When a client enters residential aged care, they are means-tested based on their income and assets to determine their aged care costs. The fees can be complex for aged care clients, and may cause cash flow issues. In this article we explain the daily means-tested care fees and look at strategies for reducing them.
The aged care reforms from 1 July 2014 introduced a daily means-tested amount (MTA) for aged care fee calculations. This added an asset-tested amount to the existing income-tested amount. The MTA has two main purposes:
1. to determine if a client enters aged care as a low means resident or an accommodation payment resident (explained overleaf); and
2. to help calculate a resident’s means-tested care fee (MTCF). The MTCF is an amount that may be payable by a resident in addition to the basic daily care fee.
Low means resident or accommodation payment resident?
• Low means resident – pays a daily accommodation contribution (DAC) equal to their MTA. This is capped at the amount of the subsidy received by the facility (i.e. facility’s accommodation supplement amount). The resident also has the option to pay the DAC as a lump sum amount, known as a refundable accommodation contribution (RAC).
• Accommodation payment resident – pays a refundable accommodation deposit (RAD). The RAD is a lump sum amount agreed with the facility and capped at the advertised price for the room. The resident also has the option to pay some or all of the agreed amount as an equivalent daily accommodation payment (DAP).
If the resident’s MTA is greater than or equal to the maximum accommodation supplement (currently $54.39 per day), the resident is determined to be an accommodation payment resident.
Centrelink considers a resident’s aged care assessable assets and income to calculate their means-tested amount. They receive this information when a care recipient submits the SA457 ‘Permanent Residential Aged Care Request for a Combined Assets and Income Assessment’ form.
Calculating the means-tested amount
Means-tested amount = (Asset-tested amount + income-tested amount) / 364
Income-tested amount = (annual assessable income – income threshold) x 50%
- Single income threshold = $25,792.00
- Couples (each) income threshold = $25,324.00
Asset-tested amount = the sum of:
- 17.5% of assets between $46,500.00 and $159,631.20
- 1% of assets between $159,631.20 and $385,893.60
- 2% of assets above $385,893.60
Means-tested care fee
Some residents pay a MTCF towards the cost of their care, depending on an assessment of their income and assets.
A resident’s MTCF is determined by using the following formula:
MTCF = means-tested amount – maximum accommodation supplement ($54.39)
The MTCF is first calculated at the resident’s date of entry into residential aged care and then recalculated on 1 January, 20 March, 1 July and 20 September, taking into consideration movements in a resident’s assets and income from the last review.
Residents may also ask Centrelink for an ad hoc review if their circumstances change. If there is a subsequent change in fees, Centrelink will apply a new rate from the date of the review and send letters to the resident and the provider informing them of the change.
The MTCF is capped at the resident’s cost of care. It is also subject to annual and lifetime caps, as discussed below.
Cost of care
When a client enters residential aged care, an approved medical practitioner completes an Aged Care Funding Instrument (ACFI) assessment of the resident. This assessment determines the level of care the resident requires and the supplements the aged care facility will receive from the Australian Government for providing that care.
Table 1 – Daily ACFI subsidy rates from 1 July 2016 to 30 June 2017
|Level||Activities of daily living (ADL)
||Behaviour (BEH)||Complex Health Care (CHC)
Table 2 – Daily residential aged care supplements from 1 July 2016 to 30 June 2017
||Amount of Supplement
|Enteral Feeding Supplement – Bolus
|Enteral Feeding Supplement – Non-bolus
Case study: Ron
Using the tables above, consider Ron who has the following care needs:
- ADL = Medium
- BEH = Low
- CHC = Low
- Enteral Feeding Supplement – Non-bolus
The cost of Ron’s care is equal to:
$79.80 + $8.37 + $16.37 + $19.79 = $124.33 per day.
If Ron’s MTCF is $150 per day based on his income and assets, then he would only pay $124.33 per day.
ACFI assessments are generally completed before a care recipient enters care or soon after. They can change over time with the resident’s care needs. Advisers can contact the Centrelink Aged Care service line to find out their client’s ACFI score.
Many clients will not be affected by the cost of care cap on their MTCF. As shown above, the cost of care for a resident can be quite high, and even a client who is low/low/low with no additional supplements will have a cost of care of $61.39 (this is equivalent to the MTCF of a single non-homeowner having deemed assets of just above $1.1 million).
