Know what to do if your client has their identity stolen.

Identity theft is a multi-billion dollar problem – and growing. To the extent that financial advisers help guide their clients in protecting against risks, the topic of identity theft is arguably one that advisers can credibly discuss, and not just because financial product communications are often targeted by those by criminal intent.

Stories like this recent one – from a member of our team – are becoming commonplace:

“A few days ago I received a Facebook friend request from a good friend of mine. It seemed odd – not only have we been friends for years, we’ve been Facebook friends for years. I assumed she’d had a tech disaster and needed to re-establish her Facebook account. Just as my finger hovered over the ‘accept request’ button, I thought better of it, and sent her a message to check. She’d been hacked.

Although my friend had privacy settings in place, the hacker was able to access sufficient information to clone her account. They copied her photo, used her name, her school’s name and her friends list to send out dummy requests. By the time she realised, the clone had access to full Facebook profiles (and friend lists) of 45 of her friends.”

Through such actions, criminals can see photos of your home; see that you’re having a wonderful overseas holiday and that perhaps that home is unattended. Posts bemoaning banks and service providers open the way for targeted phishing scams. People lay their lives open on social media, not expecting to provide intel for criminals to exploit.

And that’s just the tip of the iceberg. There’s no disputing that technology and the internet has made life easy – getting cash from an ATM, using PayPass to ‘tap and go’, going online to pay bills or shop for bicycle parts. It’s hard to imagine life without technology; however it also comes with a downside…increased risk of identity theft.

It’s not just technology that makes us vulnerable. An unsecured letterbox provides access to bills, bank statements, part-filled credit card offers and sometimes the cards themselves. It’s not unknown for criminals to go through bins looking for useful papers – a credit card statement, superannuation fund advice, even a phone bill. Anything with identification can be used by the savvy.

Why should your clients be concerned about identity theft?

People steal identities for a number of reasons, commonly for fraudulent financial gain, but sometimes for more sinister purposes According to the Australian Bureau of Statistics (ABS) Personal Fraud Survey 2010-2011, Australians lost $1.4 billion due to personal fraud.  The same survey estimated that 1.2 million Australians over the age of 15 had suffered at least one incidence of identity theft in the previous 12 months (a 50% increase compared to five years prior).

Once a criminal has the information they need, using your clients’ details they could:

• apply for a credit card, bank account or other financial service
• run up credit card debts or obtain loans
• apply for identification vehicles such as birth certificate, driver’s licence or even a passport
• access superannuation and other savings
• apply for Centrelink benefits.

A quick-acting criminal could quickly run up tens of thousands of dollars worth of debt that takes time and effort to untangle. As well as being extremely stressful, your client’s credit rating can be negatively affected and they could experience a period of financial hardship as a result.

Tap and go technology brings fresh risks

With credit card signatures to be phased out in August this year, most cards issued over the last 18 months or so have included an inbuilt RFID (Radio Frequency Identification) chip, which allows the ‘contactless’ ’payment technology such as ‘tap and go’ to function.

Whilst most appreciate the convenience of being able to simply ‘wave’ your card in front of the special scanners, the downside is that an inexpensive credit card reader can get at the data from a few inches away, even if the card is in a purse or wallet.

How can your clients protect themselves from identity theft?

An important part of safeguarding your clients’ financial future is to ensure they’re aware of potential vulnerabilities and take action to protect them. Older clients in particular should be warned about email scams; not the amateurish requests to transfer money for an African prince, but the alarmingly sophisticated requests to verify bank data, or print off delivery labels for bogus parcels. The scary thing is that these techniques can be like a Trojan horse, silently running in the background of a computer, recording every keystroke and relaying them back to the scammer.

Tips to share with your clients include:

• put a lock on your letterbox and clear it regularly
• keep personal and financial papers secure, shred when no longer required
• ensure that virus and security software on your computers and mobile devices is up-to-date – new threats emerge daily, so currency is important
• don’t use the same PIN and password across cards and websites
• don’t use unsecured wifi for internet banking or financial transactions
• never respond to scam or phishing emails promising huge rewards for information or punitive actions for non-response
• regularly review financial statements and report unauthorised transactions immediately
• always use the most secure settings on social media sites and never accept unsolicited ‘friend’ requests
• if starting a new job, only provide your TFN to the new employer once you have commenced – the ATO warns of employment scams that seek to access TFNs.
• If you are travelling, or just extra conscious of the risks around RFID data theft, you can protect your cards in special wallets, usually made of aluminium or some other material that blocks signals.

Steps to take if a client’s identity is stolen

If a client does become a victim of identity theft, it’s important to act swiftly. While the extent and nature of the theft will dictate specific action, it’s important that these first steps are taken and documented for future reference:

• contact all financial institutions – highlight disputed transactions, change PINs and passwords and discuss whether other account changes are required
• report the matter to the police with as much documented evidence as possible
• contact the Credit Reporting Agency and explain the situation; regular checks on credit status should be made in the following months
• contact any other agencies such as the ATO, Centrelink or the Australian Passport Office.

