SHOULD YOU SELL OR RENT YOUR HOME?
If you are moving into an aged care facility on a permanent basis and own your current residence, a major issue to be explored is whether it is better to sell your home or to rent it out.
Why? Because this can have two major impacts on you. First, on your pension entitlements and on your aged care fees. In some cases, liability to pay income and capital gains tax may also be a consideration, but calls for a separate article. Second, if you have a partner, you may not want to sell or rent just because you have to move to aged care. If you are single, it may not suit you to sell right away if, for example, the property market is slow.
It is important to obtain advice that relates to your particular circumstances. The following are useful ‘rules of thumb’ but do not constitute legal advice.
OUTLINE
Not surprisingly, the more you own or earn, the more you will have to contribute to your aged care costs without reliance on public monies. There are some concessions, however, with respect to your former home if you own, or co-own, it. The availability of those concessions arises from a complex interplay between the Aged Care Act and the Social Security Act or, for military service, the Veterans Entitlements Act.
PENSIONS
1. Some pensions, such as a war widows pension under the Veterans Entitlements Act, are not means tested and so your income and assets will not be relevant to your pension entitlements.
2. Most pensions and related income supplements, however, are subject to reduction or non-payment according to the level of your net income or net assets. Examples are the age pension under the Social Security Act and the income support supplement under the Veterans Entitlements Act.
Pension income test
3. Generally, the income test for pension purposes is comprehensive as to the income included. In relation to ‘financial assets’ such as shares and bank deposits, certain income will be deemed to have been earned, regardless of the actual return.
4. Basically, your pension is reduced by $0.50 for every $1.00 of income that exceeds a certain threshold ($3,900 pa of non-pension income as at 20 September 2011).
5. However, there is an exception for aged care in certain circumstances. If you own your former home, move into an aged care facility and rent out all or part of your home, that rent will be excluded from your pension income test for as long as you pay either an accommodation bond by way of periodic payments or an accommodation charge. The bond applies in low care and extra services care while the charge applies in high care. The bond can be paid by way of lump sum, periodic payments or a combination of these. The charge is always a periodic payment.
Pension assets test
6. Generally, the assets test for pension purposes is again comprehensive and works by reducing your pension by $1.50 for every $1,000 worth of net assets you own above a certain threshold. The threshold varies according to whether you are single or partnered, a full or part pensioner, and a homeowner (which is assumed in this article) or a non-homeowner.
7. Gifts exceeding $10,000 pa or $30,000 over 5 years, will be deemed to be ‘assets’ for the purposes of the pension assets test.
8. However, if you move into an aged care facility the market value of your home will be excluded for up to 2 yearsfrom when you enter care or, if your partner resides there, for as long as he or she continues to reside there. Extensions to this period may apply in certain circumstances.
Income or assets test?
9. Whichever of the income or assets test results in the greater reduction of your pension prevails. However, in relation to your former home, the exclusion of rental income and its market value in certain circumstances if you move into aged care reduces or delays the effect of those tests. Of course, other income or assets may reduce or eliminate your pension entitlements.
The bottom line
10. You may rent out your former home without that income reducing your pension if you move into an aged care facility and pay either an accommodation charge in high care or while ever you pay an accommodation bond by way of periodic payments in low care or extra services care.
11. Alternatively, you can keep your home – with or without renting it out – and move into aged care without the market value reducing your pension for up to two years or, if you have a partner, for as long as your partner continues to reside there.
AGED CARE FEES
12. There are three types of care levels available in permanent residential aged care:
(a) low care
(b) high care, or
(c) extra services care
13. There are a number fees that may be payable by you when in an aged care facility:
(a) in all levels of care
(i) the basic daily fee, and
(ii) the income tested daily fee if your income exceeds a certain threshold, and
(b) in low care or extra services care, an accommodation bond, or
(c) in high care, an accommodation charge, and
(d) in extra services care, an extra services fee.
14. Generally, the Aged Care Act and the Veterans Entitlements Act use the tests outlined above under the Social Security Act but modified at times or having a different end-result.
