There’s more to Aged Care than the accommodation bond Going beyond the fees and charges Alex Denham Challenger Financial Services Group 23 November 2006

Disclaimer Past performance is not a reliable indicator of future performance. Offers of interests in the Challenger Guaranteed Income Plan are contained in the relevant current Product Disclosure Statement (PDS) issued by Challenger Life No.2 Limited: ABN AFSL which is available on our website and should be considered before making any decision about the product. The information contained in this presentation is current as at 10 November 2006 unless otherwise specified and is intended solely for licensed financial advisers. It must not be passed on to a retail client except where it is included as part of the financial adviser's own advice to their client and is not accredited to Challenger. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. The taxation and Centrelink illustrations are based on current and proposed law at the time of writing, which may change at a future date. The case studies in this presentation are fictional and used for illustrative purposes only. Challenger Life No.2 Limited is not licensed or authorised to provide tax advice. We strongly recommend that an investor seeks professional taxation and social security advice for their individual circumstances.

Planning for Aged Care Age Pension- Potential loss of PensionStrategies to maintainand maximise Pension Aged care fees and charges - Accommodation Bond and - Charge - Basic Daily Care fees and - Income tested fees -Strategies to minimise fees, -bond and charges Tax planning -Capital gains tax -Medical expense tax offset -Other tax payment and rebates Estate planning - Personal – Wills, - Enduring Power of Attorney Review present position - Current investments - Funding the accommodation bond Family home options - Retain? Rent? Sell? - Investing sale proceeds Planning for Aged Care

Agenda Accommodation choices for the mature aged The accommodation bond The accommodation charge Assessing assets for the bond or charge The family home Enduring powers of attorney and guardianship Medical expenses tax offset Care fees for veterans and war widow/ers Conclusion

Retirement villages Self-care living where an Entry Contribution (EC) is paid Amount paid determines homeowner status If former home is kept, it is treated as an asset Less than $117,000 More than $117,000 Homeowner?NoYes EC asset tested?YesNo Eligible for Rental AssistanceYes, if enough rent paid No Accommodation choices for the mature aged

Granny flat arrangements Involves gifting of assets (“Entry Contribution”) in exchange for right of occupancy for life –Example 1: Mum transfers title of her home to her daughter and continues to live there –Example 2: Mum sells her home and pays for the construction of a granny flat off her daughter’s home EC less than $117,000 EC more than $117,000 Homeowner?NoYes EC asset tested?YesNo Accommodation choices for the mature aged

Moving in with relatives or friends * Continue to be treated as homeowner When exemption period ends, home counted as asset and treated as non- homeowner If home rented - rental income assessed Home Exempt* Eligible for rent assistance If move as result of needing “substantial level of care” 2 yearsYes, if enough rent If in good health and plan to return to home I yearNot within first 12 months

Residential Aged Care Classification Level HOSTEL Low level care Accommodation bond NURSING HOME High level care Accommodation charge Basic daily care fee ($29.98 or $37.38 per day) + Income tested fee (25c/$1 income above income test free area)

The accommodation bond – hostels and extra services places Based on an assets test No bond or charge payable if assets are less than $32,000 Determined at time of entry Applicant completes a “Request for an Assets Assessment” which goes to Centrelink Bond can be paid as lump sum or periodic payment –Hostel retains $3,282 p.a. for 5 years –Periodic payment: interest of 10.19% charged on bond amount –Can be combination of both

The accommodation bond – hostels and extra services places All accommodation bonds are exempt from the assets test –Children can pay bond for parents and have this exempt Must pay higher basic daily care fee ($37.38) if bond is greater than $128,500

Should I voluntarily pay more bond? Part pensioners under the assets test get the most benefit from reducing assets –$10,000 reduction in assets results in a $780 increase in age pension = 7.8% Bond over $128,500 results in $2,639 extra basic care fee –However no income assessed on bond for income tested fee No income or growth on bond – inflationary effects over time Inaccessible but effectively capital guaranteed Compare these things with receiving better returns elsewhere or gifting to beneficiaries

The accommodation charge – nursing homes Entry after 20 September 2006 Individual total assets Maximum daily charge Maximum annual charge $32,000 or lessNil $32,001 to $51,500Up to $9.80Up to $3,577 $51,501 to $63,263 Up to $17.13Up to $6, Above $63,263$17.13$6, Charges are set upon entry and will not change even if your situation changes

Assessing assets for the bond or charge Broadly the same as for Centrelink/DVA except: –Differing rules for the family home –Deprivation or gifting of assets –Treatment of 50% asset test exempt (complying) income streams (TAPs and annuities)

