The calculation of fees for residential aged care underwent a fundamental change on 1 July 2014.
The new rules are complex, and the financial costs of getting them wrong can be significant.
More than ever, it is important for those caring for someone approaching the stage where residential care is necessary to seek professional advice in navigating the rules and regulations surrounding the industry.
(It is important to note that nothing will change for existing residents in a residential aged care facility. Service providers will not be able to charge more.)
For those not already in residential care, the new fee structure means that the pre-July distinction (for the purpose of fees) of the two types of residential aged care: low care and high care, is no longer relevant. And all existing high and low levels of permanent residential care places became general residential care places on 1 July 2014.
Under the previous system, those residents who went into low care
were asked to pay 85 per cent of their pension as a basic daily fee. Where their means allowed it, they were also asked to pay an accommodation bond (which was potentially a significant amount of money) for their accommodation costs. There was no cap on bonds other than that the resident must have been left with at least $45,000 in assets after having paid the bond. In situations where the resident had income other than the full-rate pension, they could also be asked to pay extra daily fees, up to a total of $73.86 per day.
Where a resident went into high care
, the basic daily fee and care fees applied in the same way as to low care charges. However, there was no requirement to pay an accommodation bond. Rather, where a high-care resident had assets exceeding $116,136, they could be asked to pay a maximum of $34 per day in an accommodation charge.
The distinction between low and high care has disappeared, and all people in residential care will have their fees calculated in the same way.
A comprehensive means test will apply to everyone. Under this system, a resident's income and assets
will be used to determine how much they can contribute towards the cost of their accommodation payment and daily care fee.
The assets test will be comprehensive, and could include the family home, vacant land, shares, boats, cars, caravans, personal effects of all kinds, artwork, coin and stamp collections – everything.
Income will also be comprehensive, including the pension, share dividends, rent from investment properties, payments from super funds, income from part-time work, foreign investment income, income from trusts, and so on.
The daily care fees for both high and low care will now be determined as follows:
- ALL residents will pay 85 per cent of the aged pension as a basic daily care fee. The means test will then be applied. Some residents will need to pay a higher daily care fee, which could be above their pension; those with no income or assets may not need to pay more.
- The means test will consider the following:
- 50 per cent of income over the maximum single pension threshold. The income free threshold is $24,731.20 p.a.
- 17.5 per cent of assets between $45,000 and $154,179 (so the first $45,000 is not included)
- 1 per cent of assets between $154,179 and $372,537
- 2 per cent of assets over $372,537
- Divide the result by 364 to get the daily extra amount that will be charged for high and low care accommodation.
The family home will be excluded from the assets assessment only in situations where a spouse, or carer, resides in the home. Otherwise, its value will be capped at $154,179 (with this value likely to be indexed annually).
Consider the example of Susan.
Susan receives the full-rate Age Pension, and her only asset is her home, which is valued at $500,000. She is the only person living in her home.
Susan's income test would be $0, because she has no income other than the pension. She would still pay 85 percent of her pension, though, to the aged care provider.
The value of Susan's home is capped at $154,179 under the means test rules.
Accordingly, extra amount she can be charged per day would be calculated as:
1). 17.5 per cent of her home's value ($154,179 less the allowable asset level of $45,000, divided by 364 = $300).
2). Now calculate 17.5% of $300 = $52.50.
Susan is therefore assessed as being able to pay a FURTHER $52.50 per day towards the cost of her daily care.
Accordingly, her care fees of 85 per cent of the pension, plus the extra $52.50 per day, will exceed her total pension by over $100 per week.
Although the family home's value is capped at $154,179, many (like Susan) will find that they will need to tap into its equity somehow to fund their care fees (by taking out a reverse mortgage with the bank, for example, or renting or selling or getting family to pay the difference.)
Accordingly, unless Susan rents out her home – which she is allowed to do and which could be an excellent strategy for many reasons – Susan most probably would have to sell it to help pay her daily care fees.
But, here is the dilemma: once she sells it, her assets will rise because the $154,179 cap on the home will disappear. Her assets will grow by the amount she sells her home for. That, in turn, will increase her care fees.
Her care fees will also rise if she rents out her home, because the extra income being received will increase her assessable income.
Further, Susan's daily care fees (as calculated above) are entirely separate to any extra accommodation payment that she may be asked to pay.
This calculation is also very complex (and beyond the terms of this article). But, in summary, Susan can choose to pay an upfront accommodation payment to the aged care provider (this can be many hundreds of thousands), but she will still have to pay the daily care fees on top of that.
Susan will be able to negotiate with the aged care provider as to how she pays her accommodation payment. The accommodation payment (less fees and charges) is refunded when Susan leaves the residential care facility or dies.
Susan can negotiate how she pays the accommodation payment. She might pay it all in one lump sum (say after selling her house); choose to pay a smaller upfront lump sum accommodation payment plus a higher daily fee; or, she can pay the highest daily fee and not pay any lump sum at all.
Given the complexity of the new rules, and the many variables involved, it is important that people needing residential aged care seek good independent financial advice.
It is also important, where possible, that decisions are made at a time when the older person still has the mental capacity to do so (and that an Enduring Power of Attorney is also considered in case mental capacity is later diminished).
Further information on the process for entering residential care is also available in the government's Information Booklet on Fees for Home Care Packages and Residential Aged Care for People Entering Care, which can be downloaded here
Please note however that advice in this article is correct only to the best of our knowledge and is general in nature. It should not be taken as personal financial advice.
If readers need further assistance, they should contact Patrick O'Leary of GCC Financial Services on 02 9899 3044.