The Refundable Accommodation Deposit to Enter Residential Aged Care; Benefits and Drawbacks

By Harriet Knapman

Refundable Accommodation Deposit to Enter Residential Aged Care

1. Introduction

When a consumer moves into an aged care facility, they may pay their accommodation costs in one of three ways: a refundable lump sum, a daily payment (‘DAP’), or a combination of the two.

A refundable lump sum or Refundable Accommodation Deposit (‘RAD’) is an upfront full payment of accommodation costs. To facilitate the different payment choices, an ‘equivalence formula’ was introduced for converting a RAD into a DAP. The formula uses the Maximum Permissible Interest Rate (‘MPIR’), which remains fixed for the duration of a resident’s stay in a particular room within an aged care home.[1] On 1st July 2022, the MPIR in Australia was 5%, and as of 1st January 2023, it has increased to 7.06%.[2]

The introduction of the RAD on 1 July 2014 formed part of the Living Longer Living Better reforms to Aged Care regulation. The purpose of these reforms was to provide a source of capital to approved providers of aged care services as well as to promote ‘means testing’ of Government support for residents.[3] All incoming residents can negotiate a room price before moving into residential aged care, but not all residents will need to pay this price. Services Australia conducts a means assessment to evaluate whether an incoming resident qualifies for ‘low means’ status. Residents considered ‘low means’ are required to contribute to their aged care services only.  Incentives are available for aged care providers to consider accepting ‘low means’ individuals into their facilities. The Australian Government pays an ‘accommodation supplement’ (‘AS’) in certain circumstances.[4] It is necessary to meet the relevant conditions for an AS that an aged care provider has at least 40% low means residents in their facility.

There are several benefits and drawbacks associated with the RAD option.

2. RAD Benefits

Benefits include the following:

  • The RAD enables older people with sufficient funds to enter aged care facilities with peace of mind that should they pass away or leave the facility, any balance remaining will be refunded to them or to their estate. The repayment of RADs is guaranteed by the Australian Government under the Aged Care Accommodation Payment Guarantee Scheme.[5]
  • The RAD is not required prior to entering an aged care facility.[6]
  • A new resident has 28 days to decide what proportion of their accommodation costs is to be paid by a RAD.[7]
  • The RAD must be paid within six months of entering an aged care facility.[8]
  • Until the RAD is paid, a DAP will be set and paid in the same way as a rental payment on a daily basis.[9]

When someone enters an aged care facility and elects to pay the RAD, they are paying for accommodation via a lump sum payment. If they choose one of the alternative payment options, they must pay a daily rate plus interest. The amount advertised by the provider is the maximum price which can be charged to a resident.[10] If the RAD charged exceeds $550,000, the sum must be approved by the Aged Care Pricing Commissioner.[11] This procedure protects residents from being overcharged by assessing if the proposed price represents value for money and how the provider justifies that price.

A resident can increase their RAD at any time if they have elected to pay a combination of RAD and DAP to supplant the DAP.[12]  In addition, if a resident is able to pay a partial RAD, they can request that the provider deduct the DAP from this sum, in addition to deducting any other applicable fees associated with aged care residency.[13]

When entering into an accommodation agreement, incoming residents have a 14-day cooling-off period.[14] This allows for a change of mind and enables residents to terminate the agreement, at any time, without incurring penalties.

3. RAD Disadvantages

Consumers may feel disadvantaged by the RAD for several reasons:

  • An aged care facility does not have to admit a resident who cannot fund a RAD or one of the other two residential funding options.[15] This situation has contributed to those wishing to enter residential care selling their homes to afford the associated costs.[16]
  • The costs of moving into residential living are high. The average value of RADs has increased from 2013-14 to 2019-20 by $103,000.[17] Further, the Royal Commission into Aged Care Quality and Safety (‘Royal Commission’) concluded that the multifaceted capital financing arrangements for aged care accommodation can ‘distort incentives for older people and providers and can impose a large cost burden on older people and their families.’[18]
  • Aged care providers can, at their sole discretion, decide, first, whether to admit a new resident and, if so, whether the applicant pays the full RAD or a RAD and/or DAP.  Further, a provider may alter its requirements (in extreme circumstances) day by day.[19] Thus, if someone presents to a provider with RAD funding, the provider can admit that person. The next day, the same provider may refuse admission.

The aged care sector has become reliant on residents choosing the RAD.[20]  This option enables providers to invest residents’ large sum payments into improving the facility.[21] In recent years, an increase in residents opting to make DAPs rather than paying the RAD  has caused providers to struggle to secure loans.[22] This trend applies especially to providers located in remote areas – a disadvantage when seeking to attract high accommodation payments, which, in turn, affects lending capabilities.[23] If providers do not have a RAD being replaced by another RAD, providers must find this extra funding from elsewhere. These factors also raise concerns regarding the quality of care provided.[24]

4. Royal Commission Recommendations

The Royal Commission made 148 recommendations, two of which are particularly relevant to the continuation of the RAD.

