We hope you enjoy this opinion piece from our July-August 2013 edition.
Joanne O’Brien, partner at Carne Reidy Herd lawyers
By Joanne O’Brien
“The traditional reliance by both providers and residents on the saleability of property to fund a resident’s bond is problematic in the current real estate market.”
The hangover from the GFC appears to be continuing unabated even in residential aged care. With the continuing decline in the take up of low care places and accommodation bonds, providers are always keen to identify and assist a prospective resident to enter low care and pay the accompanying accommodation bond.
Usually, despite the options available for paying a bond, a provider’s preference is to have the resident pay the bond up front, in cash and by way of a lump sum.
The next best option has been to allow a resident to enter low care and for the provider to agree to await payment of the lump sum bond, pending the sale of a resident’s home.
The latter option was notionally a win/win for both provider and resident, as the resident could enter low care immediately and the provider would simply wait for the expected sale of the resident’s home and then receive payment of the bond, as well as accrued interest.
A new uncertainty
However, times have changed, with the potential for significant economic impact on providers. Here is an example:
A provider agrees to allow a person to enter low care and payment of the bond of $300,000 is agreed to be deferred until the sale of the person’s retirement village unit. Unfortunately, sale of the unit proves difficult and it is still not sold, almost 2 years after the resident enters low care.
Realising that the bond is accruing interest, the resident applies to DoHA [Department of Health and Ageing] for financial hardship assistance. Sadly, the resident then dies before any decision is made by DoHA.
After her death, DoHA determines that, because it has not sold within a reasonable time, the retirement village unit was, and is, an ‘unrealisable asset’ under the financial hardship provisions of the Aged Care Act. It determines that the bond should be reduced to zero as the resident did not have any other assets exceeding the exempt trigger for a bond of $42,500.
Not only that, DoHA determines that the resident was not liable to pay a bond at any time from the date of her entry to the date of her death.
A difficult predicament
The bargain reached between the resident and the provider has been unilaterally altered by DoHA’s decision and the provider has now foregone the benefit of the original bond, the interest and the retentions from it.
While the provider does have the benefit of the Accommodation Supplement in these circumstances, which lessens the financial blow, it does not provide the same financial advantages as the bond that was agreed between the resident and provider.
The traditional reliance by both providers and residents on the saleability of property to fund a resident’s bond is problematic in the current real estate market. That is particularly so in some areas, where that property is a retirement village unit.
Not only that, if a resident is able to satisfy DoHA that their property is ‘unrealisable’, a failure to sell a property can result in either the reduction or elimination of an obligation to pay a bond.
A financial hardship determination is made under the User Rights Principles and requires an assessment to be made about whether or not the resident has assets that are ‘unrealisable’.
That assessment is based on the meaning of ‘unrealisable asset’ in the Social Security Act, where an asset is unrealisable if it:
- cannot be sold or used for security for borrowing; or
- the resident cannot reasonably be expected to sell it or use it for security for borrowing
Before making a decision DoHA requires evidence that:
- the property has been marketed for at least six months at the price listed on the resident’s Asset Summary Statement; and
- that the price has be reduced at least once during that period in order to attract a sale.
“…a provider may now have to be more circumspect in terms of accommodating a resident’s financial circumstances and think more carefully about whether to agree to allow a resident to defer payment of a bond.”
If DoHA decides that a property is unrealisable and the resident’s other assets are below the threshold, the result will be a determination that the resident cannot be asked to pay a bond.
This can mean that, even if the property is eventually sold (eg by the estate of the deceased resident), the provider will have no right to access any of those sale proceeds.
Providers always have to balance difficult and often conflicting demands – providing places to and obtaining funds from otherwise eligible residents and at the same time trying to accommodate the resident’s circumstances as best they can.
In doing so, a provider may now have to be more circumspect in terms of accommodating a resident’s financial circumstances and think more carefully about whether to agree to allow a resident to defer payment of a bond.
This circumspection will be exacerbated if the proposed reforms to aged care are enacted. The distinction between low care and high care will be removed but all residents will still have a choice about how to pay the accommodation payment; as a Daily Accommodation Payment, an equivalent Refundable Accommodation Deposit or a combination of both.
They will have up to 28 days after entering care to make a decision on which option is best for them. Residents who do not have the capacity to contribute to the cost of their accommodation will continue to have those costs paid by the government through the Accommodation Supplement.
According to DoHA the aim of these changes, at least in part, is to give residents more flexibility and choice about how they pay for the accommodation. For providers they will create a greater number of residents with whom providers will have to negotiate and combined with the proposed requirement for providers to publish their accommodation prices, the changes will require an increased focus on managing the entry process.
Among other things, they will result in an increasing emphasis on providers and residents negotiating between themselves on appropriate accommodation payments rather than rely on strict government prescriptions. Providers may be well advised to start honing their negotiation skills.
Joanne O’Brien is a Partner in the Aged Care and Retirement Living group at Carne Reidy Herd lawyers.