Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 18 Pension means testing for aged care residents

Outline of chapter

Schedule 18 to the Bill introduces the 2015-16 Mid-Year Economic and Fiscal Outlook measure, Age Pension - aligning the pension means testing arrangements with residential aged care arrangements.

Background

This Schedule amends the Social Security Act and Veterans' Entitlements Act to remove an exemption from the income test in those Acts that allows aged care residents to rent their former residence and have the rental income excluded from their assessable income. The removal of this exemption will only apply to people who enter residential or flexible aged care services on or after the commencement of the Schedule.

This Schedule also amends the Social Security Act and Veterans' Entitlements Act to remove an exemption from the assets test in those Acts that provides an indefinite assets test exemption for the former principal residence from the pension assets test where the property is rented and aged care accommodation costs are paid on a periodic basis. A person who enters a residential or flexible aged care service after the commencement of this Schedule can still benefit from provisions in the Social Security Act and Veterans' Entitlements Act that treat a person's former residence as their principal home for a period of up to two years from the day on which the person enters care (unless the home is occupied by their partner, in which case it will continue to be exempt).

The amendments in this Schedule allow a person who enters a residential or flexible aged care service before the commencement of this Schedule to continue to be eligible for the income test and assets test exemptions if they leave aged care and re-enter residential or flexible aged care services within 28 days. This includes where they move to a new aged care facility.

The amendments made by this Schedule commence the first 1 January or 1 July to occur after the day this Act receives the Royal Assent.

Explanation of the changes

Item 1 adds a note at the end of paragraphs 8(8)(zn), (zna) and (znaa) of the Social Security Act that refers to new subsections 8(10A) and 8(10B) of the Social Security Act.

Item 2 inserts new subsections 8(10A), (10B) and (10C) in the Social Security Act.

These subsections make amendments to the income test in section 8 of the Social Security Act.

New subsection 8(10A) provides that paragraphs 8(8)(zn), (zna) and (znaa) of the Social Security Act do not apply in relation to a person who first enters a residential care service or a flexible care service on or after the commencement of this subsection.

Paragraphs 8(8)(zn), (zna) and (znaa) of the Social Security Act exclude from the definition of income any rent a person receives from their principal home that they, or their partner, earns, derives or receives from another person while liable to pay:

•

an accommodation charge;

•

all or some of an accommodation bond by periodic payments; or

•

all or some of a daily accommodation payment or a daily accommodation contribution.

New subsection 8(10A) applies so that if a person first enters a residential care service or a flexible care service on or after the commencement of the subsection, this rent will no longer be excluded from the person's income under section 8 of the Social Security Act. As a consequence of new subsection 8(10A), the rent will be treated as income for means testing purposes.

New subsection 8(10B) provides that paragraphs 8(8)(zn), (zna) and (znaa) do not apply, and never again apply, in relation to a person if:

(a)

the person enters a residential care service or a flexible care service on or after the commencement of this subsection; and

(b)

that entry occurs more than 28 days after the day the person last ceased being provided with residential care or flexible care through a residential care service or a flexible care service (other than because the person was on leave).

This subsection ensures that people in residential care or flexible care prior to the commencement of this subsection who leave care for a period of up to 28 days (excluding periods of leave) can re-enter residential care or flexible care on or after the commencement of this subsection and have rent excluded from their income in accordance with paragraphs 8(8)(zn), (zna) and (znaa) of the Social Security Act.

New subsection 8(10C) provides that where an expression is used in new subsections 8(10A) or 8(10B) and is also used in the Aged Care Act 1997 the expression will have the same meaning in that subsection as in that Act.

Item 3 inserts new subsections 11A(8A), (8B) and (8C) in the Social Security Act.

These new subsections make amendments to section 11A of the Social Security Act.

Section 11A sets out the definition of 'principal home' for the Social Security Act.

