Tax with Max: Calculating aged care costs

Calculating aged care costs

I am not old enough to be worried about aged care costs yet. But perhaps I should be thinking about the ramifications and if possible start planning. Is there a ceiling on aged care costs or is the value of our assets and income the defining factor? For example, if my assets are worth $3 million including super and my income above $80,000, would the cost of gaining full time aged care be the same if my assets were $5m?

Answer: The first thing to establish is that the rules relating to aged care only relate to those facilities covered by the Commonwealth aged care system and do not apply to independent living retirement villages governed by state legislation.

The new aged care system that commenced on July 1, 2014 places a greater emphasis on assisting older Australians to stay in their own homes. This has been achieved by the introduction of Home Care Packages. To receive the services offered under the HCP a Home Care Agreement must be drawn up.

The services offered under a HCA include:

• Helping with personal requirements such as showering, bathing, dressing and mobility
• Assisting with general household functions such as washing, ironing, house cleaning, gardening, basic home maintenance, home modifications related to care needs, transport for shopping and visits to doctors and social activities, and
• Providing medical based assistance such as nursing and other health support such as physiotherapy, hearing and vision services.

There are two types of fees payable under a HCA. There is a basic fee and an income tested fee. The basic home care fee has been set at 17.5 per cent of the basic age pension. Currently the basic home care daily fee is $136.78 per person per fortnight. As pensions increase twice each year, in March and September, the basic daily care fee increases as well.

There is also an income tested care fee that applies once a person’s total assessable income exceeds the income free area, which is $25,316 for a single person and $39,306 for a couple.

The amount of income tested fee payable depends on three factors. They are:

• The actual cost of the home care package
• Whether they are eligible to receive the age pension, and
• Whether the income results in them receiving no age pension.

There is a lifetime limit that relates to all aged care costs. Amounts paid under a home care package are counted towards this lifetime limit and are combined with residential care fees paid when someone needs to enter an aged care facility.

The aged care you are referring to is now called residential care. Under this category a range of fees are payable. These include:

• A basic fee paid by all people who receive residential care
• A means tested care fee as an extra contribution to the cost of care of residents that is based on their income and assets
• An accommodation payment that is also dependant on a person or couple’s assets that is paid either as a lump sum refundable deposit, and daily accommodation payment, or a combination of both
• Fees for extra or additional optional services such as hairdressing or cable TV and other services that are in addition to basic services provided.

There are maximum limits placed on what is payable under the means tested daily care fee. The maximum that a person can be asked to pay in means tested fees is $25,529 a year, or $61,269 in their lifetime. Both of these maximum amounts will increase in line with indexation each year.

The daily means tested care fee payable is made up of an income tested amount and an asset tested amount. The income tested fee is calculated by deducting an income free limit from a person’s assessable income. The income tested fee payable is 50 per cent of the excess over the income free limit divided by 364.

The assets tested fee is payable where a person’s assets exceed a limit, which was $45,000 when the new system was introduced. The calculation of this fee is incredibly complicated.  In addition to the asset free area there is a first asset threshold of $157,051, a second asset threshold of $379,154, and a maximum accommodation supplement of $53.39 per day.

The means tested fee payable is calculated by the Department of Human Services. There is a calculator on the Department of Human Services website that can provide an estimate of what your fees will be.

Under the old system a Refundable Accommodation Bond was payable and residents were able to negotiate the amount of the deposit. The refundable bond has been replaced by an accommodation payment, and as was the case under the old system the amount of refundable deposit can be negotiated with the owners of the aged care facility.

The new legislation has included a maximum refundable accommodation deposit that can be charged by an approved provider. This maxim deposit is $550,000. Accommodation providers can apply to the Aged Care Pricing Commissioner to increase this.

The amount of accommodation deposit payable will be based on a resident’s income and assets and will be assessed by the Department of Human Services or Department of Veterans’ Affairs. The accommodation deposit can be paid either as a lump sum refundable accommodation deposit, a rental type payment called a daily accommodation payment, or a combination of both.

On the basis that there is a limit placed on the refundable bond payable when going into an aged care facility I do not believe that there would be an increase in this bond for someone who had $5m of assets instead of $3m.

There are consultants that specialise in the aged care system. I advise my clients to prepare well in advance before having to go into an aged care facility, and use one of these consultants to negotiate the lowest accommodation deposit for the facility that provides the maximum benefits.

Transitioning to retirement

My current age is 55 so I can commence a TTR pension within my self-managed super fund. In the 2016 financial year I will be able to use the bring forward provisions allowing $540,000 to be contributed to my super fund. Although my accountant advises if I commence my TTR with the mandatory withdrawal of 4 per cent this would equal approximately $70,000 p.a.

Therefore over three years, for the 2016, 2017 and 2018 financial years, I would have withdrawn $210,000 and this would be deducted from my contribution of $540,000, leaving a net increase of $330,000. Could you please confirm that the above is correct?

Answer: This calculation is only partially correct as what is not included is the benefit that your super fund will get from not paying income tax on the income generated by your TTR pension account.

On the basis of your minimum pension being approximately $70,000 per year this should mean that your TTR pension account should have about $1.75 million in it. By starting the TTR pension, assuming an earning rate for your fund of 6 per cent, the fund would also receive a tax saving on the $105,000 of annual income produced of $15,750. This means after three years your fund would actually be better off by $345,750.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au