Aged care reforms: some key changes and estate planning considerations

A number of reforms to the residential aged care system in Australia will take effect on 1 July 2014, including:

• changes to how the Government assesses the ability of residents to contribute to their care and accommodation costs; and
• changes to the amounts providers may charge residents for their care and accommodation and the way providers advertise those charges.

What reforms have been introduced?

The Aged Care (Living Longer Living Better) Act 2013 (Cth) (Reform Act) made a number of changes to the regulation of the aged care sector, including broadly:

• residential care fees — changes to the way that government calculates subsidies which it pays to providers and fees which residents pay;
• accommodation payments and options — changes to the maximum amount of accommodation payments providers may charge, the amount of accommodation supplements the government pays and payment options available to residents for accommodation charges;
• administration — changes such as the introduction of the Aged Care Pricing Commissioner, who has the power to, amongst other things, approve the maximum accommodation payment a residential care facility may charge;
• home care — changes to home care arrangements, including changes to the types of care available and the fees charged for that care.

Both income and assets are now relevant to determine out of pocket costs: persons entering residential care after 1 July 2014

A key area of reform has been changes to how the Government calculates government subsidies it pays to providers, residential 'daily care fees' which residents pay and accommodation supplements the government pays in relation to a resident's accommodation payment.

An accommodation payment is the amount the provider may charge a resident upon entering the residential care service, subject to the payment options discussed below.

The contribution each resident makes to the costs of their care and accommodation will now be determined by a means test which assesses both the person's income and the person's assets.

So for persons who enter into residential care after 1 July 2014, both that person's assessable income and their assessable assets will be used to calculate:

• the daily care fee that the resident may be required to pay in addition to the standard resident contribution; and
• the accommodation supplement the government will pay and consequently the maximum amount of accommodation payment the resident pays.

The standard resident contribution remains unchanged at 85% of the basic aged pension.

Previously:

• a person's income was used to determine their obligation to pay for the costs of care and the level of subsidy that person would receive; and
• a person's assets were used to assess the accommodation payments required when the person entered into residential care.

What are the relevant income and assets thresholds?

The relevant 'means-tested amount' and thresholds used to calculate the means-tested daily care fee and accommodation supplements will be calculated for the 2014 financial year as:

• income tested amount:

  • 50% of the person's total assessable income less the 'income free area' (meaning you disregard the person's first $22,701 of assessable income)

• asset tested amount:

  • 17.5% of assessable assets between the asset free area (currently $44,500) and the lower asset threshold (currently $144,500);
  • 1% of assessable assets between the lower asset threshold (currently $144,500) and the higher asset threshold (currently $353,500); and
  • 2% of the person's total assessable assets greater than the higher asset threshold.

A person's assessable income is calculated on a yearly basis and is worked out primarily using the same income test that Centrelink applies for working out the age pension.

The Reform Act includes a complicated formula to determine a person's actual means-tested daily care fee: in addition to the means test of the relevant person, it also takes into account the maximum accommodation supplement the government would pay to the person's particular residential facility. For illustrative purposes, where a person's total means-tested amount is zero (income less than $22,701 and assets less than $40,500), they will pay no means tested care fees and no accommodation payment.

Persons with a means-tested amount greater than $18,200 using the above formula (that is, $18,200 above the income free area and the asset free area) will be required to pay a means-tested care fee and may, depending on the residential facility they are in, also be required to pay an accommodation payment.

Persons with a means-tested amount between zero and $18,200 will be required to pay a means-tested care fee based on their means-tested amount less the amount of the maximum accommodation supplement.

Family home as an asset?

The former family home will continue to be excluded from the assets test where that home is being occupied by a former spouse or other protected person.

However, where the person retains the former family home (and it is not occupied by a former spouse or other protected person) the value of the home will be capped at $144,500 for the purposes of the asset tested amount.

High care versus low care distinction removed

Further, the above fee regime will apply to all residents approved for residential care. There will no longer be a distinction between persons assessed for high level or low level care.

'Accommodation bonds' become 'accommodation payments'

The Reform Act replaces the concept of 'accommodation bonds' with 'accommodation payments'.

How much will residents have to pay?

The Act also regulates:

• amounts providers may charge for daily care fees;
• amounts accommodation providers may charge for accommodation payments; and
• how providers may advertise these amounts.

In relation to daily care fees, providers cannot charge means tested care fees in excess of $25,000 per year and $60,000 in total. Once these limits are reached, the federal government will pay these care fees for the rest of the year and, if relevant, the rest of their residency.

In relation to accommodation payments:

• providers must publish in advance the accommodation payments they charge.
• providers cannot charge accommodation payments in excess of $550,000, or its daily payment equivalent, unless they have the approval of the Aged Care Pricing Commissioner.
• residents will have 28 days to elect whether the pay the accommodation payment as a lump sum refundable deposit, a periodic payment or a combination both.

The Reform Act gives providers greater flexibility to offer additional services, such as hairdressing, wine or entertainment on an opt-in opt-out basis. This is in addition to providers being able to offer care on a dedicated 'extra service basis', including for one or more individual rooms.

What about staying in the home? 'Home care' program replaces 'Community care' program

The reforms to residential aged care have been complemented by reforms to the home care program, previously known as 'community care'.

Under new means testing rules:

• persons receiving care who have higher incomes must contribute more for their home care packages than those on lower incomes; and
• unlike residential aged care a person's assets are excluded from the means testing arrangements for home care.

Preparing for residential aged care — superannuation and estate planning

There are a number of difficult and potentially expensive decisions for persons entering or considering entering residential care. For example, the new means testing system is just one extra consideration which may affect your decision whether or not to retain the family home.

Also, in calculating the asset tested amount, the value of superannuation assets will differ depending on whether:

• the person has reached the age pension age; and
• the super fund is paying the person a pension.

Consequently, a person should consider how their age and superannuation arrangements might impact on their future entitlement to residential aged care, or home care.

Members and trustees of SMSFs, who have greater control over their super assets than members of public funds, should consider whether there are any opportunities to re-order their affairs — such as changing pension payment arrangements — in anticipation of future care needs.

Decisions about whether or not to enter residential aged care often need to be made when a person's capacity may be in question. As with any decisions which can have significant financial implications, those contemplating residential aged care should:

• ensure they have enduring powers of attorney in place in the event they lose capacity; and
• communicate their wishes to their attorney or loved ones in relation to residential aged care or home care arrangements.

Enduring powers of attorney also enable the attorney to act as trustee of (or director of the trustee of) an SMSF in place of a person who has lost capacity — enabling the person's superannuation affairs to be attended to as required.

More information from Maddocks

For questions or more information about the above article, please call Maddocks on (03) 9258 3555 and ask to speak to a member of the Private Client Services team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of estate planning topics.

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