New subsection 11A(8A) provides that subsection 11A(8) of the Social Security Act does not apply in relation to a person who first enters a residential care service or a flexible care service on or after the commencement of this subsection.

Subsection 11A(8) of the Social Security Act allows a person to treat their former residence as their principal home where the Secretary is satisfied that they have left their former principal home to enter into a care situation. The person's former residence will continue to be treated as their principal home if the person, or the person's partner, is earning, deriving or receiving rent for the residence from another person and the person is liable to pay one of a range of aged care payments detailed in subsection 11A(8).

By treating their former residence as a 'principal home' a person can treat their former residence as an exempt asset for the purposes of the assets tests in the Social Security Act.

The effect of new subsection 11A(8A) is that a person who first enters a residential care service or a flexible care service on or after the commencement of this subsection will not be able to rely upon subsection 11A(8) to treat their former residence as their 'principal home'. The person therefore cannot rely upon subsection 11A(8) to treat their former residence as an exempt asset under the Social Security Act.

New subsection 11A(8B) provides that subsection 11A(8) does not apply, and never again applies, in relation to a person if:

(a)

the person enters a residential care service or a flexible care service on or after the commencement of this subsection; and

(b)

that entry occurs more than 28 days after the day the person last ceased being provided with residential care or flexible care through a residential care service or a flexible care service (other than because the person was on leave).

This subsection ensures that people who are in residential care or flexible care prior to the commencement of this subsection and leave care for a period of up to 28 days (excluding periods of leave) can re-enter residential care or flexible care on or after the commencement of this subsection and treat their former residence as their principal home under subsection 11A(8) of the Social Security Act.

New subsection 11A(8C) provides that where an expression is used in new subsections 11A(8A) or 11A(8B) and is also used in the Aged Care Act 1997 the expression will have the same meaning in that subsection as in that Act.

Item 4 adds a new note (Note 4) at the end of paragraph 5H(8)(nc) of the Veterans' Entitlements Act. This new note refers to new subsections 5H(11A) and (11B).

Item 5 adds three new notes (Notes 1-3) at the end of paragraph 5H(8)(nd) of the Veterans' Entitlements Act. This new note refers to subsections 5N(2), 5LA(8), 5LA (9) and new subsections 5H(11A) and (11B).

Item 6 adds a new note at the end of paragraph 5H(8)(nf) of the Veterans' Entitlements Act. This new note refers to new subsections 5H(11A) and (11B).

Item 7 inserts new subsections 5H(11A), (11B) and (11C) in the Veterans' Entitlements Act.

These subsections make amendments to the income test in section 5H of the Veterans' Entitlements Act.

New subsection 5H(11A) provides that paragraphs 5H(8)(nc), (nd) and (nf) of the Veterans' Entitlements Act do not apply in relation to a person who first enters a residential care service or a flexible care service on or after the commencement of this subsection.

Paragraphs 5H(8)(nc), (nd) and (nf) of the Veterans' Entitlements Act exclude from the definition of income any rent a person receives from their principal home that they, or their partner, earns, derives or receives from another person while liable to pay:

•

an accommodation charge;

•

all or some of an accommodation bond by periodic payments; or

•

all or some of a daily accommodation payment or a daily accommodation contribution.

New subsection 5H(11A) applies so that if a person first enters a residential care service or a flexible care service on or after the commencement of this subsection, this rent will no longer be excluded from the person's income under section 5H of the Veterans' Entitlements Act. As a consequence of new subsection 5H(11A), the rent will be treated as income for means testing purposes.

New subsection 5H(11B) provides that paragraphs 5H(8)(nc), (nd) and (nf) of the Veterans' Entitlements Act do not apply, and never again apply, in relation to a person if:

(a)

the person enters a residential care service or a flexible care service on or after the commencement of this subsection; and

(b)

that entry occurs more than 28 days after the day the person last ceased being provided with residential care or flexible care through a residential care service or a flexible care service (other than because the person was on leave).

