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Opinion: Tightening the bond



Following is a summary of the nature and implications of the Aged Care Amendment Bill 2011for aged care providers.
It is written by Arthur Koumoukelis and Jessica Smythe of Gadens Lawyers, Sydney, reprinted with permission by Australian Ageing Agenda.

Above:  Arthur Koumoukelis

As part of the Government’s health and hospital reform agenda to better protect accommodation bonds paid by residents of aged care facilities and improve the complaints scheme, the Minister for Mental Health and Ageing, Mark Butler, introduced the Aged Care Amendment Bill 2011 (Cth) (the Bill) to parliament on 27 May 2011.  

The Bill implements the Department of Health and Ageing’s Consultation Paper, Enhanced Prudential Regulation of Accommodation Bonds, February 2011 (Paper).  The Bill’s primary intention is to provide clarity about the uses of accommodation bonds. 

Once the Bill is passed, the reforms are scheduled to commence on 1 October 2011.  

In summary

The effect of the Bill is that accommodation bond funds may only be used for capital expenditure for premises relating to residential or flexible aged care services.  The definition of capital expenditure is explained further below and includes repaying debt associated with capital expenditure and refunding existing bonds.  

The Bill counters the new limitations by removing the current restrictions on the use of income derived from bonds.  

To ensure compliance, the Bill introduces a criminal penalty for approved providers and key personnel who do not use bonds for their permitted use. 

As a secondary focus, the Bill introduces reforms to the management and resolution of complaints about aged care services.  To reflect an increased consumer focus, the Bill seeks to redefine the Aged Care Complaints Investigation Scheme’s priorities from investigation to resolution of complaints.  As such, the Bill proposes to replace the Investigation Principles with new Complaints Principles.  Under the new principles, consumers will be provided with a greater range of alternative dispute resolution options, including early resolution, conciliation and mediation.

Changes relating to the Complaints Principles will come into effect on 1 September 2011.  

Use of accommodation bonds

The introduction of the Bill will change the purposes for which accommodation bonds can be used.  Currently, accommodation bonds may only be used for a purpose related to the provision of ‘aged care’ or ‘flexible care’ to care recipients.  In practice, this has been interpreted to extend to operational needs.

The Bill removes this principle and introduces the concept of ‘permitted use’ to identify those matters that may be financed by accommodation bonds. Use of a bond is permitted if it is:

1.    used for capital expenditure, including any of the following if it is reasonable in the circumstances:

(a)                expenditure to acquire land on which a facility that provides residential care or flexible care is built or is to be built;
(b)                expenditure to acquire, erect, extend or significantly alter premises used or proposed to be used for providing residential care or flexible
care;
(c)                on initial construction or following an extension, significant alteration or significant refurbishment, expenditure to acquire or install furniture, fittings or equipment for premises used or proposed to be used for providing residential care or flexible care; and 
(d)                expenditure that is directly attributable to doing a thing mentioned in paragraph (a), (b) or (c).

It is important to note that capital expenditure does not include: routine repairs and maintenance; routine replacement of furniture (as opposed to significant refurbishment); or payment of disproportionate fees to building contractors or others.

2.    invested in financial products, including the following:

(a)                any deposit taking facility made available by an Authorised Deposit-taking Institution;
(b)                a Government issued debenture, stock or bond; or
(c)                a legal or equitable right or interest, or an option to acquire a right or interest in a registered scheme;

3.    used to make a loan, provided that the loan is made to a company on a commercial basis in written form and the funds are used for either capital expenditure of invested in financial products; 

4.    used to refund accommodation bond balances; and

5.    used to repay debt accrued:

(a)                for the purposes of capital expenditure or refunding accommodation bonds; or
(b)                for the purposes of providing aged care, where that cost was accrued prior to the commencement of the amendments.

Additional permitted uses may be provided in the User Rights Principles.

What is interesting in the definition is that it does not refer to rent as being a permitted capital expenditure.  

It is also clear that the use of bonds for operational expenses is not a permitted use.  This extends to repairs and maintenance.  Presumably, such costs must be funded from the non-accommodation bond income or sources and income derived from the accommodation bonds.

The Bill removes the current restrictions on the use of income received from accommodation bond investments.  This is significant as it allows that interest or income to be used for any purpose by an approved provider.

Information gathering powers and penalties for misuse of accommodation bonds

The Bill seeks to reduce the risk of approved providers being unable to make refunds and discourage inappropriate use of accommodation bonds by introducing new information gathering powers for the Secretary of the Department and criminal penalties for those who misuse bonds.  

Where an approved provider uses an accommodation bonds for a non-permitted purpose and is insolvent and unable to repay bonds when they fall due, they commit an offence with a maximum penalty of 300 penalty units (currently equal to $33,000).  This is a strict liability offence.

An individual will also commit an offence where that person is one of the key personnel and they are aware of, or should have known about, an approved provider’s misuse of bonds in the circumstances outlined above and were in a position to, but did not, take reasonable steps to prevent that misuse.  The maximum penalty is up to two years imprisonment.

Timing

It is proposed that reforms relating to bonds will take effect from 1 October 2011.  

The transitional provisions provide that:

1.   All bonds received prior to 1 October 2011 can be used for either:

(a)                providing aged care or flexible care to care recipients, in accordance with the pre-1 October 2011 requirements; or
(b)                in accordance with the new permitted uses.

2.   For bonds received on or after 1 October 2011, a two year transition period will apply allowing approved providers to continue to use bonds for purposes relating to providing aged care, including for example, repairs and maintenance, until 30 September 2013.  This will provide the industry with time to become familiar with the new requirements for permitted uses and implement any necessary operational and financial adjustments.  

3.   All restrictions that currently apply to income derived from accommodation bonds, retention amounts or accommodation charges cease to be of effect from 1 October 2011, regardless of when those funds were received.

Effects of reforms

The reforms are significant as they limit the use of bonds in a manner that will affect organisations that have relied upon bond receipts to subsidise other parts of their business.

It is likely the reforms will challenge the property holding/operating holding forms of approved providers or at least push such structures to ensure there is a tighter and closer relationship between the payment of the bond and the ability to recover the bond from related parties.  

Approved providers will be minded to ensure they have proper arms length arrangements between the operating and land holding arms of their business.

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.



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