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Retirement
www.fsadvice.com.au Volume 16 Issue 01 I 2021
As can be seen from Table 1, there is a cash flow deficit of $17,721. While Virushka has $50,000 in her bank account, the deficit can be withdrawn from there. While the $50,000 in the bank account may be sufficient to cover the cash flow deficit for about two-and-a-half years, seeing a depleting bank account balance and having no other liquid assets presents a point of worry for Virushka. There would need to be some consideration around how to pay for ongoing aged care fees should Virushka live for longer than twoand-a-half years. Some of the options for clients who have a significant cash flow deficit and a relatively low amount of liquid assets may include the Pensions Loans Scheme to unlock further cash flow by borrowing against the family home, financial support from family, keeping and renting or selling the home.
Renting out the former home—social security and aged care assessment Irrespective of whether the former home is rented out, it is exempt under the social security assets test for two years starting from when Virushka moved into aged care. During this period, Virushka is assessed as a homeowner. After the two-year period, the net value of the family home is assessed as an asset and she is deemed to be a non-homeowner. Table 2. Assets test assessment of the former home
Income test
If the former home is rented out, the assessable income is the same from a social security and aged care perspective. However, the actual amount of assessed income depends on whether the client lodges a tax return. Where the client lodges a tax return, usually the rental income is reduced by expenses incurred in deriving the income. Typically, expenses such as real estate agent fees, water and council rates, interest on borrowings and repair costs are allowable deductions. However, the following tax deductions are non-allowable from a social security and aged care perspective: • Capital depreciation • Special building write-off • Construction costs. Where the client does not lodge a tax return, or has yet to lodge a tax return, one-third of the rental income is deemed to be an allowable deduction against the rental income. If the client has a loan on the property and the loan was taken out in relation to purchasing the property, interest expense is allowed as a further deduction from the two-thirds assessable amount. If we assume a 3% net rental yield so that Virushka generates $30,000 p.a. from renting out the family home valued at $1 million, her cash flow comparison is shown in Table 3. Table 3. Cash flow comparison upon renting out the family home
Aged care assessment
Social security assessment
Resided in by a spouse
Exempt
Exempt
Cash flow
Resided in by a protected person* such as an eligible carer or a close relative** other than a spouse
Exempt
Exempt for two years from when the aged care resident (for couples, the second spouse) moved out of the former home.
Resided in by a nonprotected person Assessed but capped (currently $171,535) Vacant
Sold
During the two-year period, the person is assessed as a homeowner. After the two-year period, the net value of the former home is assessed as an asset and the person is assessed as a non-homeowner.
Proceeds assessed immediately depending on where they are invested. For a couple where one spouse remains in the former home, sale proceeds intended to purchase new home could be exempt under assets test for a period of up to 12 months or extended up to 24 months upon meeting certain criteria.
Source: Challenger * A protected person is a: • spouse • carer who has lived in the home for at least the last two years and is receiving or eligible to receive an income support payment • close relative who has lived in the home for at least the last five years and is receiving or eligible to receive an income support payment, or • dependent child aged under 16 or a full-time student aged under 25. ** A close relative is defined as a parent, sibling, child or grandchild.
In Virushka’s case, the family home is neither resided in by a spouse nor a protected person. This means that for two years upon leaving the family home to move into aged care, from a social security perspective, the home is exempt under the assets test and she is assessed as a homeowner. From an aged care perspective, as the family home is not resided in by a protected person, the home is assessed as an asset but capped (currently $171,535).
THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•
Home not rented
Home rented
Age Pension
$24,552
$11,803
Rental income
–
$30,000
Investment income
$500
$500
Incidental expenses
($2,600)
($2,600)
Total
$22,452
$39,703
Basic daily fee
$19,071
$19,071
DAP
$20,500 $20,500
Means-tested care fee
$602
Total
Nil $2,511
Tax
Nil $2,511
Net cash flow
(17,721)
Aged care fees
$6,993
($9,372)
Source: Challenger
What is apparent from Table 3 is that despite receiving net rent of $30,000 p.a., her net cash flow deficit has only reduced by $8,349. The remaining $21,651 has been consumed by reduced Age Pension ($12,749), increased means-tested care fee ($6,391) because of the rental income being assessed and increased tax liability of $2,511, resulting in a net cash flow gain of $8,349 compared to not renting out the family home. When the family home is rented out, it may not mean that the entire rental income is retained to fund ongoing aged care fees—there may be a reduced Age Pension, increased means-tested care fee and increased tax liability. We have not yet discussed a further leakage from the rental income—which is land tax. We will come to this point later in the paper.
FS Advice