If your clients aren’t sure that their online security practices are adequate, you can get them to take the ATO’s self assessment. It covers business and personal security practices.

Discuss this issue with your clients

It may be tempting – and legitimate – to decide this issue is not really an adviser’s responsibility. But this is undeniably an area where your clients can be exposed to financial risk, and those advisers who get on the front foot and discuss this issue with clients are likely to be rewarded with increased trust and loyalty.

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Important information: The information in this article has been prepared by Zurich Australia Limited and is intended for Advisers use only. It is not intended for use by any retail client. The information is current as at 23 June 2014 and is derived from sources believed to be accurate as at this date. The information in this document may be subject to change. While all reasonable care has been taken in preparing this document and the consents of this document are presented in good faith, no warranty (express or implied) is given by Zurich as to the completeness or accuracy of the information in this document, and Zurich will not be liable (in contract or tort, including negligence, or otherwise) to any party or person if, and to the extent that, they rely on any information provided.

The post Stop thief! That’s my identity appeared first on AdviserVoice.

Louise Biti

Too often articles and information published on aged care focus on how to reduce the accommodation bond. Many clients (and their families) will also express a reluctance to pay the high bonds required.

The opportunity to initially agree on a low bond can give you a stronger negotiating position to create a positive outcome with fee trade-offs or higher investment earnings. But too much focus is arguably placed on trying to reduce assessable assets to limit the maximum bond payable.

Bond negotiations

The most important aspect of aged care is securing a place in the facility of choice. Strategies that reduce assets or undervalue assets reported may only result in losing the place, or never receiving an offer from the facility of choice.

Most facilities set a target bond range for new residents. This can be influenced by a range of factors, one of which may be how much the client has in assessable assets. It can be difficult to obtain an estimate of the bond from the facility without first providing asset details for the client.

The only rule in legislation in relation to the level of bonds is that after paying the accommodation bond the client needs to be left with at least $44,000 in assessable assets. But what does this mean in practice? And what can go wrong? After all, the rule is designed to ensure that aged care is affordable and the fees for each resident are based on their level of assets and income.

The steps for keeping bond negotiations in perspective are:

Step 1 = What will it take to be offered a place?

Step 2 = Can the person afford this bond?

Step 3 = Does the fee represent value for money?

To see how these steps apply in practice, let’s review the case study below for Faye.

Faye’s dilemma – case study

Faye has become too frail to continue living in her home. She has an Aged Care Assessment Team (ACAT) approval to move into low care. Her daughter Caroline would like Faye to move into a residential facility near her home so it is easy to visit each day.

Caroline has spent time investigating options in her local area and has decided on a facility five minutes from her home. It has a very good reputation and is quite new.

Now, comes the difficult part with negotiating the bond.

This is a new facility and is carrying significant levels of debt used to fund the purchase of land and the building construction. The accommodation bonds are set at a minimum of $500,000 but range up to $650,000 depending on circumstances such as the resident’s level of assessable assets and the size of the room.

Faye’s only assets are her home in a regional town which is valued around $360,000 and $40,000 in the bank.  Her home contents are valued at $5,000 and she does not own a car.

The ACAT team left Faye a copy of the government’s booklet and pack – 5 Steps to Entry to Residential Aged Care. This pack included the Centrelink asset assessment form which Faye completed and sent to Centrelink.

Centrelink will verify the information in the form to calculate her level of assessable assets and the maximum bond she is eligible to pay. The maximum bond is calculated as the assessable assets less $44,000 (figure relevant for entry up to 19 March 2014).

Faye lives alone so her home is counted as an assessable asset for the bond calculations. This puts her assessable assets at $405,000. She receives a letter from Centrelink stating the maximum bond she can pay is $361,000.

A week later, Caroline receives a phone call to say that a place has become available and an appointment is made to discuss the opportunity for her mother to move in. Caroline takes the Centrelink letter to help with her negotiations.

However, this may not result in the outcome Caroline is hoping for. The facility is firm that the minimum bond is $500,000. To admit Faye, they would need to accept a lower bond. As a result, the facility withdraws their offer and offers the place to another potential resident who has a greater level of assets.

This outcome is not dissimilar to the situation with selling a house. If the seller wants a price of $500,000 and the potential buyer can only borrow enough to pay $361,000 the seller does not have to accept this price. They can choose to either drop the sale price to accept the offer or discontinue negotiations and look for a new buyer. The same has happened in this case.

Just because the legislation sets Faye’s maximum bond at $361,000 does not mean the facility has to admit her for this bond level. It just means that if they choose to admit her they do so under an agreement to accept the lower bond.

What could Faye and Caroline have done?

Let’s go back to the steps outlined earlier in this article and review how they may have applied to Faye.

Step 1 = What will it take to be offered a place?

When researching suitable facilities it is important to gain an indication of the bond level required and to understand what flexibility exists in negotiations.

