Aged care reforms: Unpacking the financial implications for aging Australians

Australia’s aged care reforms are another example of the Federal Government giving with one hand only to take with the other.

Planning to celebrate and enjoy some income tax relief with the stage 3 tax cuts? The shifting financial burden of aged care in Australia may be reason to put a pin in those plans. 

The Australian Government's significant changes to aged care will have important financial implications for older Australians. This article explores these effects, detailing the financial aspects of the changes and how they impact both living in care homes and receiving care at home. It also addresses the shifts in fee structures and the new ways people may need to contribute financially.

It is important for individuals and families to understand these changes. This knowledge will help you plan ahead and prepare your finances for future care needs.

Overview of aged care reforms

The shift towards user payments in aged care

As the cost of aged care in Australia continues to grow, it is increasingly apparent that the current funding scheme is insufficient and unsustainable. 
However, the government has opted not to increase subsidies. Instead, those with the financial means will pay out-of-pocket costs for their aged care costs. 

Increased out-of-pocket costs from July 2025

While the existing rules will be grandfathered for those already in care, from 1 July 2025, many Australians moving into residential aged care will be required to shoulder a greater share of their care costs. Although the legislation is still in draft stage, it has received bipartisan support, and the trend towards higher user costs has been anticipated for some time. 

Renaming and increasing the Means Tested Care Fee

What’s in a name? Under the new rules, the ‘Means Tested Care Fee’ becomes the ‘Non-Clinical Care Contribution’. The new term is not just harder to say; it also places greater demands on budgets. The maximum payment rate will increase by $3,614 per year and this will affect all residents with assets exceeding $976k, down from the previous threshold of $2m. 

Additionally, the lifetime cap on means-tested fees will be raised to $130k up from $82,018. While this contribution begins at a higher asset threshold, the payment burden accelerates faster than before. 

By our estimates, people with $500k or less may pay less for their care under the new system. Everyone else is likely to pay more.

Introducing the Hotelling Supplement

Hotelling supplement is a lovely name, but what does it really mean? When we think hotel, we think holiday, relaxation. Luxury. Well, the Hotelling Supplement covers neither luxuries, nor a sea view. Rather, it’s designed as a means-tested fee to offset a shortfall of care costs. The hotelling supplement pays for services that improve daily life in aged care facilities. It includes things like food, cleaning, laundry, fun activities and other lifestyle services that make life comfortable for older Australians in residential care. 

However, the funding for these services was previously a government subsidy to Aged Care providers. So same view, same package, more cost.

Adjustments to the Refundable Accommodation Deposit (RAD)

The Refundable Accommodation Deposit (RAD) is an upfront payment to cover the cost of a room in residential Aged Care. Under existing rules, the Government guarantees the full amount to be returned if the resident switches facilities or passes away. 

Under new rules, from 1 July 2025, 2% of the RAD will be retained by the accommodation provider each year for up to 5 years. 
Perhaps a new name would be appropriate here as well: ‘Not-so-refundable Accommodation Deposit.’

In 2020, the Government estimated the average RAD to be $450k per entrant. However, it is now increasing the approval limit for aged care providers, allowing them to charge up to $750k without requiring approval, up from the previous limit of $550k. This change, combined with inflation, is likely to drive the average RAD well above $500k, possibly approaching the new $750k threshold that does not require government approval. 

Over time this could result in a loss of $15k each year for an average room. For a five-year stay, that amounts to a total payment of $75k. 

Estate taxes anyone? Clever, well at least the kids got a tax cut. 

What if I don’t pay the RAD upfront?

The alternative to paying the RAD upfront, is rental style Daily Accommodation Payments (DAPs). These reflect a percentage of the unpaid RAD. Think of it as interest paid on an outstanding credit card balance. When rates were very low the rate sat around 4%, at present the rate is over 8%.  Moving forward, the new changes ensure these payments are indexed to CPI (typically 2 – 3% p.a.). For example, a resident in the same $750k room, could be expected to pay $62,850 per annum, which can now be expected to increase by $1,571 per annum (2.5%). This indexation alone may well exceed the stage 3 tax cut for many individuals. 

Aren’t RAD’s being phased out?

It is true that RADs could be a thing of the past by 2035. The Government’s Aged Care Taskforce recommends that the sector be fully transitioned away from RADs by 2035. This may positively impact the financial sustainability of care providers, but what does it mean for future aged care residents? 

We see two major implications:

1)    Residents will need to generate income from their assets to cover these accommodation costs. For those uncomfortable with risk, money that would have been used for a RAD, or hypothetically , to purchase a room, might instead be invested in bank deposits. However, the after-tax earnings from these deposits are unlikely to ever match the DAP. Currently, they fall short, and some residents could find themselves up to $30k per year worse off.

An example might help. Instead of paying a $750k RAD, you take the money and invest it at 4%, earning $30k  interest per annum. But you incur DAP at the current 8.38% rate, which costs you $62,850 per annum. The implied return today is higher if you pay the RAD.

If the option of paying a RAD is taken away altogether, assuming the DAP or something similar remains in place, you are over $32k worse off each year as you would be left with no choice but to pay the $62,850 per annum. 

2)    Currently, the RAD value is exempt from Centrelink’s asset test, leading to an Age Pension increase for many paying a RAD, which can assist in covering care costs. In some cases, the loss of this exemption could reduce Age Pension entitlements by $29,754 per annum (double for couples!) 

If RADs are phased out, stage 3 tax cuts may not warrant celebration. Instead, they could prompt us to ask some hard questions about the affordability of aged care for middle Australia, and the personal financial planning and budgeting required to manage costs in late retirement. Those with few assets and the very wealthy, may be less affected than Australians who fall somewhere in between. 

Bear in mind that this is speculation. The future review could find removing RADs untenable (for these very reasons) or could coincide with other affordability measures to counterbalance this impact. However, we believe it is worth noting that the potential impact to future retiree’s wealth quickly climbs into the hundreds of thousands of dollars. 

Calculating the financial impact of the proposed aged care reforms

To better highlight the impact of these changes, consider the following hypothetical impact for a couple who own their own home and have a combined $1m in super which they have withdrawn to pay a $750k RAD.

The average stay in residential care is two and a half years. Over an average stay, the above couple now face care fees of almost $200k. That is double the current arrangements. 

Preparing your finances for your future care needs

The proposed changes are significant and will impact many Australians. We hope these changes contribute to a more sustainable system, supporting more Australians to access the care they need or raising the quality of care. However, it is clear the late stage of retirement will become increasingly expensive. 

Early planning is essential. Consider again our example above; if the trends toward self-funding aged care continue, are you prepared? Have you started saving toward this increased cost which could run into the hundreds of thousands over your lifetime? 

1 in 5 Australians over age 85 reside in an aged care facility. 

Those planning stage 3 tax cut-funded holidays may need to reconsider. 

If you would like help in forward planning to adjust to these changes, reach out to one of our RSM Financial Advisers. 

We can help you:

• Understand the rules and regulations governing the aged care system and calculate the costs specific to your circumstances.
• Structure your affairs to meet these costs tax-effectively and with consideration to age pension entitlements.
• Review your superannuation contributions to ensure you are on track to support both early and late retirement needs.

For more information

For more information, please contact your local RSM office.