Aged care strategies

Considering evolving policies and retirement needs, this issue navigates tax strategies, funding and transitions to aged care and discusses key considerations for this transition.

Key Superannuation Strategies for Aged Care

Superannuation is critical to funding aged care services in retirement. Proper planning around accessing superannuation can minimise tax impacts and optimise retirement income. Some of the key strategies are as follows:

• Transition to Retirement (TTR) Strategy

• • If you’re between the preservation age and 65, you can access part of the super while working through a Transition to Retirement (TTR) income stream. This can provide an income boost or a way to gradually reduce working hours while receiving a steady income from super.
  • Earnings on assets supporting a TTR pension are tax-free if you are 60 or over. Also, from age 60, withdrawals from the superannuation income stream are tax-free.

• Re-contribution Strategy:

• • If the superannuation balance includes taxable and tax-free components, you can withdraw a lump sum and re-contribute it as a non-concessional (after-tax) contribution. This can reduce the taxable portion of the super, which can lead to lower taxes on super death benefits to non-dependents (such as adult children).

• Downsizer Contributions:

• • If you’re 55 or older (since 1 January 2024), you can make a one-off, non-concessional contribution of up to $300,000 (per person) from the sale of the primary residence. This can help increase super savings and fund future aged care needs.
  • Downsizer contributions are not subject to the usual super contribution caps and don’t require meeting a work test.

• Age Pension and Superannuation:

• • Once you reach the pension age (increasing to 67), the superannuation balance will be counted in the assets and income tests for Age Pension eligibility. Effective super management may allow you to receive a partial Age Pension alongside superannuation income.

Tax Considerations for Aged Care

Various costs are involved in residential aged care, such as accommodation payments, means-tested care fees, and basic daily care fees. Proper planning is essential to manage these costs tax-efficiently.

• Accommodation Payments: Refundable Accommodation Deposits (RADs) are lump-sum payments to aged care facilities. They are not subject to tax. However, if you choose a combination of RAD and Daily Accommodation Payment (DAP), the DAP is paid from income and superannuation, which may have tax implications.

• Means-Tested Care Fees: Means-tested fees depend on assets and income, which includes superannuation. Careful planning can help reduce these fees by efficiently structuring income and asset withdrawals.

• Gifting: Assets to family members may reduce the assessable assets and income, helping to minimise aged care fees or increase pension eligibility. However, gifting rules apply, meaning you can only gift $10,000 per financial year or $30,000 over five years without affecting the Age Pension or aged care fees.

• Pension Income: If you’re receiving a pension from the super fund, income drawn from a tax-free pension account (for individuals aged 60 and over) will not be taxed. This can help manage tax obligations while covering aged care costs.

• Rental Income: If you rent out a family home to pay for aged care fees, rental income may be taxable. However, you may be able to offset some of this income through deductions for expenses such as interest on a mortgage, repairs, and maintenance.

• Using Super for Aged Care Costs: Drawing down superannuation in lump sums or as an income stream to cover aged care costs may be a tax-effective way to manage expenses, mainly if you are over 60 and withdrawals are tax-free. 

• Retaining or Selling the Family Home
  • When transitioning to residential aged care, one of the most significant decisions is whether to sell the family home or rent it out to fund the Refundable Accommodation Deposit (RAD) or other aged care fees.
  • Selling may free up cash to pay a RAD, while renting may provide ongoing income but could have tax implications (assessable income) and impact Age Pension.
• Aged Care and Centrelink
  • When calculating aged care fees or pension eligibility, superannuation and other assets will be assessed using Centrelink’s means tests.
  • Deeming rates apply to financial assets, including superannuation income streams and bank accounts, to calculate income for Centrelink purposes. Lowering assessable income can help reduce aged care fees or increase government support.

• Home as an Exempt Asset: While you remain living in the home, it is exempt from Centrelink’s asset test. However, once you move into permanent residential aged care, the home is only partially exempt (up to a capped value), potentially increasing the assessable assets for aged care fees and Age Pension calculations.