This can be difficult as many facilities are reluctant to quote a bond until they have an indication of the person’s assets. The best strategy is to have an open and honest discussion with the facility. In reality, if Faye had disclosed the level of assets when she put her name on the waiting list she may never have received the call with the offer of a place.

Tip: Newer facilities are likely to be carrying higher levels of debt. This generally means higher bonds and less flexibility to accept a lower bond.

Step 2 = Can the person afford this bond?

In this case, Faye does not have sufficient assets to pay a bond of $500,000. Her family may need to consider whether they can afford to contribute part of the bond if they want to get her into this facility. But do they still have this opportunity when she already has a Centrelink assessment?

If an offer of a place is made and accepted, the person will be asked to sign a Resident Agreement. This is a legal contract between the facility and the resident. It sets out a range of issues including the agreed bond. The bond therefore needs to be paid by the resident, in this case Faye. It cannot be paid directly by anyone else to the facility as the facility is unable to enter into contracts with anyone but the resident.

One solution may be for the kids to gift or loan the money to Faye and deposit it into her bank account before she moves to the facility. She can then request a new assessment from Centrelink based on a change in her circumstances. This strategy is not guaranteed to work as we have seen cases where Centrelink have denied a request to reassess assets within a short period of time.

Gifting/loaning money into Faye’s account will increase her assessable income and assets but she has 14 days to report the change to Centrelink for pension purposes. If the bond is paid within this time it will not impact her age pension payments.

If children are looking at contributing all or part of the bond, the best option may be to not fill in the Centrelink assessment at all, or at least not until after the gift/loan is made to the parent. The Centrelink assessment is optional to obtain, although some facilities will require it before entry.

If the facility agrees, instead of obtaining a Centrelink assessment the person can sign a statutory declaration stating they have sufficient money to pay the requested bond and will be left with at least $44,000 after paying the bond.

If the money from the kids is a loan, they should seek legal advice about drawing up a loan contract so that the money can be recovered from the estate when the bond is repaid. Entering into a loan contract may only be possible if the parent still has full legal (mental) capacity.

Step 3 = Does the fee represent value for money?

While Step 2 has worked through a solution to ensure she can afford to pay the bond, Faye and her family should determine whether the bond represents value for money to them.

What other options might exist for facilities that will accept a lower bond? Are those facilities comparable or is the lower bond coming at the cost of a desirable feature? This is a personal choice and is very similar to how we choose where we will buy a house.

Supported residents

Legislation did not really help or protect Faye, but there are some protection mechanisms for people with very low levels of assets.

Every government-subsidised aged care facility is required to take a minimum number of supported residents. This quota is 15-40% of all subsidised places depending on the socio-economic demographics of the area.

Supported residents are those who have less than $113,784 (current to 19 March 2014) of assessable assets when moving into aged care. These people still need to be left with $44,000 of assets after paying a bond and may incur a lower retention amount (if the bond is less than $39,720).

It is important to understand that the quota applies across all places in the facility. If the facility has both low care and high care places the facility may only take supported residents into high care places. It can therefore still be difficult to secure a low care place even if you are a supported resident.

Helping clients understand bonds

It should also be remembered that bonds are not all bad. Helping clients to understand the implications of bonds may help them to be comfortable with paying the bond.

• Bonds are ggovernment guaranteed
• Bonds are exempt under the Centrelink/Veterans’ Affairs income and assets tests and can help to maximise age pension and minimise daily care fees
• The bond is not a true fee, but rather is a refundable deposit. Each month the facility can deduct $331 (up to a total of $19,860 over a five year period) and the rest of the bond is refundable when the resident leaves or passes away
• Bonds are held in trust by the facility – this can help to protect the estate.

The average new bond is continuing to increase and facilities currently hold over $11 billion in bonds. Bonds are payment for the right to live in the facility and residents have security of tenure for the rest of their lives.

Building your business

There is widespread recognition that clients are ageing at a rate we’ve never experienced before. Older clients and their families are thinking about their future aged care needs and are looking for services to guide the process.

This provides professionals (including financial planners, lawyers and accountants) who service clients of all ages with business growth opportunities to help clients and their families navigate through aged care decisions, to ultimately give them lifestyle choices in the latter part of their life. It also provides a great opportunity to market to pre-retirees, who are the children making the decisions for their parents.

By Louise Biti – Article current 1 December 2013 to 19 March 2014

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Disclaimer: The information contained in this publication is based on the understanding Aged Care Steps Pty Ltd has of the relevant Australian legislation as at the date shown in this publication. The information contained in this publication is of a general nature only and is intended for use by financial advisers and other licensed professionals only. It must not be handed to clients for their keeping nor can any copies of sections of this publication be given to clients. Aged Care Steps is an authorised representative of Strategy Steps Pty Ltd ABN 14130045242 AFSL 333649 and is not a registered tax agent under the Tax Agent Services Act 2009. We recommend that your client be referred to their registered tax agent or legal adviser prior to implementing any recommendations mentioned in this publication.

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

The post Negotiating aged care accommodation bonds – December 2013 update appeared first on AdviserVoice.

