Residents who move into residential aged care from 1 January 2017 and rent their former home will receive less generous Centrelink/DVA assessments due to changes in effect.
The rental income from a former home will be included as assessable income in the Centrelink/DVA income test for clients who enter residential aged care on or after 1 January 2017. The asset test exemptions will also only apply for up to two years unless a spouse is still living in the home.
Background
A common strategy used in aged care has been to rent the former home and ensure that some of the accommodation payment is paid as a daily accommodation payment (DAP) or daily accommodation contribution (DAC). Under this strategy, the client remained a homeowner indefinitely (not just two years) when determining age/service pension entitlements, with the home remaining an exempt asset and the rental income also being exempt under the income test.
The exemptions have been closed off for clients entering care from 1 January 2017.
The new rules to calculate Centrelink/DVA entitlements
If a client enters residential care from 1 January 2017, regardless of how they pay the accommodation payment the client will remain a homeowner under the assets test for a maximum of two years. At the end of this period (or when the home is sold) the person becomes a non-homeowner and the net market value of the home is included as an assessable asset.
If the former home is rented, the taxable rental income is assessable income under the income test - no exemption period applies under the income test.
What it means for clients
The new rules may reduce the amount of pension otherwise payable to residents who keep their former home. This adds more pressure on cashflow and may make it more difficult for clients to afford residential care.
This may increase interest in strategies such as:
Sell the home
Pay a part RAD and request the DAP to be deducted from the RAD
Use a reverse mortgage or aged care loan to access equity in the home.