The Aged Care reforms due to come into effect on 1 July 2014 will require a new approach to aged care provider payments, and advisers can play a key role in ensuring their clients, and their clients’ parents, are structuring their financial affairs in the best way, says Anna Lawton, senior manager, aged care services at Equity Trustees Limited (EQT).
The reforms come with new terminology, and new requirements, Ms Lawton says.
“Accommodation bonds will be replaced with refundable accommodation deposits (RADs) while period payments will be replaced with daily accommodation payments (DAPs)
“The biggest change from a resident’s cost point of view is that RADs will count as an asset while only the first $153,905* of a Principal Residence will be taken into account and included as an asset,” she says.
Ms Lawton provides the example of two aged care residents who face a different financial outcome, despite having essentially the same level of assets.
Resident A has a house worth $500,000 and cash assets of $200,000. Resident B sold the house for $500,000 and so now has cash assets of $700,000.
The additional cash assets acquired through selling the house results in resident B paying a MTF of $30* a day versus $5.50* a day for resident A,” Ms Lawton says.
This is because although Resident A’s home is worth $500,000, only the first $153,905* is included for asset test purposes. Resident B’s full cash value of $700,000 is included for asset test purposes.
“The reforms shift the system from an income tested fee to a broader means tested fee.
“Obviously, it is important to structure your finances correctly, and residents should seek financial advice before making any financial decisions, ” Ms Lawton said.
Another change to come into effect is, unlike accommodation bonds, RADs will be capped under the new system.
“Those aged care providers wanting to charge a RAD of over $455,000 will need to apply for permission to do this, and sufficient justification for a higher RAD needs to be provided.”
Ms Lawton says many people moving into care post the aged care reforms will be better off paying their RADs in full, upfront.
“Smart aged care providers will encourage this with creative incentives offered to residents which is going to help manage the cash flow problem that many will face as a result of the introduction of the means tested fee.
“The current bonus bond strategy may also still have its application, within a provider’s maximum RAD parameters.
“There are a number of strategies that need to be considered, depending on the level of assets and income a person has. Professional advice will be required, to ensure the approach taken best maximises cash flow and capital preservation,” Ms Lawton concludes.
Equity Trustees Limited (EQT) is a publicly listed company that provides a range of financial services to corporate and private clients. Its businesses include asset management, distribution, responsible entity appointments, private client wealth management, and corporate and personal superannuation.
*The thresholds, RADs and calculations are based on published estimates and are for illustration purposes only. Actual thresholds and RADs will be set closer to the 1 July 2014 changes.
For more information please contact:
Anna Lawton – Phone: 1300 781 586
25 November, 2013