The source and control tests for Centrelink attribution of a trust’s capital and income pose challenges for the operation of testamentary trusts.

In its Guide to Social Security Law, the Government makes the following statements:

Testamentary trusts activated after 31 March 2001
If a testamentary trust is activated by the death of the testator after 31 March 2001, the surviving partner will be attributed with the assets and income of the trust if:

• the surviving partner has control of the trust (irrespective of whether the surviving partner is a beneficiary), or
• an associate of the surviving partner has control of the trust, and the surviving partner is a potential beneficiary.

Explanation: If the surviving partner directly controls the trust, they can simply appoint themselves as a beneficiary or alternatively exert their powers to obtain benefit informally.

If an associate has control and the surviving partner is a potential beneficiary, a reasonable assessment of the situation is that the surviving partner will enjoy the benefits of the trust.

If the surviving partner (or an associate of the surviving partner) does not control the trust, attribution may be made, via the basic attribution rules, to the person(s) or members of a couple (1.1.M.120), whether of the same sex or a different sex, who have control of the trust.

Testamentary trusts with a commercial trustee
Some testamentary trusts will be established with a commercial trustee as the controller of the trust. In these cases the terms of the will need to be examined carefully to determine who the testator intended to benefit under the terms of the will.

Where the surviving partner is not a beneficiary of such a trust, attribution should be made to those who are specifically nominated as beneficiaries of the trust.

Generally such trusts are established to benefit specifically named individuals, with the direction in the will that the needs of a particular beneficiary or beneficiaries be considered.

It is not possible to attribute to a corporate trustee. In these types of cases it should be considered that the corporate trustee is administering the trust on behalf of the beneficiaries of the trust. Attribution will be made to those beneficiaries on whose behalf the trust is being administered.

In the case where neither the will maker nor the testamentary trustee is a Centrelink administered benefit recipient, it is most likely that the trust will be assessed on the basis of its pattern of distribution to beneficiaries or capital entitlement of beneficiaries.

Consideration for trust drafting
A trust where a primary beneficiary is the appointer or controller of the fund will be attributed to the beneficiary.
A trust where beneficiaries are not named but rather described (for example, ‘my children or grandchildren’) will most likely be assessed in accordance with who is in the class as the time the will maker dies.

A trust where there is discretion in the recognition of beneficiaries and their entitlements will mean that the trustee’s decisions rather than the will maker’s will drive the Centrelink consequences.

Centrelink will look for where beneficial interest lies in the administration of the trust. Where default capital rights lie with people other than Centrelink benefit recipients, expect detailed negotiation will be needed with Centrelink to agree the capital attribution pattern they will make on the trust.

Impacts on investment strategies for testamentary trustees
Capital attribution to a beneficiary will need to be assessed as the default capital that will be used to produce an investment return. Investment returns need to be considered in the light of the deemed income attributed to the beneficiary.

The collateral benefit loss a beneficiary may suffer needs to be considered when formulating a benefit attribution strategy. Recent experience has indicated some $70,000 per annum is needed to fully compensate someone who aged 55 is formerly fully dependent on public welfare, but through operation of her mother’s will, is forced out of that system.

Consider how s. 14A – D of the Trustee Act 1925 (NSW) affects the operation of the trust.

Some questions to consider asking the client and potential beneficiaries

• Is capital expected to be used to support beneficiaries?
• How large is the beneficiary pool? (In a recent matter 3 generations of a family were all alive and in the beneficiary pool. This brought up issues with Centrelink about on whose behalf capital of the trust was to be administered.)
• How long is the trust intended to operate?
• How is succession of the control of the trust to be handled?
• How is the trustee to inform themselves of the situation needs and objectives of the beneficiaries?
• Do the criteria in s.14C of the Trustee Act 1925 (NSW) (and its counterparts in other states) apply to the administration of the trust?
• What is the impact of the distribution on the overall benefit levels received including health costs?
• Is any Centrelink registered beneficiary in receipt of a non means tested benefit?

Some problems to avoid

• Do not use testamentary trust precedents that have optional operation at the election of the beneficiary.
• Do not appoint beneficiaries as appointers of any trust.
• Do not erode the independence of trustee operations with beneficiary accountability if Centrelink attribution is intended to be constrained by the trust’s operation.

The post Centrelink attribution & testamentary trusts appeared first on AdviserVoice.

Too often articles and information published on aged care focus on how to reduce the accommodation bond. Many clients (and their families) will also express a reluctance to pay the high bonds required.

The opportunity to initially agree on a low bond can give you a stronger negotiating position to create a positive outcome with fee trade-offs or higher investment earnings. But I would argue that too much focus is placed on trying to reduce assessable assets to limit the maximum bond payable.

Bond negotiations
The most important aspect of aged care is securing a place in the facility of choice. Strategies that reduce assets or undervalue assets reported may only result in losing the place, or never receiving an offer from the facility of choice.

Most facilities set a target bond range for new residents. This can be influenced by a range of factors, one of which may be how much the client has in assessable assets. It can be difficult to obtain an estimate of the bond from the facility without first providing asset details for the client.

