Accommodation Payments: FAQ's

Aged Care Accommodation Payments Explained (RAD vs DAP) with FAQ's

Introduction

The fees payable in Aged Residential care fall into one of 4 categories:

A Basic Daily Fee

A fee paid by everyone who receives care in an aged residential care, regardless of their financial situation

A Means Tested Care Fee

An additional contribution towards the cost of care that some people may be required to pay, based on an assessment of their income and assets

Fees for Extra or Additional Optional Services

Residents may elect to pay for additional, optional services, such as the internet, pay TV, etc. Fees for extra or optional services must be agreed with the resident beforehand and it is not permitted for residents to be charged for certain costs, such as:

  • any repairs or replacements necessary because of normal wear and tear;
  • maintenance inside and outside the aged care home;
  • general refurbishment of the resident's room after they have left the aged care home;
  • services or activities that would form part of the general operation of the aged care home, or are required in order to deliver residential care to the individual;
  • employment of administration staff where the staff member is primarily undertaking activities related to the general operation of the aged care home; and
  • capital costs, asset management or replacement.

An Accommodation Payment

A payment for accommodation in addition to the basic care fee and means-tested care fees. Some people will have their accommodation costs met in full or in part by the Australian Government, while others will need to pay the accommodation price agreed with the aged care home, based on an assets and income assessment. These payments take the form of lump sum payments - RADs or RACs - or their daily payment equivalents - DAPs and DACs.

The following "Frequently Asked Questions" might help in understanding RAD/DAP accommodation payments:

If you need to pay an accommodation payment, you may choose not to pay the entire accommodation payment as a lump sum (RAD), but instead elect to pay some (or all) of it as a Daily Accommodation Payment (DAP). In essence, the DAP is the interest charged on the unpaid RAD, as follows:

DAP = (RAD x MPIR)/365

Where:

DAP = Daily Accommodation Payment

RAD = Refundable Accommodation Deposit

MPIR = Maximum Permissible Interest Rate

To provide some indication of how the MPIR has tracked over time, see the chart below.

Income, for the purposes of aged care, is not the same as taxable income. Your assessed income can include:

  • income support payments from the Australian Government such as the Age Pension, a Service Pension or an Income Support Supplement, but excluding the minimum pension supplement and energy supplement
  • deemed (not actual) income from financial investments (see Age Pension page )
  • net income from rental property
  • War Widow or Widower Pensions and some disability pensions, although exclusions may apply
  • net income from businesses, including farms
  • superannuation and overseas pensions, and income from income stream products such as annuities and allocated pensions
  • family trust distributions or dividends from private company shares
  • deemed income from excess gifting
  • if you entered care on or after 1 January 2016, rental income from your former home is also included

All of your assets (and financial investments) are considered but special rules apply in some situations. Financial investments include:

  • bank, building society and credit union accounts
  • cash
  • term deposits
  • cheque accounts
  • friendly society bonds
  • managed investments
  • listed shares and securities
  • loans and debentures
  • shares in unlisted public companies
  • gold and other bullion.
Other assets include:
  • household contents and personal effects (these are typically valued at $10,000)
  • foreign assets including investments, business interests and real estate
  • investment property
  • special collections such as stamps, art works or antiques
  • superannuation balances
  • private trusts, family trusts and private companies
  • net retirement village entry contributions
  • refundable accommodation deposits (RAD) or refundable accommodation contributions (RAC) paid for accommodation in an aged care home.

Note that members of a couple are considered to have half of the combined assets of both partners.

Part of the value of your former home may be counted in your assets assessment, but there are some exceptions. It won't be counted as an asset if:

  • your partner or dependent child is living there, or
  • a carer eligible for an Australian Government income support payment has been living there for at least two years, or
  • a close relative who is eligible for an Australian Government income support payment has been living there for at least five years.

The full value of your home may not be included in the assessment of your assets; instead a capped amount of $193,219.20 (as at 1 July, 2023) will be included or the net market value of your house, whichever is lower.

Where the home is included as an asset, and the person is a member of a couple, 50% of the net market value of the home will be attributed to each member of the couple, and each member's proportion will be subject to the full value of the cap that applies at that time. It will be the lower amount of either the cap or the net value of each member's part of the home that will be included as an asset.

A means test measuring a combination of assets and income will be used to determine how much the government will contribute to your accommodation payment, if any. The following threshold amounts (revised in March and September each year, and available here) are relevant:

Fee / Charge / Threshold Rates: September 20, 2023
Income Free Area, Residential Care, Single Person $32,331.00 (annual amount)
Asset Threshold, Residential Care Means Test: Asset Free Threshold $58,500
Maximum Accommodation Supplement Amount $66.94 (daily amount)
Maximum Permissible Interest Rate 8.38% from 1/1/24

Using the above figures:

  • a resident with an income below $32,331.00 and assets below $58,500 is eligible for the Maximum Accommodation Supplement (currently $66.94 per day as at September 20, 2023) - they will be regarded as a low means resident and pay only the Basic Daily Care Fee.

