How the family home can affect aged care fees

One of the key tasks for anyone assisting an elderly relative with the move into aged care is to investigate the various fees and charges, some of which are subject to both assets and income means tests. As the family home is often the largest asset and can be a source of income if rented out, it’s particularly important to understand how it is treated in relation to these tests[1].

Assets test

For individuals entering aged care the value of the family home is not counted as an asset if it is occupied by:

  • a partner or dependent children,
  • a carer who is eligible for government income support and who has been living there for at least two years, or
  • a close relative who is eligible for income support and has been living there for at least five years.

However, even if that is not the case, the value of the family home that is counted as an asset is capped at $166,707[2]. If the actual value is less than the cap then market value applies.

For a couple where neither partner is living in the family home, half of the net market value of the home will be included as an asset for each of them, up to the cap.

 

Income test

For people who entered aged care between 1 July 2014 and 31 December 2015, rent on the family home is exempt from the income test only if they are paying some level of daily accommodation payment.

Where aged care commenced after 1 January 2016, net rental income is assessable.

Split by health

Eric, 85, and Wendy, 87, own a home valued at $650,000. In June 2018 poor health made it necessary for Eric to move into aged care. Wendy remained in the family home so the house was exempt from the assets test, and as there was no rental income, there was no impact on the income test.

Reunited

In November 2018 Wendy’s increasing frailty also saw her entering residential care, fortunately in the same facility as Eric. Their former home was rented out and became assessable as an asset. As the value of the home is more than twice the current cap, they each have $166,707 included in their assessed assets.

Under the income test, half the net rental income is applied to each of their assessments.

Expert help

Everyone’s story is different so it’s crucial to seek professional advice before making any final decisions about selling a family home.

More information:

My Aged Care website www.myagedcare.gov.au – “Considering aged care home – Fees and charges”; “Income and assets assessment for aged care home costs”

 

What about a ‘granny flat’?

Aside from structured residential care, there are several choices of accommodation older Australians may consider when they can no longer live in their own home.

One option is living with a family member or friend. This arrangement – if formalised – is generally considered as a ‘granny flat interest’ and, as usual, Centrelink has set strict criteria that must be met if you are to retain some or all of your pension entitlements.

For age pensioners any change in living arrangements may affect Centrelink entitlements so it is important to consider what this means.

When is a granny flat not a granny flat?

The usage of the term ‘granny flat’ in this instance is not referred to as a dwelling. It is an agreement for accommodation for life. In fact, a granny flat interest can describe any type of dwelling – the only difference is that you are not permitted to have any legal ownership of that dwelling

A ‘granny flat interest’ is created when you exchange payment (assets, cash or both) for a right to live in a dwelling on someone else’s property for life. Any payment made for that interest is referred to as an Entry Contribution, which is assessed by Centrelink under the “Reasonableness Test”.

How does Centrelink value a ‘granny flat interest’?

Centrelink generally values the granny flat interest as the same amount that is paid for the arrangement. For instance, when the amount paid is one of the following:

  • Transfer of the title of your home to someone else whilst retaining the right to live in that home for the rest of your life. To qualify for this, your home must have been totally exempt from the asset test.
  • Payment to have a granny flat built on someone else’s property or to have their home converted for your accommodation needs and obtaining the right to live in that home for the rest of your life.
  • Buying a property in someone else’s name and establishing a right to reside there for the rest of your life.

Centrelink assessment

You are assessed as a homeowner if your Entry Contribution is higher than the Extra Allowable Amount (the difference between the homeowner’s and non-homeowner’s assets under the assets test). In this case your Entry Contribution is not counted as an asset under the Assets Test.

If your Entry Contribution is less than the Extra Allowable Amount then you are not considered to be a homeowner, but the amount of your Entry Contribution will be assessed as an asset.

However, caution should be used when structuring the arrangement as there are some circumstances where the granny flat interest is valued differently by using the ‘Reasonableness Test’ amount rather than the paid amount.

Centrelink will assess any amount paid above the granny flat value as a gift and deprivation rules will apply, which will affect your pension payments.

It’s complicated

There are many technicalities and points to consider when moving into a ‘granny flat’ and each individual’s circumstances are affected differently. We recommend those considering setting up a granny flat arrangement to seek relevant legal and financial advice beforehand.

More information:

Human Services website www.humanservices.gov.au “Granny flat right or interest”

[1] Note that there are some important differences in the way the family home is assessed by Centrelink and the Department of Veterans’ Affairs (DVA) for aged pension or DVA pension purposes. This article only covers the rules that apply to aged care.

[2] As at September 2018

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