The only rule in legislation in relation to the level of bonds is that after paying the accommodation bond the client needs to be left with at least $40,500 in assessable assets. But what does this mean in practice? And what can go wrong? After all, the rule is designed to ensure that aged care is affordable and the fees for each resident are based on their level of assets and income.

The steps for keeping bond negotiations in perspective are:

Step 1  – What will it take to be offered a place?
Step 2  – Can the person afford this bond?
Step 3  – Does the fee represent value for money?

To see how these steps apply in practice, let’s review the case study below for Faye.

Faye’s dilemma – case study
Faye has become too frail to continue living in her home. She has an Aged Care Assessment Team (ACAT) approval to move into low care. Her daughter Caroline would like Faye to move to a residential facility near her home so it is easy to visit Faye each day.

Caroline has spent time investigating options in her local area and has decided on a facility five minutes from her home. It has a very good reputation and is quite new.

Now, comes the difficult part with negotiating the bond.

This is a new facility and is carrying significant levels of debt used to fund the purchase of land and the building construction. The accommodation bonds are set at a minimum of $500,000 but range up to $650,000 depending on circumstances such as the resident’s level of assessable assets and the size of the room.

Faye’s only assets are her home in a regional town which is valued around $360,000 and $40,000 in the bank.  Her home contents are valued at $5,000 and she does not own a car.

The ACAT team left Faye a copy of the Department of Health and Ageing booklet and pack – 5 Steps to Entry to Residential Aged Care. This pack included the Centrelink asset assessment form which Faye completed and sent to Centrelink.

Centrelink will verify the information in the form to calculate her level of assessable assets and the maximum bond she is eligible to pay. The maximum bond is calculated as the assessable assets less $40,500 (figure relevant for entry up to 19 September 2012).

Faye lives alone so her home is counted as an assessable asset for the bond calculations. This puts her assessable assets at $405,000. She receives a letter from Centrelink stating the maximum bond she can pay is $364,500.

A week later, Caroline receives a phone call to say that a place has become available and an appointment is made to discuss the opportunity for her mother to move in. Caroline takes the Centrelink letter to help with her negotiations.

However, this may not result in the outcome Caroline is hoping for. The facility is firm that the minimum bond is $500,000. To admit Faye, they would need to accept a lower bond. As a result, the facility withdraws their offer and offers the place to another potential resident who has a greater level of assets.

This outcome is not dissimilar to someone selling a house. If the seller wants a price of $500,000 and the potential buyer can only borrow enough to pay $364,500 the seller does not have to accept this price. They can choose to either drop the sale price to accept the offer or discontinue negotiations and look for a new buyer. The same has happened in this case.

Just because the legislation sets Faye’s maximum bond at $364,500 does not mean the facility has to admit her for this bond level. It just means that if they choose to admit her they do so under an agreement to accept the lower bond.

What could Faye and Caroline have done?

Let’s go back to the steps outlined earlier in this article and review how they may have applied to Faye.

Step 1 What will it take to be offered a place?

When researching suitable facilities it is important to gain an indication of the bond level required and to understand what flexibility exists in negotiations.

This can be difficult as many facilities are reluctant to quote a bond until they have an indication of the person’s assets. The best strategy is to have an open and honest discussion with the facility. In reality, if Faye had disclosed the level of assets when she put her name on the waiting list she may never have received the call with the offer of a place.

Tip: newer facilities are likely to be carrying higher levels of debt. This generally means higher bonds and less flexibility to accept a lower bond.

Step 2 Can the person afford this bond?

Clearly in this case, Faye does not have sufficient assets to pay a bond of $500,000. Her family may need to consider whether they can afford to contribute part of the bond if they want to get her into this facility. But do they still have this opportunity when she already has a Centrelink assessment?

If an offer of a place is made and accepted, the person will be asked to sign a Resident Agreement. This is a legal contract between the facility and the resident. It sets out a range of issues including the agreed bond. The bond therefore needs to be paid by the resident, in this case Faye. It cannot be paid directly by anyone else to the facility as the facility is unable to enter into contracts with anyone but the resident.

One solution may be for the kids to gift the money to Faye and deposit it into her bank account before she moves to the facility. She can then request a new assessment from Centrelink based on a change in her circumstances. This strategy is not guaranteed to work as we have seen cases where Centrelink have denied a request to reassess assets within a short period of time.

Gifting money into Faye’s account will increase her assessable income and assets but she has 14 days to report the change to Centrelink for pension purposes. If the bond is paid within this time it will not impact her age pension payments.

If children are looking at contributing all or part of the bond, the best option may be to not fill in the Centrelink assessment at all, or at least not until after the gift is made to the parent. The Centrelink assessment is optional to obtain, although some facilities will require it before entry.

If the facility agrees, instead of obtaining a Centrelink assessment the person can sign a statutory declaration stating they have sufficient money to pay the requested bond and will be left with at least $40,500 after paying the bond.