Basic daily fee
15. The Basic daily fee is equivalent to 84% of the maximum single age pension (SAP), being $41.34/day as at 20 September 2011. If your income exceeds a certain threshold this fee may be slightly reduced to between 78% and 83% of the SAP as a ‘phased resident’.
Income tested daily fee
16. The Income tested daily fee only applies if you receive a certain range of income. This will result in you having to pay a fee equivalent to 5/12’s of that range of income. The range includes any pension income (excepting the pension supplement) and the deemed income from financial assets mentioned above. The range is currently roughly between $21,000 and $82,000 pa. Income exceeding $82,213.77 attracts no greater fee, the maximum fee being $66.43/day as at 20 September 2011.
17. However, as with the age pension income test, any rent from your former home is exempt while ever you are in permanent residential aged care paying an accommodation bond by way of periodic payments or an accommodation charge. In these circumstances, receiving rental income from your home will not increase your aged care fees.
Bond or charge exemption
18. As to the accommodation bond or charge, you will be fully exempt from paying either if your assets are less than the threshold mentioned above (2.25 x SAP, or $40,500 as at 20 September 2011).
19. More generously than is the case with the age pension, ‘your assets’ will exclude the market value of your home if, when you move into permanent aged care, any of the following people still live in your home:
(a) your partner or dependent child
(b) a pensioner who has cared for you for the last two years, or
(c) a pensioner who is a close relative who has lived there for the last five years.
Bond
20. The amount of the bond is by agreement reached with the aged care provider, as long as you still have assets exceeding the threshold of (2.25 x SAP) after paying the bond. You can sell your home to pay the bond fully by way of a lump sum, and invest any surplus. The surplus will normally be ‘income’ relevant to the age pension income test and also to the aged care Income tested daily fee, including deemed income from ‘financial investments’. The amount of the lump sum bond is exempt from the age pension assets test. So, selling your home will not adversely affect your pension entitlements to the extent that you use the sale proceeds to pay the lump sum bond.
21. As mentioned above, if you elect to pay the bond in whole or in part by way of periodic payments, then for as long as you do so any rent from the former home will be exempt income for the purposes of both the Income tested daily fee in the aged care facility and for the income test for the age pension.
Charge
22. The maximum charge is determined by the Department of Health & Ageing, being $32.38/day as at 20 September 2011. As mentioned above, this applies in high care.
23. If your net assets are between (2.25 x SAP) and a certain threshold (6.02 x SAP, or $107,850.40 as at 20 September 2011), the charge will be less. It will be determined according to the following formula: {[your total net assets – (2.25 x SAP)]/2,080}.
24. As mentioned above, while you pay an accommodation charge any rent from your former home will be exempt income for the purposes of both the Income tested daily fee in aged care and for the income test for the age pension.
The bottom line
25. Any bond for low care or extra services care paid by way of lump sum will be excluded from the age pension assets test. So, selling your home will not reduce your age pension entitlements to the extent that the sale proceeds are used to pay the lump sum bond.
26. If you pay the bond in low care in whole or in part by way of periodic payments, or in high care you pay an accommodation charge, retain your home and rent it out to fund these payments, that rent will neither increase your aged care fees and nor reduce your pension entitlements.
CONCLUSIONS
27. Given the concessional treatment accorded to both the market value of, and the rental income from, your former home if owned by you when you move into aged care, the decision on whether to sell or rent probably has more to do with your other income and assets apart from your former home. Remember that the exemption of the market value of your home from the assets test for the age pension is limited to two years from you enter care, unless (and for as long as) your partner still lives there.
28. There are many permutations and variations to the above ‘rules of thumb’ that can apply in particular circumstances, for example
(a) whether you are partnered or not,
(b) if you are partnered, whether your partner moved into aged care before you,
(c) whether you are a full or part pensioner,
(d) whether you are a ‘phased’ resident under the Aged Care Act, and
(e) when you move, or moved, into residential aged care.
Always get timely professional advice.
Richard McCullagh BA LLB
26 October 2011