on commercial factors. The service provider may charge the same price for all rooms or a different price for different rooms. The basic daily fee is payable by all residents. This rate indexes on 20 March and 20 September in line with age pension changes. It is set at 85% of the basic single rate of age pension (ie. the single pension before supplements are added) which is currently $47.86 per day. The means-tested care fee (MTF) is a daily fee charged at the lower of: The person s cost of care (up to $24.92 per day) An amount calculated using a means-tested amount (MTA). This is a formula that combines assessable income and assets to create a measure of daily affordability. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 3

4 The MTF payable is subject to two caps an annual cap currently set at $25,73.05 (indexed) and a lifetime cap set at $6, (indexed). The facility may choose to offer additional services packaged to the client for an additional services fee. If the facility is classified as extra-service this package may be attached to the room and is not optional. In other cases, it may be an optional package that the client can select. This package could include items such as: Choice of meals and wine/beer with meal Access to services such as podiatrists or hairdressers Newspapers Foxtel etc. Additional service fees generally range from $0 a day to $50 a day but the average seems to be around $40 to $50 a day. Apart from the accommodation payment and additional services fees the cost does not matter which residential service the person is in because the daily care fees are set by government regulation and formula. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 4

5 2. The accommodation payment Accommodation payments are a contribution towards a person s aged care accommodation. Each accredited residential service needs to set the payment (or range of payments) and publish these amounts on their own website as well as on myagedcare.gov.au. The published rate is the maximum that the service can charge. In some cases, the provider may be willing to negotiate a lower amount for clients who do not have the financial means to pay this level. Services cannot negotiate to accept higher payments. Services are able to self-assess the price they set for accommodation based on commercial factors. But if they want to charge more than $550,000 they need approval from the Aged Care Pricing Commission and must justify that the price represents a higher standard of accommodation. Client payment choices The accommodation payment is specified in the Resident Agreement which the person moving into care will be asked to sign, usually before becoming a permanent resident. The Resident Agreement will specify the accommodation payment as both a lump sum (called a refundable accommodation deposit RAD) and the equivalent daily accommodation payment (DAP). This is a bit like choosing to either buy or rent the room. The conversion of the RAD into a DAP is based on an interest rate (called the maximum permissible interest rate MPIR) set by the government. This interest rate may change each quarter but is fixed for each resident as the amount that applied when the Resident Agreement was signed. The rate from January 206 to 3 March 206 is 6.22% per annum. Once the person is accepted as a permanent resident, interest (DAP) applies on any RAD that was agreed but remains unpaid. They can choose to keep paying this DAP or to pay all or some of the RAD. They have 28 days after moving into care to decide which option to pay but can change their mind at a later stage. This gives residents time to seek advice on how to structure investments to meet cashflow and protect their estate. Example Dorothy has agreed to pay an accommodation payment of $400,000 for her room in residential aged care. When she enters care the interest rate for accommodation is 6.22% per annum. This is now her fixed rate. In her Resident Agreement it states that Dorothy agrees to choose to pay: A RAD of $400,000, or A DAP of $68.6 per day ([$400,000 x 6.22%] / 365), or A part RAD and DAP on the unpaid portion. Dorothy signs the agreement and moves into care. She does not immediately pay any RAD so she will start paying the $68.6 per day for her accommodation in addition to any other care fees. After seeking advice, she chooses to sell some assets and pay $25,000 as a RAD. When this is paid, her DAP payable reduces to $63.90 per day ([$375,000 x 6.22%] / 365). Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 5

6 RAD is fully refundable and guaranteed The RAD is fully refundable when the client leaves care (or passes away) unless the client has agreed to have fees deducted. Repayment is guaranteed by the Federal Government provided the service provider is approved under the Aged Care Act. Always get the client to check that the service is operated by an approved provider check details of the service on the myagedcare.gov.au website. TIP The guarantee does not apply to non-approved services such as supported residential services in Victoria and South Australia or independent living units and serviced units in retirement villages. Low-means residents A person can only be asked to pay an accommodation payment if they have sufficient means. If a person has low income and assets they may qualify as a low-means resident and the government will also help to pay for their accommodation. Accredited aged care services need to hold a certain number of beds for low-means residents. A person will be assessed as low-means if their MTA is lower than the amount set as the maximum accommodation subsidy (MAS) that is payable to any service. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 6