Step 3 Does the fee represent value for money?

While Step 2 has worked through a solution to ensure she can afford to pay the bond, Faye and her family should determine whether the bond represents value for money to them.

What other options might exist for facilities that will accept a lower bond? Are those facilities comparable or is the lower bond coming at the cost of a desirable feature? This is a personal choice and is very similar to how we choose where we will buy a house.

Supported residents
Legislation did not really help or protect Faye, but there are some protection mechanisms for people with very low levels of assets.

Every government-subsidised aged care facility is required to take a minimum number of supported residents. This quota is 15-40% of all subsidised places depending on the socio-economic demographics of the area.

Supported residents are those who have less than $108,266.40 (current to 19 September 2012) of assessable assets when moving into aged care. These people still need to be left with $40,500 of assets after paying a bond and may incur a lower retention amount (if the bond is less than $38,760).

It is important to understand that the quota applies across all places in the facility. If the facility has both low care and high care places the facility may only take supported residents into high care places. It can therefore still be difficult to secure a low care place even if you are a supported resident.

Helping clients understand bonds
It should also be remembered that bonds are not all bad. Helping clients to understand the implications of bonds may help them to be comfortable with paying the bond.

• Bonds are government guaranteed
• Bonds are exempt under the Centrelink/Veterans’ Affairs income and assets tests and can help to maximise age pension and minimise daily care fees
• The bond is not a true fee, but rather is a refundable deposit. Each month the facility can deduct $323 (up to a total of $19,380 over a five year period) and the rest of the bond is refundable when the resident leaves or passes away
• Bonds are held in trust by the facility – this can help to protect the estate.

The average new bond is continuing to increase and facilities currently hold over $11 billion in bonds. Bonds are payment for the right to live in the facility and residents have security of tenure for the rest of their lives.

Building your business
There is widespread recognition that clients are ageing at a rate we’ve never experienced before. Older clients and their families are thinking about their future aged care needs and are looking for services to guide the process.

This provides professionals (including financial planners, lawyers and accountants) who service clients of all ages with business growth opportunities to help clients and their families navigate through aged care decisions, to ultimately give them lifestyle choices in the latter part of their life. It also provides a great opportunity to market to pre-retirees who are the children making the decisions for their parents.

Can you afford to miss out on this opportunity?
If not, register for a one-day workshop on Strategic Advice Steps for Aged Care to unlock your business potential. This workshop goes beyond the basics to show you how to provide advice to your clients and develop the skills to build an effective aged care advice business.

The next dates are:

• Sydney – 22 October
• Melbourne – 5 December
• Sydney – 17 December

Book early as numbers are limited. To register email to info@agedcaresteps.com.au with details of which session you are interested in, or express your interest in attending a session in another state.

Aged Care Steps enables professionals to participate in the rising dominance of the aged care market. We provide end-to-end support to set up business, grow business and provide client solutions. Aged Care Steps is supported by its parent company, Strategy Steps. For further information contact us at info@agedcaresteps.com.au

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

The post Negotiating aged care accommodation bonds appeared first on AdviserVoice.

In many instances, ‘Mum and Dad’ had a family business for many years that has long since ceased to be a going concern and, but for the large loan account inside the company, would have wound it down a long time ago. In other cases, it is a family investment trust – testament to a wealth creation and/or asset protection strategy set up years ago with their accountant and financial adviser which may have provided some tax benefits and built scale in pooling family investment reserves. Sometimes, however, it is not necessarily Mum and Dad’s family trust or private company but their high-income-earning son or daughter who has set up the structure and asked Mum and Dad to be beneficiaries to help manage tax.

Nevertheless, in all the cases I have looked at, no-one has ever had the forethought, a decade out from retirement, to ask; “Will this impact on our ability to qualify for the Age Pension?”

What are the Attribution Rules?

The attribution rules were introduced from 1 January 2002 and became effective from 30 April 2002. Their purpose was to assess interests in family trusts, testamentary trusts and private companies under both the Income and Assets Tests.  This would effectively remove a ‘Centrelink shelter’ that had allowed many people to qualify for Government assistance who otherwise would have been caught if assets held in these structures had been invested in their own names.

Trusts and Private Companies

Without going into “what is a company?” and ‘“what is a trust?”, details of which I am sure we are all cognisant, consider what Centrelink and the Department of Veterans’ Affairs (DVA) defines as a private company or private trust. According to the Centrelink Financial Information Services (FIS) Fact Sheet FIS022.0905, a private company,

“is a separate legal entity, set up to run a business or to hold investments, registered under Corporations Law, owned by shareholders and managed by its directors who are elected by the shareholders (1).”

Centrelink will deem the entity as a private company if, at the end of the last financial year, it met any two of the following three criteria:

1. the consolidated gross operating revenue of the company and any subsidiaries was less than $25 million;
2. the consolidated gross assets of the company and any subsidiaries were less than $12.5 million;  and
3. the company and any subsidiaries had less than 50 employees.