This subsection ensures that people in residential care or flexible care prior to the commencement of this subsection who leave care for a period of up to 28 days (excluding periods of leave) can re-enter residential care or flexible care on or after the commencement of this subsection and have rent excluded from their income in accordance with paragraphs 5H(8)(nc), (nd) and (nf) of the Veterans' Entitlements Act.

New subsection 5H(11C) provides that where an expression is used in new subsections 5H(11A) or 5H(11B) and is also used in the Aged Care Act 1997 the expression will have the same meaning in that subsection as in that Act.

Item 8 inserts new subsections 5LA(8A), (8B) and (8C) in the Veterans' Entitlements Act.

These new subsections make amendments to section 5LA of the Veterans' Entitlements Act.

Section 5LA sets out the definition of 'principal home' for the Veterans' Entitlements Act.

New subsection 5LA(8A) provides that subsection 5LA(8) of the Veterans' Entitlements Act does not apply in relation to a person who first enters a residential care service or a flexible care service on or after the commencement of this subsection.

Subsection 5LA(8) of the Veterans' Entitlements Act allows a person to treat their former residence as their principal home where the Commission is satisfied that they have left their former principal to enter into a care situation. The person's former residence will continue to be treated as their principal home if the person, or the person's partner, is earning, deriving or receiving rent for the residence from another person and the person is liable to pay one of a range of aged care payments detailed in subsection 5LA(8).

By treating their former residence as a 'principal home' a person can treat their former residence as an exempt asset for the purposes of the assets tests in the Veterans' Entitlements Act.

The effect of new subsection 5LA(8A) is that a person who first enters a residential care service or a flexible care service on or after the commencement of this subsection will not be able to rely upon subsection 5LA(8) to treat their former residence as their 'principal home'. The person therefore cannot rely upon subsection 5LA(8) to treat their former residence as an exempt asset under the Veterans' Entitlements Act.

New subsection 5LA(8B) provides that subsection 5LA(8) does not apply, and never again applies, in relation to a person if:

(a)

the person enters a residential care service or a flexible care service on or after the commencement of this subsection; and

(b)

that entry occurs more than 28 days after the day the person last ceased being provided with residential care or flexible care through a residential care service or a flexible care service (other than because the person was on leave).

This subsection ensures that people in residential care or flexible care prior to the commencement of this subsection who leave care for a period of up to 28 days (excluding periods of leave) can re-enter residential care or flexible care on or after the commencement of this subsection and treat their former residence as their principal home under subsection 5LA(8) of the Veterans' Entitlements Act.

New subsection 5LA(8C) provides that where an expression is used in new subsections 5LA(8A) or 5LA(8B) and is also used in the Aged Care Act 1997 the expression will have the same meaning in that subsection as in that Act.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Pension means testing for aged care residents

This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview of the Schedule

This Schedule will improve the sustainability and equity of the income support system by removing the social security income and assets test exemptions that are available to aged care residents who are renting their former home and paying their aged care accommodation costs by periodic payments.

New entrants to residential and flexible aged care from the commencement of this Schedule have:

1)

the net rental income from their former home assessed under the social security income test; and

2)

the value of their former home assessed under the social security assets test after two years, unless the home is occupied by a protected person, such as their partner, in which case it will continue to be exempt.

The changes will not impact income support recipients who enter residential and flexible aged care before commencement provided they remain in care or are only absent from care for a period not exceeding 28 days. They will continue to be eligible for these income and assets test exemptions.

This Schedule commences on the first 1 January or 1 July to occur after the day this Act receives the Royal Assent

Human rights implications

This Schedule engages the following human rights:

Right to social security

Article 9 of the International Covenant on Economic, Social and Cultural Rights (ICESCR) recognises the right of everyone to social security. This right requires a social security system to be established and that States Parties must, within their maximum available resources, ensure access to a social security scheme that provides a minimum essential level of benefits to all individuals and families that will enable them to acquire at least essential health care, basic shelter and housing, water and sanitation, foodstuffs, and the most basic forms of education.

