A major part of the current aged-care system is the bond residents can choose to pay for their accommodation. It is known as a Refundable Accommodation Bond (RAD) and, as its name indicates, is refundable in full to the resident or their estate when they leave.
The purpose of the bond is to provide working funds for the aged-care operator, who has the use of the RAD money until it is repaid.
Residents do not have to pay a RAD; they can choose alternative arrangements - opting for a daily payment instead of the bond, or a partial RAD and a lower daily payment.
A major recommendation in the Aged Care Royal Commission's Final Report was to phase out RADs. The Commissioners point to aged-care advocates who claim RAD's are "unnecessarily complex, inequitable and cruel".
The Commissioners also highlight the very real liquidity issue for providers in refunding RADs as they fall due, an issue that was brought into focus last year due to COVID-19. The ultimate risk here lies with the government, who guarantee the almost $30.2 billion deposit pool.
While the statistics show that there is a growing trend towards paying by daily payment, with 41 per cent of residents paying in this way in 2018-19 compared to 33 per cent in 2014-15, the majority of residents still choose to pay a RAD.
It is simplistic to allege that aged-care providers are hoodwinking more than 60 per cent of residents. It is far more likely that those paying a RAD are doing so because they want to swap one pension-exempt asset (the home) for another (the RAD) and because the interest on any unpaid RAD, currently 4.01 per cent per year, is greater than what they can earn in the bank.
Under the current legislation, residents do not even have to nominate their chosen payment method before they enter aged care. And if they do nominate to pay a RAD when they move in, but subsequently change their mind, they simply continue paying the daily payment.
Aged Care Guru Rachel Lane believes that phasing out RADs is likely to lead to a number of perverse outcomes. For starters, aged-care residents will resist selling their former home, particularly within the first two years, when the home is proposed to be exempt from pension and aged-care means testing. This will slash the number of established homes available to purchase.
Those who do sell their home and find their pension reduced will most likely find that returns from investments such as cash and fixed interest products won't replace the lost pension. Those who lose their pension completely will also need to contribute more towards their cost of aged care through the proposed new means testing arrangements.
Without the option to pay by lump sum, residents will be forced to pay by daily payment. The current interest rate is 4.01 per cent a year, but we shouldn't bank on it staying that low - before the GFC the rate got as high as 11.75 per cent a year. Whatever the rate, it is likely to put pressure on aged-care residents' cash flows.
It's hard to see why the commissioners have made this recommendation. Aged-care providers are not able to insist on charging lump sums - it is currently the resident's choice. A system built on "care, dignity and respect" should be providing more choice, not less.
Taking away the ability to pay a RAD is likely to prove a triple whammy for many aged-care residents: loss of pension, higher fees, and no lump sum available on departure. But it's a trifecta worth billions for the government: lower pension payments, greater means-tested aged-care fees, and no need to guarantee a $30 billion pool of money.
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Noel answers your money questions
You said in a recent column that super in accumulation mode should not be deemed.
What about people who are over 65 years old? I thought that people who are over 65 who have super in accumulation mode should be deemed and they are also counted for assets test.
For Centrelink purposes, as you point out, money in superannuation is assessed once the member reaches pensionable age, or when they start an account-based pension.
However, in the column you mention I was discussing eligibility for the Commonwealth Seniors Health card which has no assets test, and whose income test is based on adjusted taxable income plus deemed income from superannuation in pension mode. These are two entirely different matters.
My spouse and I are retired and have account-based pensions derived from shares and cash within our SMSF. When one person dies and their pension assets pass to the other, is there CGT to be paid on the shares? Do they have to be sold or can those shares be transferred into the remaining spouse's name?
The fact that a member of your fund dies is no reason to automatically commence redeeming assets. The assets inside the fund are owned by the fund not by the individual members so there is no capital gains tax event on the death of a member.
Depending on the balances, the transfer balance account of the remaining member, and whether the pension of the deceased was reversionary, the entire balance may be able to be retained in the fund.
It is important to obtain advice - even if amounts need to be paid out of the fund. If that can be done as soon as practicable, the fund will still be eligible to claim exempt current income status on the balance of the deceased pensioner.
If the entire fund is in pension phase, and one of the members dies, no tax is payable. Some tax may be payable within the fund if the remaining member has an accumulation balance.
My mother is in a residential care facility and has received a request from Centrelink regarding her income and assets. She has an old house she wants to leave to her grandchildren after she dies. Will the house be considered an asset?
Aged Care Guru Rachel Lane explains there are different assessments for the home for pension and for aged care.
For aged-care purposes the former home will be included in your mother's assets for the aged care means test up to a capped value of $173,075. Therefore if the home is worth less than that they will take the actual value of it - if it's worth more they will only include the first $173,075.
It's different if a "protected person" lives in the home. A "protected person" is a partner or dependant child, a carer who has been living there for the last two years who is eligible to receive an Australian income support payment, or a close relative who has lived in the home for the last five years and who is eligible to receive an Australian income support payment, In this case the home is exempt for age care purposes.
For pension purposes the only "protected person" is a partner and the home is an exempt asset for as long as your mother or her partner lives there and for two years after the last one moves out.
Beyond two years the home will be included in her pension assets but she will be classified as a "non-homeowner" which gives an asset threshold that is $214,500 higher than for a home owner. This answer assumes your mother moved into aged care after 2016.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org