Most of the Mum and Dad enterprises I have encountered are certainly within that range, and if private companies hold many millions in Net Tangible Assets (NTAs) it generally means the directors hold significant wealth in their own names and in family trusts and Self-Managed Superannuation Funds (SMSFs), so they will not be looking to qualify for Centrelink anyway. But the Global Financial Crisis (GFC), which has been our constant companion since 2007, has put many previously high net worth retirees in a position where Centrelink support is certainly an option to help cover the costs of living in retirement.

But the attribution rules have come into play to reduce or deny the prospect of Centrelink support for many people. Money tucked away in family trusts and private companies, even where it is for the benefit of children, or for asset protection purposes, has been caught in the ‘attribution’ net.

In terms of private trusts, again referring to the aforementioned FIS Fact Sheet, Centrelink includes family discretionary trusts and testamentary trusts with fewer than 50 ‘members’. Now, trusts generally don’t have ‘members’, they have beneficiaries, or objects (in the case of a discretionary trust). But for the purposes of the attribution rules, a trust with more than 50 members is deemed to be a widely-held trust in the same form as listed (or unlisted) property trusts, managed equity trusts and other public trading trusts. In these cases the member’s holding is treated as a financial asset and deemed for income using the normal deeming rates.

The Assessment Tests with regard to Private Companies and Trusts

One of the difficulties faced by many people seeking to apply to Centrelink or to the DVA for financial support, particularly when they become eligible for the Age Pension, is determining how they will be assessed when there are often some seemingly minute and innocuous associations to a private company or trust. For instance, in the examples mentioned above where Mum and Dad are directors of a defunct company that ceased trading many years earlier, or where they are objects of a family trust and have never received a distribution, are they still caught by Centrelink/DVA?

There are two distinct tests that apply jointly to determine the inclusion of assets and income from a private company or trust. These are:

1. a Source Test; and
2. a Control Test.

Simply speaking, the Source Test relates to the source of funds introduced to a trust or private company, and the Control Test relates to who is in control of the trust or private company – for instance, directors of the company or corporate trustee, individual trustees, appointors and beneficiaries/shareholders.

By applying the attribution rules, a person applying for Centrelink/DVA support is attributed with the assets or income of the private trust or company and those assets and income are treated no differently to how the person’s own assets and income are treated.
1. The Control Test

You might think, “Well, the trustee has control of the assets of the trust so it is likely they will be ‘pinged’ by Centrelink/DVA”. And it is true that the director of the private company or the trustee of the trust does have control of the assets. But consider also, apart from the day-to-day management of the trust, who else can exercise effective control of the trust. Centrelink considers that anyone that can dismiss and appoint a trustee, veto a trustee’s decision or change the trust deed is also included; that is, an appointor, principal or guardian. Centrelink will also look beyond the normal trust law auspices where it deems a person might have influence over the trustee, or where the trustee might be expected to act for the benefit of that person.

2. The Source Test

The Source Test, on the other hand, seeks to attribute capital invested in a trust or company with the person(s) who originally transferred assets (which can include non-tangibles such as services), into the company or trust. If there has been no consideration paid for these assets, then there is necessarily an assumed retention of control by the transferor, unless in the case of a genuine gift.

If, after applying the above tests, a person is attributed with a share of the assets and/or income of a private trust or company, then the person’s share of the market value of the attributable assets, or the portion of net attributable income, will be assessed as being his/hers.

Strategy Considerations

There are some positives and negatives when applying the attribution rules.

Negatives

Many would consider it a negative to be assessed in the first place.  In addition to this, not all deductions allowed under the Tax Act will be allowed by Centrelink/DVA as a deduction to reduce income. These non-allowable deductions can include:

• prior year losses;
• losses from unrelated businesses;
• deductions caught up in the definition of Reportable Employer Superannuation Contributions (RESC); for example – salary sacrifice, and certain capital expenses.

Positives

There are some positive aspects however. On the assets side, a principal residence owned by a family trust will not be assessable. Also, assets are net of liabilities (if those liabilities are attributable to assessable assets). If a person is deemed not to be the controller of the trust of a private company, the person will not have the market value of the assets assessed against him/her, but will be assessed on the actual distributions or dividends (including imputation credits) made by the private trust or company for twelve months after the date of distribution.

However, the strategic advantage of the attribution of private trust/company income comes from the fact that private trusts and companies are not deemed for income, as are other financial assets, such as listed shares, term deposits and managed equity trusts.

This provides for the ability to manage the amount of income that is assessed to the Age Pension applicant. It can also have a positive outcome in planning for aged care as the use of a private trust may be useful in reducing the income-tested fee with only the actual (taxable) income of the trust assessed under the Income Test.

