From an article by Rahul Singh (Tech Services Manager @ ANZ)
There is a legislative rule relating to paying aged care fees which to me stands out as often bringing unintended consequences. The Government arguably intended the rule to operate as providing protection to clients in leaving them with minimum assets (currently $46,000) after paying for their accommodation as a lump sum – herein referred to as the $46,000 rule. However, in situations involving couples, it can often lead to unnecessary interest costs on unpaid Refundable Accommodation Deposits (RADs).
While the issue can be easily overcome by helping our clients navigating the maze that is aged care, it is not widely understood. Being aware of how clients structure their accommodation payment enables us in adding value in providing aged care advice and assisting our clients in minimising aged care fees.
Consider a situation.
Jim is married to Nola. They own their home. Unfortunately, Jim’s health has been deteriorating with onset of dementia and Nola with her own frailties can no longer provide the care he needs. The decision has been made by the family for Jim to be cared on a full time basis in a residential aged care facility.
Besides the family home (which is exempt because Nola lives in it), the only other assets they have are $600,000 in a term deposit which they recently received as an inheritance and $30,000 in car and contents. The family has been quoted a Refundable accommodation deposit (RAD) of $500,000 by the facility.
What is the issue?
The aged care means testing takes into account only 50% of the combined assets and income. This means that even though Jim and Nola’s combined assets are $630,000, Jim’s share is $315,000.
So can he pay the $500,000 RAD?
One would logically think there should not be an impediment given they as a couple have $630,000 in assets. Surprisingly, and this was the case even before 1 July 2014, there is a barrier in Jim paying the full RAD. Remember, his share of the assets is $315,000. The issue has been exacerbated since 1 July 2014 due to many providers not bringing the RAD price down with a resident’s assets. For example, pre 1 July 2014, if Jim’s assets were the $315,000, then many providers would have adjusted the accommodation bond from $500,000 to $269,000 ($315,000 – $46,000).
Worth noting, any of the RAD which is not paid in full incurs government prescribed interest rate of 6.14% (current rate to 31 December 2015).
Unfortunately, under the current rules, unless the facility adjusts the RAD price down to bring it in line with Jim’s assets (which seems to be rarer now), he would need to pay the advertised RAD of $500,000 or an equivalent periodical payment. Jim is required to enter into an accommodation agreement with the facility within 28 days of entering, confirming how he is going to pay the $500,000 accommodation payment. As he must be left with $46,000 in assets, he is only allowed to pay $269,000 as a RAD. On the remaining $231,000 he must pay interest at the rate of 6.14% – $14,183 annually referred to as Daily Accommodation Payment (DAP).
Unless the couple were earning more than 6.14% on their other assets or had other plans with the funds, this means the 6.14% interest cost is an unnecessary cost. In the absence of the $46,000 rule, Jim and Nola would have preferred to pay as much of $500,000 as a lump sum.
What can be done?
The solution was open to some debate when the rules came in on 1 July 2014. Upon request, Department of Social Services (DSS) had issued unpublished guidance to some practitioners but until recently there was nothing in the public domain.
So what is the solution?
DSS have confirmed that a resident is not subject to the $46,000 rule once the 28 day period expires. The solution here would be to pay the RAD of $269,000 upfront, pay approximately 1/12 of the annual interest cost of $14,183 for the initial 28 day period. As soon as the 28 day period expires, the remaining $231,000 of the unpaid $500,000 RAD is paid.
Given low interest rates, assuming clients were earning 2.5% on the Term Deposit, the differential between 6.14% and 2.5 %, there is a saving of 3.64% – saving Jim and Nola approximately $7,000 in unnecessary interest costs (taking into account the interest payment for first 28 days). Worth noting, that there is always going to be the differential between the two rates, given that the aged care interest rate is based on General Interest Charge (currently 9.14%) minus 3%.
We haven’t even touched on social security entitlements but given the exempt status of RAD, exchanging assessable deemed assets to the exempt RAD would naturally also help with increasing social security entitlements. From 1 January 2017, the social security advantages of exchanging assessable assets to RAD will be further magnified given the increased tapering rate from current $1.50 to $3.
Being aware of how we can navigate around the $46,000 rule adds another strategy to the toolkit in adding value to our clients’ situation.