Changes to Treatment of Former Home – Aged Care & Age Pension

Assessment of the Former Home – from 1 January 2016

Rental income derived from a former home became assessable in the calculation of aged care related fees for individuals new to residential aged care from 1 January 2016.  For many residents, this represented a significant increase in their ongoing costs of care.  You can read more about this change here.

Changed Assessment of the Former Home – from 1 January 2017

For residents who are either in care now, or who enter residential aged care prior to 1 January 2017, it is possible to structure finances such that the market value of a former home may remain exempt indefinitely in the calculation of age pension payment rates.

For individuals new to residential care from 1 January 2017, the ability to exempt the market value of a former home indefinitely will cease.  The standard two year exemption will apply, and the property will become assessable in full after the two year anniversary of entry to residential care.

This change may result in a significant negative impact to age pension payment rates for residents who enter care in the new year, and choose to retain their former home.

The effect of this change on the treatment of the former home will be as follows:

  • From day one, the full amount of rental income derived from a former home will be assessable in the calculation of both aged care related fees, and age pension payment rates.
  • After two years of continuous care, the full market value of a retained former home will become assessable in the calculation of aged pension payment rates.

This change, coupled with changes to age pension assets test thresholds (which you can read more about here, also coming into effect in the new year) may have significant implications for the finances of individuals new to residential aged care from 1 January 2017.

Aged Care Assessment

For the purposes of calculating aged care related fees, the capped assessable value of a former home (currently $159,631.20) will persist indefinitely.  As such, viable strategies may remain available to individuals entering residential aged care who wish to retain their former home.  Action to restructure finances will however be required to ensure impact to age pension payments is minimised, and cash flow remains adequate.

Protected Persons

Full exemption of the capital value of a former home for both age pension and aged care purposes where a protected person resides in the property will persist.  While a protected person resides in the former home, this change will not impact financial outcomes for the individual entering residential aged care.  It will however become important to consider and plan for the impact of this change for individuals new to residential aged care after 1 January 2017, in the event the protected person leaves the former home in the future.

Categories of Assessment

Following this change there will effectively be three categories of potential treatment of a former home for individuals in residential aged care where a protected person does not reside in the property, depending on the date of entry to care as follows:

  • Entry to care prior to 1 January 2016:
    • Aged Care Fees – Asset value capped at $159,631.20 and rental income exempt indefinitely.
    • Age Pension Payments – Asset value and rental income exempt indefinitely.
  • Entry to care between 1 January 2016 and 31 December 2016:
    • Aged Care Fees – Asset value capped at $159,631.20 and rental income assessable in full from day one.
    • Age Pension Payments – Asset value and rental income exempt indefinitely.
  • Entry to care from 1 January 2017 onwards:
    • Aged Care Fees – Asset value capped at $159,631.20 and rental income assessable in full from day one.
    • Age Pension Payments – Asset value assessable in full after two years of continuous care, and rental income assessable in full from day one.

Summary

This change impacts planning considerations for all individuals new to residential aged care from 1 January 2017, and most significantly impacts those individuals who decide to retain their former home.  Where a former home is retained, age pension payments may significantly reduce or indeed cease in full after two years of continuous care if no action is taken to restructure finances.

Aged Care continues to be a dynamic and complex area that is regularly impacted by legislative change, and the benefit of receiving the right financial advice at the right time cannot be understated.  There remains significant benefit able to be achieved in restructuring finances in transition to and during residential aged care to reduce overall costs, increase age pension payment rates, and optimise overall financial outcomes.

If you (and/or a loved one) are considering moving into permanent residential care, I encourage you to contact us to discuss the circumstances and your options.