7 3. Means-tested amount (MTA) When a client is looking to enter residential care they need to determine how much they need to pay for care. This is where the means-tested amount (MTA) is important as it is a measure of affordability. The MTA is based on a client s income and assets to determine whether they can afford the published accommodation payment (as daily rate which can then be converted to lump sum). If the client cannot afford the published accommodation payment, they could ask the service provider whether they would be willing to negotiate a lower payment. Otherwise, the client needs to: Look for ways to restructure assets to pay the lump sum or daily rate or Get help from family members or Search for a cheaper service. Low-means application If the client has very low financial means they might be able to apply to the Department of Human Services (DHS) for concessional status as a low-means resident. If approved as low-means, and the service is willing to offer a place on this basis, the accommodation payment becomes an accommodation contribution and is set by a formula instead of the published market rate still with the choice to pay as a lump sum or daily rate. The government will also pay accommodation subsidies directly to the service provider. To determine eligibility as a low-means resident, the client must complete the Permanent Residential Aged Care Request for a Combined Assets and Income Assessment (SA457) form and submit it to Centrelink (or Veterans Affairs if a DVA client). This process uses an assessment of assessable assets plus assessable income to calculate a MTA for the client. If the result is a MTA less than $53.84 (the MAS current to 9 March 206) the client qualifies as low-means. TIP To qualify as low-means a person will generally need to have assessable assets of less than $57, (including the capped value of any house which is not exempt because a protected person lives there). But it is not as simple as this as the formula uses a combination of income and assets. However using this rule can help to make quick assessments for many cases. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 7

8 The MTA formula The formula below is used by the Department of Human Services (DHS) to calculate a client s MTA. It is really two separate formulae (one to calculate income amount and one to calculate asset amount) combined into an overall formula. The rules for assessing income and assets pick up the same rules that are used for the Centrelink/Veterans Affairs (DVA) means-testing with the a few differences which are explained below. Step : Calculate the income amount When calculating the MTA, all income is generally assessed at the annualised value and includes: Annual income as assessed under the Centrelink/DVA income test assessment, plus Centrelink/DVA benefits* less the minimum pension supplement and the energy supplement * DVA disability benefits and war widow pensions for veterans with qualifying service are exempt Clients who enter aged care from January 206 will have their rental income from their former home included as assessable income when determining their MTA, even if they are paying some of their accommodation payment as a daily accommodation payment (DAP) or daily accommodation contribution (DAC). However, the rental income exemption will continue to apply for the Centrelink/DVA income test for all residents. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 8

9 Step 2: Calculate the asset amount When calculating the MTA, all assets are generally assessed at net market value and include: Assets as assessed under the Centrelink/DVA asset test assessment, plus Amounts paid towards accommodation as a refundable accommodation deposit (RAD) or accommodation bond (for pre July 204 residents) are included as an assessable asset 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 $57,987.20). TIP If the client is a member of a couple, all income and assets need to be combined and then halved, regardless of ownership status of income/assets. The client's half is then applied against the formula to calculate the income and asset amount. Step 3: Add income amount to asset amount and divide by 364 to calculate the MTA. Note that 364 is deliberately used here as 26 fortnights times 7 days equals 364 days in year. This avoids rounding differences. TIP Assessment of income is defined in Section of the Aged Care Act 997. Assessment of assets is defined in Section 44-26A. You can refer to this Act at: Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 9

10 4. Means-tested care fee (MTF) Once a client has moved into residential care they need to pay part of the ongoing cost of their care (in addition to the cost of their accommodation). Everyone pays the basic daily care fee and those clients with higher financial capacity may also pay a means-tested care fee (MTF). For every dollar that a client pays as a MTF, the government pays a dollar less in subsidies to the service provider. The MTF does not increase revenue to the service it just alters who is paying. Care needs to be taken with managing cashflow and client expectations as the fee could take quite some time to calculate and it may be 6-8 weeks (or longer) before the client is notified of the fee payable. It is however, payable from date of entry. Calculating the MTF Essentially, if the client s MTA is higher than the MAS (currently $53.84) they will pay a MTF. The MTF is calculated as: MTF = MTA less the MAS ($53.84) The MTA is reviewed each quarter and will change with market changes as well as changes in the client s financial situation. Example Assume DHS has calculated that Dorothy has a MTA of $ She does not qualify as a low-means resident so she must fully fund her own accommodation. Her MTF is calculated as: MTF = MTA less the MAS = $ $53.84 = $.75 Dorothy will be charged a means-tested care fee of $.75 per day. This is in addition to the $47.86 basic daily care fee and the accommodation cost which is payable as either a RAD or a DAP. The MTF caps The MTF is paid at the amount calculated unless it is reduced due to one of three caps: Daily cap cost of care Annual cap $25,73.05 (indexed) Lifetime cap $6, (indexed) Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 0

11 5. The treatment of the former home If a client rents their home after moving into residential care, the former home can impact age pension entitlements and aged care fees. However, exemptions may apply if the home is rented and the arrangement is structured appropriately. The assessments for Centrelink/DVA and aged care follow different rules so each aspect needs to be assessed differently and the rules vary depending on date of entry into care. The table below outlines the treatment of the former home for both Centrelink/DVA and aged care fee purposes. Does the home count when Determining aged care fees? Asset value: Exempt if protected person* still living there Otherwise, capped asset value included in MTA ($57,987.20) Income value: Rent will count as assessable income for clients who enter aged care from January 206^ Calculating age pension? Asset value: Homeowner and exempt first 2 years (or until sell) Exempt indefinitely if: Income value: Spouse lives there, or Pay some DAP & home rented Rent exempt if paying some DAP (however see warning below) * Protected person:. spouse OR 2. carer (2+ years) / close relative (5+ years) and eligible for income support ^ Existing clients in aged care pre January 206 will be grandfathered and will have no rent included as assessable income for the purposes of calculating aged care fees Warning The 205/6 Mid-Year Economic and Fiscal Outlook (MYEFO) included a proposal to include a former home that is rented in the Centrelink/DVA income and assets test assessments for clients who move into care from January 207. This legislation is yet to be introduced into Parliament. If passed, the rental strategy will no longer provide Centrelink/DVA concessions for residents who move into permanent care from January 207. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206

12 6. Trudy s calculations Shortfall in cashflow Trudy (single and aged 87) is moving into residential aged care. Her assets include: Home - $950,000 Non superannuation investments - cash $50,000 and shares $250,000 Account-based pension - $400,000 The ABP was purchased 22 years ago and is all taxable component. She draws the minimum income of $36,000 (6% drawdown rate) and has a deductible amount of $20,000. Trudy has been asked to pay a RAD of $40,000 which can convert to $69.87 per day at a 6.22% interest rate. On Day, assuming she pays no RAD and is paying the full DAP, her cashflow shortfall is $6,580 per annum. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 2

13 Trudy s options Trudy needs to decide whether to liquidate assets and if so, which ones to liquidate. She is also unsure of whether to rent or sell the home. If she rents the home, she plans on receiving rental income of $26,000 per annum. However, after factoring in ongoing expenses ($6,500) and land tax ($2,500), she will receive net rental income of $7,000 per annum. So Trudy leaves $0,000 of the RAD unpaid (for concessions on the home) and is considering the impact of cashing out her non-super investments against selling the home and using the sale proceeds to pay the RAD in full. 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 2.5% over the year. Cash is assumed to earn 3.25% pa and the shares 4% pa income (fully franked) and 2.5% growth. Account-based pensions are assumed to have a growth rate of 6.00% per annum. Deeming rates of.75% on the first $48,600 of financial investments and 3.25% on the balance have been used. No upfront costs were required to prepare the house for rent or sale. Costs to be deducted from the sale price will be $28,500 (3% of market value). In addition to aged care fees, Trudy has lifestyle expenses of $5,200 and private health insurance premiums of $2,200 per annum. The rates and thresholds are current to 9 March 206. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 3

14 Assets Option Option 2 Rent home for $26k pa, use cash/shares to pay $400k RAD and rest as DAP Sell home and use proceeds to pay full $40k RAD, with surplus to bank Home 950,000 - RAD paid 400,000 40,000 Cash - 66,500 Shares - 250,000 Account-based pension 400, ,000 Total assets,750,000,72,500 Centrelink Financial investments -,3,500 Deemed income - 4,895 Income streams 6,000 - Assessable income 6,000 4,895 Assessable assets 400,000,3,500 Cashflow (per annum) Interest (cash) - 2,499 Dividends - 0,000 Rental income 26,000 - Account-based pension 36,000 36,000 Centrelink age pension 4,957 - Refunded franking credits - 3,2 Total cashflow 76,957 70,70 Aged care fees (per annum) Basic daily fee 7,469 7,469 DAP Means-tested care fee 24,428 25,73 Total aged care fees 42,59 43,200 Other expenses (per annum) Lifestyle expenses 5,200 5,200 Private health premiums 2,200 2,200 Home maintenance 6,500 - Land tax 2,500 - Tax (including Medicare) - - Total other expenses 6,400 7,400 Total expenses 58,99 50,600 Cashflow position 8,038 20,0 Projected net assets,749,495,734,780 Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 4