Assessing assets for the bond or charge Family home Value is included for assessing the bond or charge UNLESS it is “protected” –Spouse or dependent child is living there –Carer eligible for income support has been living there 2 years –Close relative eligible for income support living there 5 years

Assessing assets for the bond or charge If the resident owned a home in the last 2 years and either: –transfers the title somewhere else (e.g. to a trust or children); or –Sold it in the last 2 years and the proceeds were gifted: The value of the home should not be included in bond assessment (entry pre 1 January 2007) however Details of the transfer are provided on a questionnaire for the purpose of determining “concessional” or “assisted” resident status –Entry on or after 1 January 2007: Value of home will be included in bond assessment

Moving from a retirement village –Entry contributions (or refunds after costs) repaid are treated as an asset for bond assessment Moving from a granny flat arrangement –Value of entry contribution not counted as an asset for bond assessment as title not in residents name –If transferred within 5 years, deprivation of entry contribution could apply if the reason for moving could have been anticipated Query entry post 1 January 2006 Assessing assets for the bond or charge

Entry prior to 1 January % asset test exempt income streams are not counted as assets Amounts gifted prior to the bond assessment are not counted as assets Example: –Peter’s assets$400,000 –Maximum bond$368,000* Purchases 50% ATE income stream or gives away $200,000 –Maximum bond$168,500* * Assets - $32,000

Entry on or after 1 January 2007 Budget announcement: –Assets over $10,000 ($30,000 in five year period) gifted since 10 May 2006; and –50% of the value of 50% ATE income streams were to be included as assets for the purpose of calculating a bond or charge for those entering on or after 1 January 2007 Amendment: 50% ATE income streams will remain 100% exempt for the bond or charge assessment –The Bill has passed with amendments Assessing assets for the bond or charge

Example –Mavis (80) lives in Geelong, Victoria –In June 2006 she sold her flat and gave $200,000 to her son –She has been living with her son, but plans to move to a hostel –She has $150,000 cash in the bank –Pre-January 2007 max bond: $118,000 –Post-January 2007 max bond: $308,000 –Post-January bond assessment $200,000: needs to find an extra $50,000 Assessing assets for the bond or charge

Deprived asset: $190,000 (deemed income: $11,232) Outcome –Pays $140,000 lump sum from her bank account ($3,282 annual retention amount will come from this) –Remaining $60,000 paid as periodic payment IncomeExpenses Age Pension$11,104Periodic payment$4,076 Daily care fee$10,943 Income tested fee$1,476 Total$11,104Total$16,495 Her income doesn’t cover her expenses – her son will have to help her out Assessing assets for the bond or charge

Extra service places Some facilities offer additional “hotel” type services –E.g: higher standard of accommodation and increased food choices May be required to pay a bond for high or low level care Resident must pay additional fee known as “extra service amount” –Set by facility, but must be approved by Department of Health and Ageing (no maximum cap) –Must sign extra service agreement –Paid in addition to daily care fees

Age Pension The home is means test exempt: –If spouse continues to live there; and –For 2 years from the date the last member of the couple leaves the home; and –If paying accommodation charge or bond by periodical payment (part or all) AND renting home out Rent not included in Income Test or income tested fee, but is taxable Exemption may now be indefinite for residents in both hostel and nursing home facilities! I’m in – how does Centrelink assess my home now?

The family home Capital Gains Tax (CGT) Generally no CGT liability on main residence If home is not rented out, may be treated as main residence for unlimited period after moving out If home is rented out, may treat it as main residence for up to 6 years after moving out

Moving from a Retirement Village –Will continue to be treated as homeowner (if previously): While partner continues to live there; or until unit is sold –Unable to take advantage of long-term home exemption rules as unit must generally be sold –If former home kept, cannot reclaim this to be principal home even if rented out Moving from a Granny Flat –If treated as a homeowner in granny flat, this will continue: Whilst partner remains in granny flat For 2 years after 2 nd member of couple has moved to Aged Care facility I’m in – how does Centrelink assess my home now?

