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Removal of rental income exemption for aged care fees

Removal of rental income exemption for aged care fees

Residents who enter aged care from 1 January 2016 will have their rental income from renting out their former home included as assessable income when determining their means-tested care fee (MTF), even if they are paying some of their accommodation payment as a daily accommodation payment or contribution.

Existing residents who leave care for 28 days or more (other than because they are on leave) and re-enter care after 31 December 2015 will also be affected by these changes.

This measure was announced in the 2015 Federal Budget and the minister for aged care has now released principles to remove the rental exemption when calculating a resident’s total assessable income for aged care fee purposes.

Background

A common strategy used in aged care is to rent the former home and ensure that some of the accommodation payment is paid as a daily accommodation payment (DAP) or contribution (DAC).

The benefit of this strategy is an indefinite Centrelink/Veterans’ Affairs assessment as a homeowner and exemption for the home when determining pension eligibility. In addition, the rental income received is not assessable which reduces the MTF and also helps to maximise pension entitlements.

What it means for residents

As rental income will now be included as assessable income for aged care, the MTF will increase which may create more pressure on cash flow. This may make it more difficult for clients to afford to move into residential care unless they use one of the following strategies:

– Sell their home

– Pay a part RAD and request the DAP to be deducted from the RAD

The table below shows how the former home will affect a clients aged care fees and Centrelink/DVA pension if they move into care from 1 January 2016:

Aged care fees Centrelink/DVA pension
Income value Rent will count as assessable income No change:Rent exempt if paying some DAP/DAC
Asset value No change:Home exempt if a protected person* still lives thereOtherwise, capped asset value is included in means-tested amount assessment (currently $157,987.20) No change:Client is considered homeowner and home exempt first 2 years (or until sell), orHome exempt indefinitely if:1/ Spouse lives there, or2/ Pay some DAP/DAC and home rented

* Protected person: 1. spouse OR 2. carer (2+ years) / close relative (5+ years) and eligible for income support payment

Example

Jan is a widow who was living alone. She moves into residential aged care on 2 January 2016 and agrees to an accommodation payment of $300,000. She decides to pay her accommodation as a DAP ($18,420 per annum). In addition to her home, she also has $60,000 in financial assets.

Jan and her family decide to keep her former home and rent it for $18,000 per year (after all expenses) to pay for her accommodation. She currently receives the full age pension of $22,542 per annum.

The rental income continues to be exempt for the age pension income test and she continues to qualify for the full age pension. However, the rental income is no longer exempt when determining her care fees.

The table below compares the difference in fees if Jan enters care after 1 January 2016:

Pre 1 Jan 2016 Post 1 Jan 2016
Age pension $22,542 $22,542
Interest (at deeming rates) $1,221 $1,221
Total cashflow $41,763 $41,763
Basic daily fee $17,469 $17,469
MTF $602 $8,127
DAP $18,420 $18,420
Total fees (year) $36,491 $44,016
Surplus cashflow $5,272 -$2,253

The numbers show that when Jan moves into care on 2 January 2016, her overall fees of $44,016 are more than her income of $41,763 per year, which will create a cash flow deficit for Jan.

Note: these calculations use rates and thresholds as at the time of writing (18 Dec 2015) to demonstrate the impact of the changes.

Implications for residents

* Clients who move into care after 31 December 2015 may find it more difficult to fund their aged care needs if they do not want to sell their former homes and have limited other financial resources.

* Advice on aged care funding and cash flow management will become even more critical for client and their families.

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