Noel Whittaker is a Co-Founder of Whittaker Macnaught Pty Ltd.
His advice is general in nature & readers should seek their own professional advice before making any financial decisions.
As the baby boomers age, more and more of their parents are faced with making choices about aged care.
It is an area that is full of traps, and one of the biggest mistakes made is the assumption that it is necessary to sell the family home to fund the move to aged care.
It may be the best decision in some cases, but anybody involved in the decision should be aware of the special rules involved.
First, there is the general exemption on the former home that applies for two years from the date you or your partner moves out.
The exemption is applied to the asset for the purposes of calculating your aged pension, and is designed to enable you to move back to the home if you are able to do so.
The other set of rules allows you to keep and rent out your former home with both an asset and income exemption applying.
The criteria that need to be met for these exemptions to apply are that you must be:
- Paying an accommodation charge or paying an accommodation bond by periodical payment; and
- Renting out the former home.
Where these criteria are met, the former home, and any rent received from it, is exempt from the Centrelink income and assets test as well as calculation of daily income tested fees.
The rent received doesn't need to be commercial (you could rent the home for $1 a week plus outgoing expenses to a child or grandchild) but rent does need to be received for these exemptions to apply.
If the criteria are not met the two-year general exemption will apply.
Even though social security exemptions apply to the asset and the income, the rent must be declared for income tax purposes.
Also, capital gains tax may apply to the eventual sale of the asset.
BETH (aged 85) is a single homeowner with $250,000 in term deposits. Her home is worth $400,000 with contents worth $5000.
She wants to move to a low care facility which has quoted her an accommodation bond of $200,000 with the ability to pay by lump sum or periodic payment (or a combination of the two).
Any amount of unpaid bond will have interest charged at the government set rate of 8.86 pre cent a year.
Beth's age pension is $16,128 a year . If she sells her house and pays her bond in full, her total assets will increase to $455,000, of which deemed assets will be $450,000.
Her pension entitlement will fall to $11,628 and she will pay an income tested fee of $11.17 a day.
If she pays her bond in full, keeps $50,000 in cash, and leaves the house vacant, her pension will increase to the full pension of $748.80 a fortnight until the two-year exemption period expires.
Because she paid her bond in full she would be disadvantaged if she rented the home.
If she received $300 a week rent, her pension would drop to $493.39 under the income test and she would have to pay an income tested fee of $9.79 a day - a penalty of $10,214 a year for generating $15,600 a year of income!
Suppose, instead, she uses $190,000 to pay most of the bond with the balance of $10,000 paid by periodical payment.
If she rents her home for $300 a week she will meet the criteria to have both the income and asset test exemptions applied to the home (for both pension and aged care purposes), and will receive the full pension of $19,468.80 a year plus $15,600 a year rent - she will also pay zero income tested fee.
Of course she will need to pay a periodical payment of $886 a year to the aged care facility for the exemptions to apply. Yes, this is a complex example, but that is the way government has made aged care.
What it does demonstrate is that there is a range of options available and making the right one can lead to a much better financial outcome.
In this area expert advice is absolutely vital.