However for those with a high level of assets, their cost of care can be a consideration.
Annual and lifetime MTCF caps
The MTCFs a resident pays are currently capped at an annual amount ($26,041.09) and a lifetime amount ($62,498.86). These caps are indexed on 20 March and 20 September each year.
Income-tested fees paid for home care count towards these caps; however income-tested fees paid under the pre-reform aged care rules for a resident who entered care before 1 July 2014 do not count.
The period the annual cap applies to is the year from the date the resident first began receiving a home care package or residential aged care (the start-date year). The annual cap follows the care recipient between providers, services and care types.
Because the MTCF is calculated on a daily basis, it is possible to reach the annual cap before the start-date year has ended. This can create cash flow and estate planning issues for residents who are required to pay a high MTCF early during their start-date year.
Chart 1: The effect of the annual cap on various daily MTCF amounts
Chart 1 shows a resident paying a $40 MTCF will not reach the annual cap. However a resident who has the highest cost of care and is paying a MTCF of $244.971 will reach the annual cap during their fourth month.
If a resident happens to pay MTCF amounts over the annual cap to the facility during a start-date year, then overpaid amounts must be refunded to the resident.
Reducing fees for aged care clients
Understanding how the aged care fees work allows advisers to identify opportunities for reducing them and improving aged care clients’ cash flow. Even for clients who have a high level of assets, there are strategies that can be implemented to reduce their daily costs and improve the position of their estate for their beneficiaries. The following case study illustrates how this can be done.
Case study: Eva
Eva is 83 years old and a single non-homeowner who has just moved into residential aged care. She had $300,000 in cash but after selling her home for $1.6 million, her balance increased to $1.9 million. Eva pays her $550,000 RAD in full which leaves $1.35 million in cash.
Table 3: Income summary for month one2
||Current $1.35mil cash||$675K CarePlus + $675k cash
||$1.2mil CarePlus + $150k cash
|Total monthly income
Table 4: Aged care fees summary for month one2
|Aged care fees
||Current $1.35mil cash
||$675K CarePlus + $675k cash
|| $1.2mil CarePlus + $150k cash
|Basic daily fee5 (per month)
Days until cap is reached
|Total aged care fees per month
If Eva invests her portfolio 50% Challenger CarePlus and 50% cash, then a $675k CarePlus investment will save her $648 per month in MTCFs (reduction from $3,397 to $2,749 per month). By the 230th day of the start-date year, when Eva is projected to reach the cap in the current scenario, Eva will have paid $4,9687 less in MTCF fees by investing in CarePlus.
If Eva invests $1.2 million in CarePlus and maintains a cash reserve of $150,000, she can further improve her cash flow position, with:
- guaranteed monthly CarePlus payments of $3,130 per month for life
- savings of $7,8648 in MTCFs by the 230th day of the start-date year
For more information on any aspect of aged care advice, please contact Challenger Technical Services on 1800 176 486.
1As per MyAgedCare calculator (equivalent to High ADL, High BEC and High CHC subsidies, plus the oxygen and ‘enteral feeding supplement – non-bolus’ supplements).
2Rates and thresholds as at 1 January 2017.
3Challenger CarePlus quotes 07/02/2017 for an 83 year old female, monthly payments, no adviser service fees.
4Bank interest 3% p.a. ÷ 12.
5$48.44 for 30 days.
6Daily MTCF for 30 days.
7($113.23 - $91.63) *230.
8($113.23 - $79.04) *230.
The information contained in this update is current as at 23 February 2017 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger). It is intended solely for licensed financial advisers and this update must not be passed on to retail clients. The examples shown are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. This information is not intended to be financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should, therefore, consider its appropriateness having regard to these matters. This document may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Neither Challenger nor its related bodies corporate nor any of their employees receive any specific remuneration for any advice provided in respect of a product. Some or all of Challenger group companies and their directors may benefit from fees and other benefits received by another group company. Any taxation, Centrelink and/or Department of Veterans’ Affairs illustrations are based on current law at the time of writing which may change at a future date. Neither Challenger, nor any of its officers or employees, is a registered tax (financial) adviser under the Tax Agent Service Act and it is not licensed or authorised to provide tax or social security advice. Before acting, we strongly recommend that prospective investors obtain financial product advice, as well as taxation and applicable social security advice from a professional and registered tax agent who can take into account the investor’s individual circumstances.