Transitioning from home care to Residential Aged Care—Part 2
This is the second of a two-part series on Residential Aged Care in Australia and looks at the costs involved. The first takes an overview.
I mentioned in Part 1 that there are a set of ‘old rules’ that applied before the ‘Living Longer Living Better’ reforms were introduced by the Federal Government on July 1, 2014. Prior to these reforms, Residential Aged Care homes came under State and Territory legislation and varied from State to State.
The reforms were introduced to encourage greater investment in facilities by making changes to the financial arrangements to truly reflect the cost of providing aged-care services. At the same time, residents entering a facility after July 1, 2014, select how they pay for their accommodation while the government continues to support those with lower means.
Those who decide to live in a Residential Aged Care home enter into a contract with the company. The contracts are different for those who entered a home before the reforms were introduced, and for those who fell under the ‘new rules’.
A lot of media attention about the shortcomings of contract terms and conditions within the aged-care industry relate to contracts under the ‘old rules’. The most criticised provision allows the manager of the home to charge large exit fees. In many cases, people were charged an exit fee that reduced the sum paid to enter the home by 3 per cent a year to a maximum of 30 per cent. The management effectively takes all the capital growth in the property plus an exit fee.
Fortunately, the 2014 reforms provide a much fairer system. It’s important to note that the contracts involved in moving into a Residential Aged Care home are much more complex than a normal home purchase contract. They are long and contain a huge amount of detail. Such contracts shouldn’t be rushed and advice should be sought from a lawyer familiar with these types of contracts.
How are the fees determined?
Residential Aged Care homes all charge a set of fees for accommodation and daily care. In addition, they may also charge fees for:
- maintenance of the inside and outside of the facility
- repairs and maintenance for wear and tear on beds and other furnishings
- a fee for refurbishing the resident’s room or unit when they leave the facility
Some homes charge for ‘club services’ that might include bus tours and entertainment. Be aware that not all Residential Aged Care Homes charge all the fees mentioned, and some fees can be negotiated.
Residential Aged Care homes charge a fee for the accommodation they provide. These charges vary depending on the size and location of the unit or room, as well as the amount of government subsidies they receive. The accommodation fee is determined by individual Residential Aged Care homes, and some may be open to negotiation on the price. As a guide, facilities often advertise their fees and charges on their websites.
The Aged Care Pricing Commissioner needs to approve accommodation costs that exceed $550,000 for a room or unit.
Once the accommodation fee has been quantified, you need to work out the basis on which the fee will be paid. There are three different ways of covering the accommodation fee:
- A ‘once only’ lump sum Refundable Accommodation Deposit referred to as a RAD.
- A regular rental-type payment called a Daily Accommodation Payment referred to as a DAP.
- A combination of both DAP and RAD.
Until a decision has been made as to how the accommodation will be paid for, daily accommodation charges will apply. These charges don’t apply to those receiving respite care.
How are daily accommodation fees calculated?
The daily accommodation fee is calculated by dividing the accommodation price (or part thereof) by a set percentage—referred to as the Maximum Permissible Interest Rate (MPIR). That figure is currently 5.76 per cent but is reviewed quarterly.
The price for a room or unit might be $450,000 and the resident doesn’t wish to pay for the accommodation in a lump sum. The calculation is:
$450,000 multiplied by 5.76 per cent and divided by 365 days which equals $71.01 per day. This amount becomes the DAP.
Basic daily care fee
The Basic Daily Care fee is paid by all residents regardless of their means—age pensioners receiving a full or part pension, as well as self-funded retirees.
The Basic Daily Care fee covers day-to-day living costs such as meals, laundry, cleaning, and utilities such as power and basic telecommunications. The rate is calculated by the Department of Human Services and is set at 85 per cent of the single rate of Age Pension.
The Basic Daily Care Fee rises each time the Age Pension is indexed (March 20 and September 20 each year). The regulations governing subsidised Residential Aged Care Homes provide that a resident can’t be charged more than 85 per cent of the single age pension rate.
The current rate of the Basic Daily Care Fee is $49.07, and it’s about to rise due to the indexation provisions. The rates can be checked on the Department of Human Services website.
The means tested daily care fee
The Means Tested Daily Care Fee only applies to residents who are arguably in a stronger financial position and can afford to pay more than an age pensioner.
The assessment process involves completing a 132-question income and assets document that can be downloaded from the Centrelink website. In some cases, people may elect not to complete the questionnaire knowing that they will be subject to the maximum Means Tested Daily Care Fee. This is often justified on confidentiality.
However, in some cases, it’s wise to complete the questionnaire because it may impact on the availability and choice of homes. If a financial planner or accountant has been involved in planning and investment advice, it’s also wise to involve them in completing the questionnaire.
Here are a few additional things to note:
- If the resident was receiving a Home Care Package before moving into a Residential Aged Care Home and has been paying a Means Tested Care Fee, the amount already paid will count toward the annual and lifetime caps described below.
- There are annual and lifetime caps (maximums) that you can be charged as a Means Tested Daily Care Fee. Currently, these maximums are $26,380.51 per annum, and the lifetime cap is $63,313.28 (these caps are indexed in September and March each year).
- If the resident is part of a couple, the Means Tested Daily Care Fee will be based on half of the couple’s combined income and assets regardless of who might generate the income or own any assets.
Readers are encouraged to review the examples provided to see how varied and, perhaps, expensive these fees can be.
Note: As mentioned earlier there may be additional charges for maintenance, refurbishment, and other services. These should all be set out in the contract.
Below are some examples that highlight how the fees can vary.
|Scenario A||Scenario B||Scenario C|
|Case||Age pensioner on full pension||Resident with $420,000 in assets||Resident with $3,000,000 in investments|
|Price of the Room||$350,000||$500,000||$650,000|
|Notes||Sells home, pays RAD||Pays 50% of RAD||Pays the RAD of $650,000|
|Daily Accomodation Fee||$–||$39.25||$–|
|Basic Daily Care Fee||$49.07||$49.07||$49.07|
|Means Tested Daily Care Fee||Nil||$27.47||$282.28|
|Total Daily Fees||$49.07||$115.79||$331.35|
|Annual Fees||$17,910.55||$42,263.35||$120,942.75 *
(*The annual cap is $26,380.51 which means that after 94 days the Means Tested Daily Care Fee will become zero for the next 271 days. At the end of the first 365 days, the means tested fee will be reintroduced and calculated using a revised formula (due to indexation.)
Part one of this post takes an overview of Residential Aged Care homes. It can be found here.
Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi.