Current Law relating to the rest home
subsidy “Gifting”
For people contemplating rest home care
there are two tests to determine if you are entitled to a rest home subsidy.
The first is the asset test:
Asset test
The first test is to add up your assets and
if they exceed certain limits then you are not entitled to the subsidy (the
limit is about 220.000 for a single person)
More importantly if you have ever gifted
more than $27,000 pa then that amount needs to be added into the asset amount.
It is accepted that any gifts of less than $27000pa are not added into the
asset amount.
The second is the income test:
Income test
In the event that your adjusted assets are
still below the permitted threshold the income test will apply.
Pretty much your not permitted more than
about $1000 of annual income before the rest home subsidy starts to reduce.
The purpose of this article is to set out
what income you could have “deprived yourself of” which will also be added into
your income assessment and result in a reduced subsidy.
The current state of the law is set out in
the Broadbent v MSD case in the High Court. That decision clarifies that you
are permitted to gift up to $27,000 pa and those gifts will not constitute
deprivation of the income that could have been earned on that money had it not
been gifted. Any Gifts in excess of $27,000pa will constitute deprivation of
income that could have been earned on that capital.
The problem for advisors is that although
this is the law, the MSD refuses to accept it and continues to assess deprived
income that could have been earned if gifts of less than $27,000 had not been
made.
So the quandary for advisors is should they
advise in accordance with the High Court decision or should they advise on the
basis of the ministries policy which is being applied in contravention of the
High Court decision. And depending which advise they give are they negligent
for giving the wrong advice?
Or do advisors simply give no advice? And
how helpful is that?
In the public hearing at the Court of
Appeal on 10 July 2018 I asked the question that if I gave someone $50,000 I
would deprive myself of potential income, but if I gave $27,000 today and gave
23,000 in 14 months time would those gifts result in deprived income for rest
home subsidy purposes.
The Court of Appeal has not yet answered
that question so until they do the High court decision stands and that is that
the 27k plus the 23k over a year later do not deprive income.(For rest home
purposes)
Bottom line is that if a client asks you
this question the High Court ruling is the correct answer but on applying for a
rest home subsidy that person will be assessed by MSD to have deprived themselves
of income. This outcome is not fair to the person or their advisors. Another alternative is that people do not
make any gifts in which case they have foregone the opportunity to gift $27000
in that particular year.
Stephen Broadbent 11 July 2018
Update 1 June 2019 ...The Court of Appeal has confirmed the High Court decision
" I am pleased that this decision clarifies the financial entitlement of people who require rest home care.
MSD has been treating all trust income as deprived income of the trust settlors/beneficiary even though no gift ever exceeded $27000 per annum (the exempt level of gifting).
The decision confirms that the small gifts (less than $27000pa) are not acts of deprivation and the hypothetical income on the gifted capital cannot be added into the means assessment. The court also comments that bad investment decisions and "profligacy" is not deprivation, this is contrary to the view previously held by the MSD and SSAA.
The decision clarifies that the amount of income deprived needs to be calculated based on the act that deprived the income in a logical and rational manner. MSD's policy of taking all trust income is never appropriate. If the depriving act was to gift say $100,000 then the income deprived would be the interest rate on $100,000, not the current return on whatever the $100,000 may now be invested in.
However the Court of Appeal has commented that other actions within a trust may deprive income. Care needs to be taken when any other benefit from a trust is forgone. This includes interest on loans, beneficiary distributions and powers that the settlors may have over trustees.
The Court also confirmed that although a lender may not have charged interest on a loan they may have received other benefits such as rent free use of a house in which case, such benefits received should be set off against the interest value.
This leaves MSD with a very complicated calculation to make for the thousands of people it has wrongly reduced or denied rest home subsidies too over the last four years or more."