 Transitioning to Aged Care – Key Considerations

Transitioning to aged care in Australia is a significant life decision, and several key considerations need to be addressed to ensure a smooth and appropriate transition. These considerations include:

Assessment and Eligibility

• Aged Care Assessment Team: An ACAT (Aged Care Assessment Team) or ACAS (Aged Care Assessment Service in Victoria) assessment is required to determine government-subsidised aged care services eligibility. The assessment evaluates the level of necessary care (home care, residential care, respite care).
• Types of Care: There are different care options, including:
  • In-home care (for those who want to stay at home with support).
  • Residential aged care (for full-time care in an aged care home).
  • Respite care (short-term care to provide caregivers with a break).
  • Retirement villages (offering independent living with access to services).

Costs

• Upfront Fees and Ongoing Costs: Understanding the cost of aged care services is essential. This can include:
  • Accommodation fees (refundable or non-refundable deposits for residential aged care).
  • Means-tested care fees (based on financial situation).
  • Basic daily fees (contribution toward care services).
  • Additional services (for extra services, like premium amenities).
• Government Subsidies: The government heavily subsidises aged care services, but the level of subsidy is based on the individual’s financial assessment.

Choosing the Right Aged Care Provider

• Location and Facility: Proximity to family and friends, the quality of the facility, and availability of activities and services should be considered. Visit different facilities to get a feel for the environment, staff, and overall care quality.
• Staffing and Services: Investigate staff-to-resident ratios, qualifications, and the quality of care services (e.g., medical care, recreational activities, and specialised services for conditions like dementia).

Emotional and Psychological Impact

• Adjustment to Change: Moving to aged care can be an emotional process for the individual and their family. A support system is crucial to ensure the emotional well-being of the person transitioning, as they may feel a loss of independence or experience anxiety about the change.
• Family Involvement: Involving family members in decision-making can help ease the transition and provide emotional support.

Legal and Administrative Issues

• Enduring Power of Attorney (EPOA): Legal arrangements for managing finances and healthcare decisions are essential. An EPOA allows someone trusted to manage financial and legal matters if the person cannot do so.
• Advanced Care Directives: These guide medical treatments and care preferences should the individual become unable to communicate their wishes.

Health and Care Needs

• Medical Considerations: If the individual has specific health needs (e.g., dementia, physical disabilities, or chronic illnesses), it is essential to choose an aged care facility or home care provider that can meet these requirements with the appropriate medical care and support.

Cultural and Personal Preferences

• Culturally Appropriate Care: Many aged care providers offer culturally sensitive services, including language support and community connections for non-English-speaking people.
• Personalization of Care: It’s important to consider how much the aged care provider can cater to personal preferences, such as dietary needs, religious practices, and lifestyle choices.

Government Resources and Support

• My Aged Care: This government portal is crucial for information about aged care services, providers, and financial assistance. It helps individuals navigate the aged care system, guiding eligibility, services, and funding options.

Considering these factors and seeking appropriate professional advice, the transition to aged care in Australia can be planned with care and sensitivity, ensuring the individual’s better quality of life.

Superannuation Changes

• Reduction of the Downsizer Age to 55: Effective 1 January 2024, the eligibility age for downsizer contributions was reduced from 60 to 55. This allows more individuals to bolster their super balance by selling their family home.
• Legislative Cap on Superannuation Balance
  • The government introduced a $3 million balance cap on superannuation, effective 1 July 2025. Individuals with super balances exceeding this cap will pay an additional tax of 15% on earnings on the excess.

Conclusion

Developing an effective aged care tax strategy involves carefully managing the superannuation, pension entitlements, and assets. Understanding the tax impacts of superannuation withdrawals, managing aged care costs, and planning around Centrelink and income tests can optimise the financial situation during retirement and aged care transitions. Consulting with a financial advisor can provide tailored advice to ensure compliance with regulations and maximise the benefits.

Consulting an expert in aged care can help you make informed decisions about funding options, using assets (like the family home), and managing ongoing costs. They can also advise on government entitlements, such as the Age Pension.