Australia is facing challenging times on all fronts, but one sector of the economy is facing particularly tough times.
Since COVID-19 struck, the federal government has committed more than $545m in funding to support home care and residential aged care providers, and the government's My Aged Care service. Unfortunately, even that is going to fall a long way short of what is really needed.
This is because COVID-19 represents a far greater cost to the industry than the obvious increased expenses of additional staff, training and personal protective equipment. There is potentially a huge credit crunch looming for the industry's almost $30bn accommodation deposits. This is because the aged care industry works somewhat like a legal Ponzi scheme: incoming residents pay a bond, and when they leave, the bond is refunded to their estate. But there is no legal requirement for the aged care home to hold that money in trust for future withdrawals.
The system works as long as the funds paid to outgoing residents are matched by the funds received from incoming ones. And until recently, they were; there was a waiting list for aged care places. But now the landscape has changed. The number of people entering aged care is dropping, and the number who are dying is increasing. Furthermore, a weak property market, combined with favourable aged care and social security means testing of the former home, means that more and more incoming residents are choosing to pay by daily fee instead of by a one-off lump sum payment.
Industry expert Cam Ansell says, "if Australia follows the UK, we could expect to see $9.5bn of accommodation deposits needing to be refunded by Christmas."
Aged Care Guru Rachel Lane spells it out, saysing, "since July 2014, residents have had the choice of paying for the cost of their accommodation by a lump sum, a daily payment or a combination of the two. The trend has been that more people are choosing to pay by daily payment, or a combination of daily payment and lump sum, than to pay the lump sum in full.
"In the current COVID-19 crisis, aged care homes who have positive cases are not taking new residents, which means that as residents leave the lump sum is not being replaced. No lump sum, no partial lump sum payment, no daily payment. It's not being replaced at all."
Cam Ansell explains: "The situation we have in Australia, asking residents for deposits, is unique to us - it's been essential because funding has been so lean. Accommodation deposits have funded 56 per cent of the industry's assets, and it's worked until now because we have found that when a resident leaves, they are usually replaced with another resident paying a deposit. But with COVID-19 we think that replacement of capital is unlikely and providers will become insolvent unless the government acts."
Accommodation deposits are guaranteed by the government, so don't panic: residents (or their estates) will receive their deposit back. There is also a legislated timeframe, generally 14 days, within which providers must refund the deposit or pay the Maximum Permissible Interest Rate (MPIR) on the overdue amount, which is currently 4.1% p.a.
To date, the guarantee scheme has seen the government repay 260 accommodation deposits, totalling just over $43.5m. The legislation gives the Minister the right to levy residential aged care providers to recoup both the default and administrative costs, but to date this has never been imposed. And it is hard to see how the levy could work in the current situation without strong potential to create a domino effect and send even more providers to the wall. The bottom line for the government is that short term credit may be cheaper than long term collapse.
Noel answers your money questions
Question: My wife is retired and about to turn 66. Her super is in accumulation mode and enables me to draw an aged pension, as it is not an assessable asset for Centrelink. I am 67 and my super is in pension mode, with a balance of 320,000. My wife's super balance is $820,000
When we convert my wife's super to pension mode, it will mean our assessable assets will prevent me being able to continue to obtain the aged pension. So, can we leave her super in accumulation phase indefinitely?
Answer: It's not quite that simple - once your wife reaches pensionable age it will be assessed by Centrelink irrespective of whether it is in pension or accumulation mode. Given that pension mode is a tax-free mode, and accumulation mode is a 15% income tax environment, I reckon your best course of action is to leave the money in accumulation until your wife reaches pensionable age. You should talk to a good advisor to work out the best way to handle your finances to deal with the loss of your pension.
Question: In a recent article you refer to giving one of your children an Enduring Power of Attorney with instructions to withdraw all superannuation when the fund member is close to death. The purpose is to avoid the death tax. I assume this only works if the withdrawal actually takes place before death - in other words if death occurs before the withdrawal is made, then the withdrawal can no longer be made.
Answer: The instructions would need to be received by the fund before death occurred. However, some managed funds require notice before they will pay out which has the potential to cause delays if the assets are held by a self-managed superannuation fund. The length of notice varies from fund to fund so investigate that sooner rather than later. Based on the best information I have received it would appear there will not be a problem if the fund has received the notice to redeem prior to death, and paperwork has been forwarded to the manager of the asset prior to death.
Question: In your recent article about the Commonwealth Seniors Health Card (CSHC) you pointed out that eligibility depended on adjusted taxable income. But how is that calculated when a person does earn income which is taxable but at a level where it is not enough to lodge a tax return. Also, how is a Commonwealth government pension assessed for the card.
Answer: Services Australia General Manager, Hank Jongen says that any taxable Centrelink or Department of Veterans' Affairs payments a person or their partner received in a prior financial year, will count as taxable income for the CSHC income test. The CSHC income test looks at the adjusted taxable income of a customer and their partner, plus deemed income from any account-based income streams they hold.
Applicants must provide evidence of their income for the prior financial year and their account-based income streams, including if these have a grandfathered status. If they have a defined benefit income stream(s), this will already be included in their adjusted taxable income.
As part of the supporting documents required for a CSHC claim, applicants must provide an original Notice of Assessment as issued by the Australian Taxation Office (ATO), their income tax return, and/or a payment summary for the prior financial year.
If they weren't required to lodge an income tax return because they were either under the tax free thresholds or they had an ATO tax offset, they will need to present other documents to verify these income amounts. These include a statutory declaration or non-lodgement advice from the ATO, their tax agent or accountant.
If this isn't possible, they can use the prior financial year. If their income will be lower in the current financial year, for instance, if they've recently retired, they can provide an income estimate instead.
Question: Many self-funded retirees have suffered a severe income reduction in the current crises. If they are over 65, they cannot transfer more contributions to a super fund, where tax is zero in the pension phase, unless they pass a work test. It is very difficult for these people to obtain work, and I and many others would benefit greatly if this test could be abolished.
Answer: I think you need to keep in mind that the combination of various tax offsets mean that a single person can earn $33,088 a year, and a member of a couple $29,783 a year each before tax is payable. You would need to have a large portfolio in your own name to generate an income in excess of these figures. Yes, if you could contribute to super, and then convert it to pension mode, you would be in a zero tax environment but you would have ongoing fees, and the possibility of the death tax if you died and your super was left to a non-dependent.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org