Rent exemption removed for new aged care residents

Strategies

Wednesday 17 February 2016

Individuals moving into aged care from 1 January 2016 may be subject to higher means-tested care fees following a change to the treatment of the former home for aged care means testing arrangements. The change, legislated late in 2015, removes the income test exemption for rental income from an aged care resident’s former home that was available for residents paying at least part of their accommodation costs through daily accommodation payments or contributions.

Furthermore, the Government has proposed changes to the Age Pension assessment of the family home to align with the new aged care assessment, which if enacted will apply to those entering aged care from 1 January 2017.

This article provides a summary for financial services professionals of the aged care and Age Pension implications of both these measures.

Removal of the rental income exemption

The amount of means-tested fee an individual is required to pay is based on their income and assets, or for a member of a couple, half the couple’s combined income and assets. For information on how to calculate the means-tested fee, please refer to the Appendix.

For aged care means testing purposes, the income that is assessed from real estate is generally the same as that assessed for taxation purposes (ie rent received less allowable deductions). However, rent from an aged care resident’s former home was previously exempt from means testing where their accommodation costs were paid by periodic payments.

..rent from an aged care resident’s former home was previously exempt from means testing..

The removal of this exemption means that the rent received (less allowable deductions) from an aged care resident’s former home will generally be assessable income for those entering care from 1 January 2016 regardless of how their accommodation costs are paid. This will increase the amount of income that is assessable for some residents, potentially resulting in a means-tested care fee that is significantly more than would have otherwise been payable if they had entered care prior to 1 January 2016. For example, an individual with other assessable income of $26,000 who rents their former home, could see their means-tested fee increase by 50 cents for every $1.00 of net rental income assessed.

For residents who entered care prior to 1 January 2016, rental income from their former home will continue to be exempt where they are paying all or part of their accommodation costs by periodic payments. However, existing residents who leave care for 28 days or more and re-enter care after 31 December 2015 will no longer be eligible for the rental income exemption.

It should be noted that as assessable income from property is based on actual rent received, if an aged care resident’s former home is not rented, no income would be assessable from the property.

Example: Impact of removing the rental income exemption

Gwen, age 84, is a widow and lives on her own. She is finding she requires assistance with day-to-day tasks and has decided to move into an aged care home to get the help and support she needs.

She has secured a place at an aged care facility which requires an accommodation payment of $400,000. Her only assets are the family home which is valued at $900,000, personal effects of $15,000 and a bank account of $150,000. She receives the full age pension of $22,542 per annum.

Gwen would like to keep her home and is considering renting it out to assist in meeting her aged care fees. It is estimated the property could be rented for $700 per week (after allowable deductions).

Pre 1 January 2016

If Gwen had moved into care prior to 1 January 2016 and elected to pay part of her accommodation costs by daily accommodation payments, the rental income from her former home would not be assessable income under the aged care means test.

Assuming Gwen makes an upfront payment of $100,000 towards her accommodation costs, her means-tested care fee would be $1,650 per annum.

From 1 January 2016

If Gwen moves into care on or after 1 January 2016, the rental income from her former home will be assessable income under the aged care means test, regardless of whether she pays her accommodation costs upfront or via periodic payments.

Assuming Gwen makes an upfront payment of $100,000 towards her accommodation costs, her means-tested care fee would increase to $18,375.30 per annum.

Alternatively, if Gwen decided to retain her home and not rent it out, then she would not be impacted by this change, as there would be no rental income to assess for aged care means testing purposes. However, in doing so, she would forego any additional income generated from the property, which could have otherwise been used to assist in meeting the cost of her care and accommodation.

The chart below shows the means-tested care fee payable by single residents for varying combinations of income and assets. In Gwen’s situation, renting her former home increases her assessed income from $22,538.40 to $58,938.40, resulting in a means-tested fee that is approximately $16,725 more than if her home was not rented or she entered care before 1 January 2016. There is no change in Gwen’s assessed assets in either scenario, which remain at approximately $322,987.

Means-tested care fee

Impact on the Age Pension

The change to the assessment of rental income from an aged care resident’s former home does not impact the treatment of the family home for social security entitlements such as the Age Pension.

Currently, an aged care resident’s former home is excluded from the pension asset test for two years, where an individual vacates their home to enter a care situation. After two years, the individual may qualify for an indefinite exemption where the property is rented and the individual is paying their aged care accommodation costs by periodic payment. Where an individual qualifies for an indefinite exemption, their former home and any rental income from the property are not assessable under the asset or income tests.

However, in the 2015/16 Mid-year Economic and Fiscal Outlook the Government proposed to align the treatment of the former home for pension means testing with the means testing arrangements for aged care. This means that the asset test exemption and rental income exemption currently available for the former home under the pension means test would be removed for aged care residents paying their accommodation costs by periodic payment. This change is proposed to apply for new aged care residents from 1 January 2017.

