Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 280

Royal Commission must remove aged care anomalies

The Royal Commission into Aged Care will resolve once and for all the debate about staffing ratios. It is imperative that the Commission identifies appropriate minimum standards of care. It is equally imperative to broaden their scope to identify who pays what for care now, and who should pay what in the future.

Resident contributions system is broken

The current means testing arrangements use a complex formula combining an income and asset test to determine the resident’s liability to contribute to the cost of their accommodation and care. While on the surface this seems fair, the reality is that the current means test protects the very poor and the very wealthy, leaving those in the middle to pay the most.

The formula used to calculate someone’s liability to contribute towards their cost of accommodation and care involves a combination of an income test and an asset test:

  • 50c per dollar of income above $26,985 (single) $26,465 (couple), plus
  • 5% of assets between $49,000 - $166,707, plus
  • 1% of assets between $166,707 - $402,122, plus
  • 2% of assets above $402,122

A few important aspects of the means test are:

  • The former home is exempt if a protected person is living there.
  • When the former home is assessed, it is assessed up to a capped value of $166,707.
  • Any amount the resident pays as a lump sum accommodation payment is included in the asset test.
  • The resident cannot pay more than their cost of care.
  • There is an indexed Annual Cap of $27,232 and a Lifetime Cap of $65,357 (which includes any amount paid as an Income Tested Care Fee in a Home Care Package).

How the means test works

Every resident can pay the basic daily fee, set at 85% of the age pension, currently $51/day. In addition to the cost of care, residents still have personal expenses including telephone, medications, clothing and travel, as well as any extra or additional services provided by the facility.

At the fully subsidised end is Tom, a full pensioner with $40,000 of assets. Tom pays the Basic Daily Fee and the government pays the facility an accommodation supplement up to $57/day to cover the cost of his care.

Three examples of means testing

1. At the low means end, Shirley is a full pensioner with $90,000 in the bank and $5,000 of personal assets.

Based on Shirley’s assets, her Daily Accommodation Contribution (DAC) is $22.11/day. The lump sum equivalent (Refundable Accommodation Contribution or RAC) is $135,067. The RAC is calculated at the government-set interest rate, currently 5.96%/year. With $95,000 of assets, Shirley cannot afford to pay by RAC alone but she can pay by combination. If she pays $40,000 towards her RAC, her DAC will reduce to $15/day. After meeting her cost of care, she has less than $2/day for personal expenses or will need to dip into her $50,000 of remaining capital.

2. Don is a part pensioner. He has $190,000 of investments and $10,000 of personal assets. Because his assets exceed $166,707, his accommodation payment is based on the market price set by the aged care facility. If Don lives in a capital city, the Refundable Accommodation Deposit (RAD) could easily be $500,000 or more.

If Don moves to a facility with a RAD of $500,000, paying $100,000 towards his RAD, his daily accommodation payment (DAP) will be $65.31/day. Combined with the basic daily fee, his cost of care will be over $42,000/year. Don’s income is just $26,000/year so he will either dip into his remaining investments to meet his cash flow or deduct his DAP from his RAD (an option available to all residents). If Don chooses this option, which would ease the pressure on his cash flow, his DAP will increase each month as his RAD reduces and in less than 5 years his RAD will be exhausted.

3. At the other end of the spectrum is Dot, a self-funded retiree with a home worth $1 million, $1.5 million of investments and $50,000 of personal assets. She is also moving to a facility where the RAD is $500,000. She pays her RAD in full, from her investments.

If Dot keeps her home, it will be assessed at the capped value of $166,707 and she will pay a means tested care fee of $85/day. After 320 days, she will reach her annual cap and stop paying this fee for the remainder of the year and in 2.5 years she will reach her lifetime limit of $65,000.

By keeping her home Dot’s Means Tested Care Fee is around $90/day less than if she sold it.

Inequitable outcomes

If all three retirees live out their lives in aged care, Shirley, as a low means resident, will have just $2/day to cover her living expenses or will need to dip into her limited capital. Dot will keep her $1 million home, $1 million of investments and $50,000 of assets, and her $500,000 RAD will be refunded after she leaves care. She will pay the lifetime limit of $65,000 toward her cost of care. Don, meanwhile, will have lost the entire $100,000 of his RAD within five years. He may still have some investments left, but like Shirley he has needed to draw on his assets to meet his cost of care.

The outcome of the Royal Commission will undoubtedly recommend changes to the cost of providing aged care. The next step will be to ensure that the means testing arrangements share that cost in a way that is equitable.

 

Rachel Lane is the Principal of Aged Care Gurus and has co-authored a number of books including ‘Aged Care, Who Cares?’ with Noel Whittaker. This article is for general information only.

 

RELATED ARTICLES

What the RC, Budget and Keating mean for aged care

Family home no longer the sacred cow

It isn’t just the rich who will pay more for aged care

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Superannuation

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Economy

Should Australia follow Trump's new brand of capitalism?

A new brand of capitalism may be emerging - one where governments take equity in private companies. Is it state overreach, or a smarter way to fund public goods without raising taxes?

Gold

Why gold may keep rising - and what could stop it

Central banks are buying, Asia’s investing, and gold’s going digital. The World Gold Council CEO reveals the structural shifts transforming the gold market - and the one economic wildcard that could change everything. 

Investment strategies

Fact, fiction and fission: The future of nuclear energy

Nuclear power is back in the spotlight, including in Australia. For investors exploring the sector, here are four key factors to consider in this evolving energy landscape. 

Taxation

The myth of Australia’s high corporate tax rate

Australia’s corporate tax rate is widely seen as a growth-killing burden. But for most local investors, it’s a mirage - erased by dividend imputation. So why is it still shaping national policy? 

Taxation

Should we change the company tax rate?

The headline 30% corporate tax rate masks a complex system of dividend imputation and franking credits that ensures Australian shareholders are taxed only once, challenging traditional measures of tax competitiveness. 

Investing

Noise cancelling for investors

A lot of the information at an investor's fingertips today has little long-term value. The modern investing greats are not united by access to faster information, but by their ability to filter out what doesn’t matter.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.