15 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. The results of each option will differ depending on the variables that are used to model the client s situation. In Trudy s case, renting the home provides her with more cashflow however her overall cashflow position is lower due to the ongoing costs to maintain the home. Although cashflow is the first consideration, we also need to consider net assets. By renting the home, Trudy has kept the home which may continue to grow in value in the future. With selling the home, Trudy s overall cashflow position is slightly higher than renting the home as she does not have the ongoing house expenses to worry about. However she has sold the house and will miss out on any growth potential. What if Trudy used the account-based pension to pay the RAD? When it comes to SMSFs and account-based pensions (ABPs), we normally think tax-free income and the favourable Centrelink treatment. As a result, many advisers may not want to commute their client s ABP to fund their aged care fees. We considered the impact of cashing out Trudy s ABP to pay a $400,000 RAD (leaving $0,000 unpaid for concessions on the home) and the results over the first year are shown in the table below. Assets Option 3 Rent home $26k pa, use ABP to pay $400k RAD and rest as DAP Home 950,000 RAD paid 400,000 Cash 50,000 Shares 250,000 Account-based pension - Total assets,750,000 Centrelink Financial investments 400,000 Deemed income 2,27 Income streams - Assessable income 2,27 Assessable assets 400,000 Cashflow (per annum) Interest (cash) 4,875 Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 5

16 Dividends 0,000 Rental income 26,000 Account-based pension - Centrelink age pension 4,957 Refunded franking credits 2,243 Total cashflow 58,075 Aged care fees (per annum) Basic daily fee 7,469 DAP 622 Means-tested care fee 22,559 Total aged care fees 40,650 Other expenses (per annum) Lifestyle expenses 5,200 Private health premiums 2,200 Home maintenance 6,500 Land tax 2,500 Tax (including Medicare) - Total other expenses 6,400 Total expenses 57,050 Cashflow position,025 Projected net assets,75,82 When comparing this option to cashing out her non-super investments (cash and shares), Trudy has less cashflow as the ABP balance has been exhausted. However Trudy can draw on her cash and redeem her shares if she needs to generate any further cashflow. The points below explore the common assumptions to retain an ABP. Assumption - the ABP is more tax-effective than non-super investments The ABP for Trudy is tax-free but in the first option, even if she retains the non-super investments a large amount of tax liability is offset by the net medical expenses. She will still pay Medicare and she will need to complete a tax return to claim the net medical expense tax offset (NMETO). Therefore, this assumption may not hold true for aged care clients (at least until 30 June 209 when the NMETO is abolished). 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. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 6

17 In Trudy s situation the ABP has assessable income for age pension and aged care purposes of $6,000. If she fully exhausted her ABP to pay the RAD and retained her non-super investments, these investments would have an assessment of up to $2,27 at current deeming rates. For Trudy, the deeming rules would be more beneficial on her ABP than the deductible amount rules. She is drawing the required minimum so we cannot reduce the amount drawn. 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: Trudy 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 Trudy, the income received from rent on her former home and the age pension are already sufficient to cover her aged care fees and personal expenses. She may not need the additional income into her bank account. The required drawing on the ABP creates a much higher level of surplus cashflow for Trudy. Therefore, this assumption holds less relevance for aged care clients. Trudy s outcome So was it better for Trudy to liquidate the ABP or the non-super investments? With the assumptions used, retaining the ABP 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 provided a tax difference. However, one factor that this analysis has not yet captured is the impact of tax on any death benefit. Trudy does not have any financial dependants. If her 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 $68,000 ($400,000 x 7%) may be payable. If the super fund pays an anti-detriment benefit this may offset some of the tax on a death benefit but this is often complicated and not available for an SMSF (and the government has also indicated that potentially this might be abolished). On balance, it may be preferable for Trudy to cash out the ABP while she is still alive and can access the full value tax-free. Natasha Panagis, Aged Care Steps Pty Ltd (ABN ) 206 7