In relation to the asset test exemption, the Government’s announcement indicates the indefinite exemption will be removed, however it is not clear if the two-year exemption will also be impacted. In any case, the proposed changes to Age Pension means testing arrangements for the former home are likely to adversely impact pension entitlements for some aged care residents who enter care on or after 1 January 2017. At the time of writing, legislation implementing this change had not been tabled in Parliament.

Conclusion

Deciding what to do with an aged care resident’s former home is not purely a financial decision. There are a range of emotional and practical reasons why an individual may prefer to retain their home and keep it vacant or rent it out. However, it is important for individuals to be aware of the financial implications of their decision, particularly following the removal of the aged care rental income exemption for the former home, as well as the proposed changes to Age Pension means testing arrangements.

The Macquarie Aged Care Calculator can assist advisers in understanding the financial implications of the various options.

Resources

Appendix

Calculation of the means-tested care fee

The means-tested care fee is a contribution towards the cost of the resident’s care. The amount payable is calculated as an individual’s means-tested amount less the maximum accommodation supplement ($19,597.76 per annum as at 20 September 2015) payable by the Government. The means-tested care fee is capped at what the Government would otherwise pay in care subsidies and supplements for the individual based on an assessment of their care needs. An annual cap (ie $25,731.05) and a lifetime cap (ie $61,754.55) also apply to limit the amount of means-tested care fees a resident can be required to pay over time.

The means-tested amount, used in the calculation of the means-tested care fee, is made up of income-tested and asset-tested components, which are calculated using the rates and thresholds outlined in the table below.

Income and asset test thresholds as at 20 September 2015

Income testIncome thresholdsIncome-tested amount
Single $25,487.80 50% of income above threshold
Couple (each) $25,019.80
Asset testAsset thresholdsAsset-tested amount
Single/Couple (each) Up to $46,000 Nil
$46,000 to $157,987.20 17.5% of assets between thresholds
$157,987.20 to $381,961.60 $19,597.76 plus
1% of assets between thresholds
Above $381,961.60 $21,837.50 plus
2% of assets between thresholds

The means-tested care fee is broadly calculated as follows:

Step 1: Determine the income-tested amount

  • Determine the individual’s assessable income
  • If assessable income is greater than the relevant income threshold (ie $25,487.80 for singles, or $25,019.80 for a member of a couple), the income-tested amount is 50 per cent of income above the threshold
  • Otherwise, the income-tested amount is nil

Step 2: Determine the asset-tested amount

  • Determine the individual’s assessable assets
  • If assessable assets are more than the asset free area (ie $46,000), the asset-tested amount is the sum of:
    • 17.5 per cent of assets between the asset free area (ie $46,000) and the first asset threshold (ie $157,987.20)
    • 1 per cent of assets between the first asset threshold (ie $157,987.20) and second asset threshold (ie $381,961.60)
    • 2 per cent of assets above the second asset threshold (ie $381,961.60)
  • Otherwise, the asset-tested amount is nil

Step 3: Determine the means-tested amount

  • This is the sum of the individual’s income-tested amount and asset-tested amount

Step 4: Calculate the means-tested fee

  • If the individual’s means-tested amount is more than the maximum accommodation supplement (ie $19,597.76) payable by the Government, the means-tested fee is equal to the means-tested amount less the maximum accommodation supplement, subject to the following caps:
    • the amount the Government would otherwise pay in care subsidies and supplements for the individual
    • the annual means-tested fee cap (ie $25,731.05), and
    • the lifetime means-tested fee cap (ie $61,754.55)
  • Otherwise, the means-tested fee is nil

Note – the rates/thresholds outlined above are applicable as at 20 September 2015.

Example

George has recently moved into aged care. For aged care means testing purposes, he has assessable income of $27,000 and assessable assets of $250,000.

George’s means-tested fee will be $1,676.23, which is calculated as follows:

  1. Determine George’s income-tested amount
    = (assessable income – income threshold) x 50%
    = ($27,000 - $25,487.80) x 50%
    = $756.10
  2. Determine George’s asset-tested amount
    = (assessable assets up to asset threshold 1 – asset free area) x 17.5% +
      (assessable assets up to asset threshold 2 – asset threshold 1) x 1% +
      (assessable assets up to asset threshold 3 – asset threshold 2) x 2%
    = ($157,987.20 - $46,000) x 17.5% + ($250,000 - $157,987.20) x 1%
    = $19,597.76 + $920.13
    = $20,517.89
  3. Determine George’s means-tested amount
    = income-tested amount + asset-tested amount
    = $756.10 + $20,517.89
    = $21,273.99
  4. Calculate George’s means-tested care fee
    = means tested amount – maximum accommodation supplement
    = $21,273.99 - $19,597.76
    = $1,676.23

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1 The value of the former home is assessed as an asset (unless occupied by an eligible person), capped at $157,987.20.

2 Assessable income for aged care means testing includes a resident’s Age Pension entitlement less their minimum pension supplement (ie $899.60 per annum for singles as at 20 September 2015).

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