This Schedule is consistent with supporting the right to social security.

The social security system uses income and assets testing to ensure the social security system:

•

is sustainable, by reducing pension outlays

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is targeted to those in need, by reducing pension support to those who have the financial capacity to be more self-reliant

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encourages self-provision, by progressively withdrawing pension payments as an individual's level of income and asset increases to ensure that people with additional private income and assets are better off than those relying solely on the pension; and

•

is fair, by ensuring individuals with similar levels of income and assets receive similar levels of assistance through the pension.

While the effect of this Schedule will be that pension payments for some recipients who enter aged care from the commencement of this Schedule will be lower than would have been the case if the income and assets test exemptions had not been removed, those affected will hold substantial levels of private income and assets. They have the capacity to be more self-reliant and it is appropriate that they:

•

use their income and assets to help support themselves; and

•

do not get higher pension payments that other people in aged care who have similar levels of income and assets, but who are not eligible for the income or assets test concessions.

Pensioners who are affected by the changes and who receive larger amounts of rental income will better off in terms of their overall income than if they did not receive income from rent. This is because of the design of the pension income test, which reduces pension by 50 cents for every $1 of private income over the pension income test "free areas", meaning that pensioners are always better off in terms of their total income when they have private income. The pension income test only assesses net rent received, that is, the rent received less legitimate expenses, such as rates.

Pensioners who are affected by the changes and receive modest amounts of rent will not have their pension reduced if their total private income is less than the pension income test free areas.

Where the value of a pensioner's former home is assessed for social security purposes after two years, there are asset test "free areas" that will allow single non-homeowner pensioners to have assets of up to $450,000 before their pension is reduced and about $747,000 before their pension is cancelled as at 1 January 2017. These amounts are higher again for couples.

If a pensioner's payment is reduced or cancelled because their assessable assets exceed those amounts, they have the option of continuing to rent the home, or selling the home and investing and/or drawing down the proceeds, to compensate for the reduction in pension.

Affected pensioners may also have the option of obtaining additional income through the Pension Loans Scheme. The Pension Loans Scheme is available through Centrelink and the Department of Veterans' Affairs to part-rate pensioners and some self-funded retirees who own real estate. Under this scheme, a person who is of Age Pension age, or the partner of someone who is, may be able to obtain a loan that will bring their fortnightly payment up to the maximum pension rate. Repayments can be made at any time or the debt can be left, including the accrued interest, to be recovered from the person's estate. The loan is secured against the value of any real estate they own.

The current income and assets test exemptions do not require that the amount of rent charged reflects commercial rates, nor is the amount of rent exempted limited to the amount of the aged care accommodation periodic payment. Aged care residents can qualify for the concessions by paying the bulk of their accommodation costs by a lump sum (which is assets test exempt under social security law) and leaving a small portion outstanding to be paid by small periodic payments. In these circumstances, the entire net rent amount is exempted from the pension income test, even though the periodic payment is much less than the rent received, and the indefinite assets test exemption under social security law for the home and the lump sum payment applies.

The current exemption is also inequitable. Net rental income is fully assessed for pensioners in aged care who have a rental property which is not their former home.

If a person leaves aged care and returns to live in their home, their pension income and assets test assessments would be adjusted to reflect that they are no longer renting the home and that the home would be an exempt asset, as it would be their principal home.

Aged care fees and charges are partly based a person's total income, including pension payments with the minimum aged care fee being a percentage of the pension rate. A reduction in pension payments under this measure will reduce a person's total income assessable under the aged care means test, which could lead to a reduction in their aged care fees and charges.

Improving the long-term sustainability of the income support system is important to ensure the income support system will continue to provide an adequate level of support to those in need over the long term.

Conclusion

The amendments in this Schedule are compatible with human rights because they do not limit access to social security.