The RAD (Refundable Accommodation Deposit), as its name suggests, is generally fully refundable to the resident (or their estate) within 14 days of their leaving the aged care home, unless the resident has agreed for amounts to be deducted e.g. DAP payments, in which case it would be the balance that would be refunded. Other amounts - such as care fees or the costs of additional services - may also be deducted, if agreed between the resident and the provider.

Paying accommodation costs by a lump sum RAD will avoid paying the comparatively high interest rate (MPIR, as explained above). Depending on your own personal circumstances, you should consider the RAD as if it were a loan - if you have capital available and it is earning less than an after tax rate of 8.38% (the MIPR rate from 1 January 2024) then it may make sense to pay your accommodation as a RAD, rather than a DAP. Conversely, if your capital is earning more than a guaranteed net of tax rate of 8.38% then it may be sensible to maintain your investment and pay for your accommodation as a DAP.

Importantly, paying a RAD locks away your capital, and bear in mind that we believe that the level of RADs considerably overstates the actual cost of your residential age accommodation. It is important to have this understanding - many people are underspending in retirement on the false premise that they need to set aside perhaps $450K, just in case they need residential aged care. Simply paying a DAP may be an adequate approach unless you have considerable capital which you perhaps intend leaving as an inheritance.

The Government sets the minimum assets a person must retain when establishing the amount the person can pay towards their accommodation. A person cannot be charged an upfront accommodation payment amount that would leave them with less than the minimum asset amount, currently stipulated as $58,500 (September 20, 2023) per person for a couple and excludes the family home if a spouse remains within the home. Accordingly, if you don't have enough capital to pay a "full RAD" , then you may need to utilise a combined RAD/DAP strategy - and this might be the best approach in any event, depending on your full circumstances.

Another situation where a combined strategy may apply is where you opt to pay the ongoing DAP out of the RAD (i.e. the resident pays part of the RAD, then the DAP is drawn down from the RAD (with this payment slowly increasing as the RAD is drawn down).

When it comes to making accommodation payments most information suggests that use of DAPs and a combination of RADs and DAPs predominate - as suggested in the figure below, drawn from a StewartBrown Aged Care Sector Report. The figures make sense - RADs are significant in size but if you have access to sufficient capital it can make sense to pay a RAD and effectively avoid the 8.38% (from January 1, 2024) interest charge. As we mention elsewhere, the recent significant increase in interest rates is likely to lead to the greater use of RADs.

Each member of the couple will need to be assessed if they are both thinking about taking up aged care at the same time. Otherwise, only the person entering care needs to be assessed.

If you are a member of a couple, the value of your income will be assessed as half the value of your combined income. The same applies to assets, with your assets assessed as half the value of your combined assessed assets.

You will be considered a member of a couple if you are:

  • legally married or in a relationship registered under a state or territory law (providing you are not living separately or permanently apart from the other person)
  • living in a de facto relationship.

This applies regardless of the gender of each member of the couple. For aged care purposes, you are considered to be a member of a couple if you are permanently living apart for health-related reasons.

Finally, we are always surprised at how relatively few families seek professional advice when it comes to choosing between paying for residential care through a RAD or DAP. This is a significant decision and one in which a balance needs to be struck between financial and individual considerations - and care needs to be taken that the aged person is not being disadvantaged by virtue of decisions taken to protect capital for family estate purposes rather than their welfare. Equally, family members can be disadvantaged if they contribute to a relative's RAD because, unless care is taken, it returns to the estate of the individual in residential accommodation.

We summarise some of the considerations that often need to be balanced when deciding between making a RAD or DAP payment - effectively "buying" or "renting" accommodation - or a combination RAD+DAP payment – in the table below.

RAD vs DAP Considerations

RAD

DAP
Fully refunded when the accommodation ends - either paid to the individual or their estate.
No refund at the end of accommodation.
No interest is earned on the RAD and you effectively forego any investment return you may have earned on this amount.
The DAP may vary significantly with changes in interest rates (MPIR) but note that it does not change through the period of accommodation - the DAP remains static.
The RAD is an exempt asset for Centrelink purposes, and therefore does not count in terms of the age pension asset test. However, it is included when calculating aged care fees.
The assets supporting a DAP will likely not be exempt for age pension purposes and this may lead to a lower age pension compared to a RAD approach, but leave more cash accessible to support the individual in care.
If paying a RAD requires the sale of a family home, then this may reduce the age pension, as homes are treated on a concessional treated when assessing the age pension and aged care fees.
Given that most individuals spend less than four years on average in aged care accommodation, a DAP may be able to support a higher quality of accommodation if access to capital is limited. Averages, however, need to be treated with caution - and this is where an understanding of individual circumstances is very important.

Please note prior to making any Inquiry: Financial regulations regarding the provision of specific advice mean that it is impossible for us to provide assistance unless it is provided as part of professional advice for which fees will apply. If your circumstances are not complex and you don't require or want to pay for professional advice you should direct any queries in relation to the Aged Care to Myagedcare.

If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.