Aged Care Changes and Investment Bond Strategies 2016

18 January 2016

On 1st January 2016 changes to the treatment of rental income from an Aged Care entrant’s former home will come into effect. This means that clients and their advisers will need to explore strategies with the potential to reduce their care fees.

Prior to these changes, Aged Care entrants who decided to keep their homes and derived rental income from the property and who were paying at least a partial daily accommodation payment (DAP) had their rental income exempt from the Aged Care Means Test.

Now, any Aged Care entrants entering residential aged care on or after 1st January 2016 will have their rental income assessed for the Aged Care Means Test. For a single entrant on a full Age Pension earning $15,000 of rental income per year, the changed rules would represent an increase in their Means Tested Daily Care Fee of around $6,000 pa.

If the Aged Care entrant also had financial assets over and above their rented home, these assets would be deemed for the Aged Care Means Test and could potentially increase their Means Tested Daily Care Fee.

Transferring deemed assets to a discretionary family trust and investing the proceeds into an Investment Bond can have a significant impact on reducing Aged Care fees by removing the client’s financial assets from deeming in the Aged Care Means Test. This is because Centrelink does not deem trust assets, assessing only actual distributions from the trust in their calculations. As Investment Bonds do not distribute this effectively removes any assessable income from the assets transferred into the investment bond.

In the light of the January 1 2016 changes this strategy becomes particularly effective as more clients begin to be assessed under the income test.

The table below shows an example of the Residential Care Fee reduction when moving the client’s financial assets to trust and investing within an Investment Bond:

Figure 1: Impact on Care Fees of Financial Assets

Single Homeowner,     $500,000 RAD and partial DAP,     $500,000 home,

$15,000 rental income (home and rental income exempt from Age Pension)

Financial Assets Residential Care Fees (pa) Residential Care Fees (pa) –
Assets within Trust/Investment Bond
Fee Reduction (pa)
$100,000 $34,474.25 $33,207.70 $1,266.55
$150,000 $36,291.95 $34,211.45 $2,080.50
$200,000 $37,719.10 $34,824.65 $2,894.45
$250,000 $39,055.00 $35,346.60 $3,708.40
$300,000 $39,894.50 $35,372.15 $4,522.35
$350,000 $40,734.00 $35,397.70 $5,336.30
$400,000 $41,573.50 $35,423.25 $6,150.25
$450,000 $42,413.00 $35,448.80 $6,964.20
$500,000 $43,256.15 $35,474.35 $7,781.80

Disclaimer: All information in this document is simplified and viewed from a general perspective. It is also based on a broad understanding of current rules and guidelines at the time of producing this document. It does not represent ‘financial product advice’ as defined by the Corporations Act 2001 (as amended by the Financial Services Reform Act 2001), and no specific product is recommended. Appropriate and independent professional advice should be obtained by individuals before making any decisions based on the contents of this document. This document is issued for the use of financial advisers only and is not to be provided to clients. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230 867.