Recommendation 132

Recommendation 132[25] relates to the liquidity of aged care providers. It recommends that from 1 July 2023, the Prudential Regulator be authorised to impose ‘liquidity and capital adequacy requirements’ on providers. This highlights the need for providers to ensure they have sufficient financial support to provide high-quality care to residents. Further, Recommendation 132 suggests that the Prudential Regulator be empowered to impose these requirements on providers who hold RADs to ensure they will be able to repay these large-sum payments when the time comes. The former Morrison Government responded[26] to this recommendation through the ‘Residential Aged Care Services and Sustainability – Aged Care Structural Adjustment Strategy’.[27] Further, Recommendation 132 would be legislated as part of the implementation of a new ‘consumer-focused’[28] Aged Care Act with requirements that must be met for liquidity and capital adequacy.[29]

The current Albanese Labor Government has introduced the Aged Care Amendment (Implementing Care Reform) Bill 2022 (‘the Amendment Bill 2022’). This Bill includes changes to s 9-3B of the Aged Care Act 1977 (‘Aged Care Act’), which will enable monitoring of requirements for permitted uses of the RAD.[30] Further, the amendments aim to shed light on the use of the RAD for securing loans which in turn can impact an aged care provider’s financial viability.[31]

Recommendation 142

Recommendation 142 suggests phasing out the RAD entirely,[32] reflecting the recent trend towards rejecting this payment option. The Commission recommended that the Federal Government begin to discontinue the use of the RAD from 1 July 2025 [33] and that the Government should assist providers with the ‘transition away from [RADs] as a source of capital’. As mentioned, funding aged care accommodation has been slowly shifting away from utilising the full RAD in place of a DAP or a combination of a RAD and DAP. Recent data from StewartBrown shows that 24% of residents from 1,282 aged care homes across Australia are electing to pay a full RAD, 55% a DAP, and 21% a combination of the two.[34] This shift away from a lump sum payment can, in part, be attributed to people entering care with more uncertainty about how long they might remain in care, ongoing health concerns, and the need to sell their assets in order to pay a large RAD. The current Albanese Government has stated an intention to ‘implement a new financial and prudential monitoring, compliance and intervention framework in the aged care sector’.[35] Further, the aforementioned Amendment Bill 2022 will create a ‘stronger disincentive against the use of the [RAD]’ by extending the period of liability for offences relating to non-permitted use of RADs from the current two years under the Aged Care Act to five years.[36]

5. Conclusion

The current aged care environment and industry sentiment signal a shift away from the use of RADs. The Morrison Government appeared reluctant to move with this shift based on its response to the Royal Commission’s recommendations. However, the introduction of the Amendment Bill 2022 by the Albanese Government shows an intention to put action to words in the aged care sector. Whether or not the RAD will continue from 2025 onwards is unknown. But clearly, incoming residents appear to be moving away from electing to pay the RAD.

For now, the RAD presents various benefits and detriments to consumers entering aged care. It is paramount that incoming residents are informed and aware of the options available to them for funding their aged care living.

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[1] Australian Government Aged Care Financing Authority, ‘Review of the Current and Future Role of Refundable Accommodation Deposits in Aged Care’ (2021) 2. (“RADs Review 2021”).

[2] Australian Government, Department of Health, ‘Base interest rate (BIR) and maximum permissible interest rate (MPIR) for residential care’ (2023) 2.

[3] Ernest Young, ‘Review of Aged Care legislation which provides for the regulation and protection of Refundable Accommodation Payments in Residential Aged Care’ (Final Report, 26 May 2017) 8.

[4] Aged Care Act 1997 (Cth) s 44-28 (‘Aged Care Act’).

[5] Royal Commission into Aged Care Quality and Safety (Final Report Executive Summary, March 2021) 160 (“Royal Commission, Executive Summary”)

[6] Aged Care Act (n 5) s 52F.4.

[7] Richard McCullagh, Australian Elder Law (Thomson Reuters, June 2018) 170 (“R. McCullagh 2018”).

[8]  Ibid.

[9] Ibid.

[10] Aged Care Act (n 5) ss 52G-2(e)(ii) and 52G-5; Fees and Payments Principles 2014 (No 2) (Cth) ss 19 and 21

[11] Ibid ss 52G-3 and 52C-4; Ibid s 26

[12] R. McCullagh 2018, 174.

[13] Aged Care Act (n 5) s 52J-7(1) and (2) (b).

[14]  Ibid s 59-1(2)(c) and User Rights Principles 2014 (Cth) s 15(2) referred to in R. McCullagh 2018, 172.

[15] Ibid 169.

[16] Ibid.

[17] RADs Review 2021 (n 2)  6.

[18] Royal Commission Executive Summary, 77.

[19] R. McCullagh 2018, 169.

[20] Royal Commission, Executive Summary, 77.

[21] Ibid.

[22] Ibid.

[23] Ibid.

[24] Ibid 161.

[25] Royal Commission (Final Report, List of Recommendations, March 2021) 299 (‘Royal Commission Recommendations’).

[26] Australian Government, Department of Health, ‘Australian Government Response to the Final Report of the Royal Commission into Aged Care Quality and Safety’ (Report, May 2021) (‘Government Response, May 2021’).

[27] Ibid 88.

[28] Ibid 1.

[29] Ibid 88.

[30] Explanatory Memorandum, Aged Care and Other Legislation Amendment (Royal Commission Response) Bill 2022 117. (“Memo, A C Response Bill 2022”).

[31] Ibid.

[32] Royal Commission Recommendations (n 26) 307.

[33] Ibid.

[34] StewartBrown, Aged Care Financial Performance Survey Sector Report (March 2022).

[35] Memo, A C Response Bill 2022 (n. 31)120.

[36] Ibid; Aged Care Act (n 5) s 52N.2(2)(d).


The views expressed in this article are the views of the author. The contents of this article are for general information purposes only and do not constitute legal advice, are not intended to be a substitute for legal advice, and should not be relied upon as such. Legal advice should be sought prior to any action being taken in reliance on any of the information. If you need legal support, please contact Aged Care Justice who can provide access to legal assistance.