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Did the aged care industry budget for the 2018-2019 Budget?

Victor Harcourt, Isobelle Pepe

In the 2018-2019 Budget, aged care providers were informed that the government would be introducing a levy to fund the Accommodation Payment Security Scheme ("Scheme").

The Scheme acts like a fidelity fund for Accommodation Payments when approved providers become insolvent and are unable to refund residents the balances owed to them.

While this is the first time a levy has been foreshadowed, the government has had the power to set and impose a levy on providers since 2006. The levy was designed to be used to buoy the funds available in the Scheme and originally was hoped to assist with transferring the risk and cost of maintaining the Scheme from the government (and therefore tax payers) to approved providers and the beneficiaries of the Scheme, being the residents.

By way of background, the protection of resident’s Refundable Accommodation Deposits ("RADs") has long been protected by a strong prudential scheme first established through the Aged Care Act in 1997. Many know that the Prudential Standards under the Act were intended to ensure that approved providers were restricted to only engaging in low risk activities to protect against the loss of Accommodation Payments such as RADs and as a consequence, reduce the risk posed to the Scheme.

The Department of Health announced in this year’s Budget that regulations would be enacted to introduce a compulsory and retrospective levy on residential aged care providers where defaults exceed $3 million in any fiscal year.

The Department of Health have estimated that the changes brought about by the upcoming levy regulations will cost $4.8 million over the next four years. Presumably, given the high cost, the Department foresees many changes and therefore a need for greater resources to manage the Scheme and the implementation of the new levy.

It is currently unclear as to what this will look like; for example, will smaller providers as a class of approved providers pay a lower levy? How far back will the retrospective levy apply and will the default threshold amount of $3 million be phased in?

While many believe that the recent Senate Inquiry into the Tax Practices and Financials of For-Profit aged care providers was brought about by the Australian Nursing and Midwifery Federation’s report into Tax Avoidance, changes to the financial management of providers has been in the works for some time.

In May 2017, Ernest & Young delivered a report (“EY Review”) commissioned by the Department of Health on the management of RADs. The review was commissioned in light of an increase in reliance on the Scheme when providers became insolvent. The Scheme has paid out approximately $43 million dollars in the last eleven years due to failing providers. The EY Review outlined 15 recommendations for the overhaul of the Act’s Prudential Standards in relation to RADs.

One of the key recommendations was that approved providers disclosed to and educated residents on their corporate structures, sought and received the Department’s approval for ownership changes and had set liquidity and capital adequacy thresholds. While the EY Review is yet to receive support from the government, these recommendations are no doubt in the peripheral given the government’s consideration of the industry’s tax practices and general financial management.

The Legislated Review of Aged Care (“Tune Review”) was then published in July 2017 and covered the imposition of a levy to recoup all of the costs of default events in the past. In comparison, the government intend to lower the threshold amount from the recommended $5 million to $3 million in a fiscal year.  

We see the EY Review forming the basis for the Senate Inquiry to conclude that providers must take further, more onerous steps to inform the Department of their financial situation. These recommendations evidence a policy objective to reduce calls on the Scheme and to place more risk and burden on providers all the while increasing the regulation of a highly regulated industry. 

Our concern is that the outcome will be further costly reforms which tip more providers into losses than predicted by recent benchmarking reports.

The Senate Inquiry’s report is due on 14 August 2018.

If you would like more information please contact Victor Harcourt or Isobelle Pepe from our Aged Care team.

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