Enduring Power of Attorney and Guardianship Power of Guardianship appoints a decision maker to make lifestyle and healthcare decisions in event of loss of capacity –If incapacitated without one, may go to the Guardianship Tribunal to appoint one Power of Attorney appoints a person to act in relation to property and financial affairs States have different laws

Illness separated rate A married couple is considered to be an illness separated couple when one or both of the couple permanently live in a hostel or nursing home Each member of the couple is eligible for the single pension rate including pharmaceutical allowance (PA) Maximum combined rate is $26,931 (including PA) Cut out threshold for Assets Test is $574,000 for homeowners and $691,500 for non-homeowners

Medical expense tax offset Tax offset of 20% of net medical expenses over $1,500 – no upper limit May be available for those who pay tax and residential care fees that require care at levels 1 to 7 Residential aged care expenses which qualify for the tax offset include: –Daily care fees and income-tested daily fees –Accommodation charge –Periodic payments of accommodation bond –Annual retention amount ($3,282) Could be useful to offset tax on rental income from home

The forms Found at Application for Respite Care or Permanent Entry to an Aged Care Home –Completed and sent to each Aged Care facility to which the client wishes to apply –Must have assessment from an Aged Care Assessment Team (ACAT) Request for an Assets Assessment and Supplementary Booklet –To provide information to Centrelink or DVA to calculate bond or charge

Agreements Accommodation payment agreement: –Residents enter into within 7 days of entry Resident agreement: –A formal agreement made between the resident and the provider before they enter the service –Providers must offer and residents choose if they enter into a written agreement –May incorporate the accommodation payment agreement –Specifies the fees that the resident must pay

Care fees for veterans and war widows/widowers Basic daily care fee –Disability and war widow’s pensions not means tested –Recipients must hold current Pensioner Concession Card (PCC) to be regarded as pensioner and pay lower basic daily care fee Income tested fee –Not paid by ex-prisoners of war –Special rules apply for those on disability or war widow’s pension

Income tested fee calculation Disability and war widows pension Does the resident have qualifying service? Disability or war widow’s pension exempt income for Income Tested Fee Disability or war widow’s pension counted as income for Income Tested Fee Yes No Does the resident qualify for full Income Support Supplement? Discount applies to calculating income No discount applies to calculating income YesNo War widows/widowers 1. 2.

War widows – case study Linda (85) recently moved into a hostel and is on a war widow’s pension –Also receiving full income support supplement (ISS) –Bond required $125,000 Just sold her home for $420,000 Assets after paying bond: –Personal $5,000 –Financial investments$445,000 –Total$450,000

War widows – case study Impact on DVA benefits: –Entitled to full war widow’s pension as not means tested –Loss of ISS as assets above cut out threshold AssetsIncome Personal$5,000 - Financial 5%$445,000$22,250 War widow’s pension -$13,965 Income support supplement - - Total$450,000$36,215

War widows – case study Impact on aged care fees –Linda no longer entitled to PCC due to loss of ISS Now subject to the higher basic daily care fee –War widow’s pension included in calculation of income tested fee as no qualifying service Basic daily care fee$37.38 per day$13,644 p.a. Income tested fee$21.69 per day$7,917 p.a. Total costs$59.07 per day$21,561 pa

War widows – case study Let’s assume Linda purchases a 50% ATE annuity for $150,000 and gifts $10,000 She is now entitled to a part ISS under Income Test * Annuity quote as at 1 /11/2006, 8 year term, 3% indexation, 3.3% upfront commission & 0.275% trail AssetsIncome Personal$5,000 - Financial 5%$285,000$14,250 Annuity* - 8 year term$150,000$20,748 War widows pension -$13,965 Income support supplement - $2,868 Total$440,000$51,831

War widows – case study Impact on aged care fees –Linda pays the lower basic daily care fee as she receives part ISS Part ISS entitles her to PCC –Income-tested fee reduced as a result of deductible amount from annuity Basic daily care fee$29.98 per day$10,943 pa Income tested fee$17.58 per day$6,418 pa Total costs$47.56 per day$17,361 pa

War widows – case study summary Increase in ISS$2,868 Reduction in fees$4,200 $7,068 No annuityWith 50% ATE annuity War widow’s pension$13,965 Income support supplement$0$2,868 Basic daily care fee$13,644$10,943 Income tested fee$7,917$6,418

Conclusion Complex but growing area of advice Information available from: – – Guide to Aged Care Aged Care calculator Go to adviser section of Challenger website

Disclaimer Past performance is not a reliable indicator of future performance. Offers of interests in the Challenger Guaranteed Income Plan are contained in the relevant current Product Disclosure Statement (PDS) issued by Challenger Life No.2 Limited: ABN AFSL which is available on our website and should be considered before making any decision about the product. The information contained in this presentation is current as at 10 November 2006 unless otherwise specified and is intended solely for licensed financial advisers. It must not be passed on to a retail client except where it is included as part of the financial adviser's own advice to their client and is not accredited to Challenger. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. The taxation and Centrelink illustrations are based on current and proposed law at the time of writing, which may change at a future date. The case studies in this presentation are fictional and used for illustrative purposes only. Challenger Life No.2 Limited is not licensed or authorised to provide tax advice. We strongly recommend that an investor seeks professional taxation and social security advice for their individual circumstances.