The following is an extract from the Guide to Social Security Law, 4.12.7.10, which contains the general rules regarding the attribution of income to an attributable stakeholder:

‘Attribution of the income of a private trust or private company
The basic approach for the attribution of the income (section 8(1)-‘income’) of a private trust or private company is as follows:

• If the assets (1.1.A.290) of an entity are attributed to a person (the attributable stakeholder) then all of the income (adjusted net profits) generated by those assets will also be attributed to them (subject to the percentage of attribution of the assets)
• Income from the entity for an attributable stakeholder will NOT be deemed, actual income will be used and will generally be assessed on an annual basis from the income tax return
• If the attributable stakeholder(s) choose to distribute entity capital or income to other people, the amounts distributed are to be treated as gifts by the attributable stakeholder and are subject to deprivation (1.1.D.110).

Exception: Distribution of the income of an entity to the partner of an attributable stakeholder is NOT treated as a gift of the stakeholder and is NOT subject to deprivation.

Note: An income support recipient who is an attributable stakeholder of a controlled entity can request a reassessment of their circumstances at any time (2).’

Therefore, in order to manage assessable income, a non-interest bearing deposit (or an insurance bond purchased by a private trust where there are no withdrawals) will generate zero assessable income for tax purposes. This means that while the value of the insurance bond will continue to be assessed under the Assets Test in full, there will be no assessable income, thus resulting in minimising the assessable income of the trust.

Of course, the benefits of the treatment of income from a private trust or company as opposed to the  deemed income from financial assets needs to be weighed up against the reporting and other associated costs of running a separate investment structure.

But what about the mum and dad with a loan to a defunct company, or the elderly parents who are trustees or minor beneficiaries of their children’s family trust?

Other Options

According to Centrelink, any person who has a loan to a private trust or company will be assessed under the deeming provisions, irrespective of whether he/she is a controller or non-controller. On the surface it sounds fairly black and white. This is, however, where the ‘Special Assessments’ area of Centrelink earns its stripes. In the case where a private company has a debt to the directors that will never be repaid (because the business that the company ran ceased to be a going concern a long time ago), it is worth going the extra step to push pass the initial bureaucracy and appeal the decision. I have seen instances like this where the loan was ignored, pending the winding-up of the company, without the amount being seen as a gift and deemed for a period of five years (as might normally happen).

For beneficiaries or shareholders with minority interests, Centrelink will look at the trust’s history of income distributions, or the company’s history of dividend payments to ascertain a payment pattern. If Mum and Dad are objects of a trust that has been in existence for a long time and have never received an income distribution (and are not deemed to be controllers of the trust or to have been an initial or subsequent source of transferred capital), then Centrelink has, in the past, been shown to disregard the holding, pending surrender of the holding.

In the case of a trusteeship or a directorship that has precluded eligibility for the Age Pension, the trustee or director can relinquish control, that is, resign as the appointor and/or trustee of a trust or, for a company, relinquish all formal roles, directorships and shareholdings. They are, of course, considered to have gifted all the assets held by the trust or company and the deprivation rules will therefore apply where the market value of the amount foregone/gifted, is assessed as an asset for five years and deemed for income.

According to Centrelink, it will accept a genuine resignation has occurred where, in respect of the private trust or company, both the controller and his/her partner:

• relinquish all formal roles and control;
• relinquish all beneficial interests; and
• make a written declaration that they will not exert any control over, or benefit in any way from, the trust or company.

Excluded Trusts

For the purposes of the Centrelink/DVA means test provisions, and in particular the attribution of assets or income of a private trust to an individual, the Social Security (Means Test Treatment of Private Trusts – Excluded Trusts) (DEEWR) Declaration 2008 specifies classes of trusts that are ‘excluded trusts’ for these attribution purposes, including:

• pre-10 May 2000 community and fixed trusts;
• trusts where the sole or dominant purpose of a trust is to receive, manage and distribute property transferred to it by a government body for a community purpose; and
• trusts that hold, manage, or dispose of indigenous-held land for a community purpose or where the sole or dominant purpose of a trust is to receive, manage and distribute income generated from the use of indigenous-held land for a community purpose.

It is also important to note that certain ‘Court-ordered trusts’ and, particularly, Special Disability Trusts, have different treatments again imposed by Centrelink and the DVA. But these issues are beyond the scope of this paper.

Conclusion

There are three important aspects of dealing with private trusts and companies to bear in mind:

1. Make sure your clients fully disclose all beneficial interests and any trusteeships or directorships they might have.
2. Know the attribution and deprivation rules and how they will impact on your clients’ chances of qualifying for Centrelink/DVA support before you implement any strategies to maximise their pension amount.
3. An initial Centrelink assessment should not be taken as the be-all-and-end-all – there are avenues for appeal.

And get some good technical advice!

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

1. Centrelink, Private trusts and private companies, FS022.0905, p1, <http://www.centrelink.gov.au/internet/internet.nsf/filestores/fis022_0905/$file/fis022_0905en.pdf>, accessed   23 July 2010.

2. Australian Government, Guide to Social Security Law, Version 1.166,  Section 4.12.7.10 Income Attribution, updated 1 July 2010, <http://www.fahcsia.gov.au/guides_acts/ssg/ssguide-4/ssguide-4.12/ssguide-4.12.7/ssguide-4.12.7.10.html>, accessed 28 July 2010.

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