Refundable Accommodation Contribution (RAC): What It Is and How It Works

by | Oct 1, 2024 | Aged Care

Refundable Accommodation Contribution RAC

Navigating the various costs associated with aged care can be challenging. Among these, the Refundable Accommodation Contribution stands out—not only because it is less commonly encountered, but also because it is one of the most complex to understand.

In this article, we’ll explore what the Refundable Accommodation Contribution is, who is required to pay it, and under what circumstances it is refunded.

What is a Refundable Accommodation Contribution?

A Refundable Accommodation Contribution (RAC) is a one-time lump sum payment made by certain residents towards their costs of aged care.

The amount of RAC payable by an aged care resident is determined by their level of financial means at any given time.

A RAC is paid either as an alternative to or in conjunction with a Daily Accommodation Contribution (DAC). Specifically, making a RAC payment can reduce or completely offset the need to pay a DAC.

Who Pays a Refundable Accommodation Contribution?

A Refundable Accommodation Contribution is an optional payment made by aged care residents who are classified as low-means upon entering care.

This voluntary RAC payment varies periodically based on the resident’s income and assets, along with the Maximum Permissible Interest Rate (MPIR), which the Australian Government adjusts quarterly.

How is a RAC Calculated?

The RAC is derived using the Daily Accommodation Contribution (DAC) and the Maximum Permissible Interest Rate (MPIR). Both of these figures must be known to calculate the RAC.

A DAC represents the amount that a low-means aged care resident is required to make towards their aged care costs, as determined by Services Australia. The MPIR is the figure set by the Australian government each quarter and can be found here.

With the DAC and MPIR values in hand, the RAC is calculated using the following formula:

RAC = (DAC x 365)/MPIR

For instance, if a low-means resident had a DAC calculated as $25 per day and the MPIR was 8.36% (Sept 2024 quarter), then the RAC would be calculated as follows:

RAC = ($25 x 365) / 8.36% = $109,150.72

This formula provides the method for calculating the RAC.

What’s the Difference Between a DAC and a RAC?

The distinction between a DAC and a RAC is that the DAC is an ongoing daily charge, typically billed monthly, paid in lieu of a RAC; whereas a RAC is a one-off lump sum payment that reduces or eliminates the DAC to be paid.

A DAC is paid on any unpaid RAC amount. If the calculated RAC is paid in full, then no DAC is payable.

What is the Difference between an Accommodation Contribution and Accommodation Payment?

The difference between a Daily Accommodation Contribution (DAC) and a Daily Accommodation Payment (DAP) is that the DAC applies only to low-means aged care residents and is calculated based on the resident’s income and assets, whereas a DAP applies to residents not classified as low-means and is based on the specific advertised Refundable Accommodation Deposit (RAD) set by the aged care home.

Is a RAC Refundable?

Any remaining RAC balance will be fully refunded when a resident departs from an aged care facility or passes away.

The refunded RAC might be less than the initially contributed amount if fees, such as Daily Accommodation Contributions, were deducted from it or if a portion of the RAC was previously refunded following a reassessment.

Should I Pay a DAC or a RAC?

Deciding whether to pay a Daily Accommodation Contribution (DAC) or a Refundable Accommodation Contribution (RAC) depends on several factors, including:

  • Available Funds: You need sufficient bank savings to make a lump sum payment towards a RAC. If you don’t have much in savings, a DAC might be more suitable.
  • Cash Flow Position: If your expenses while residing in aged care will exceed your income, you might need to rely on bank savings to cover the shortfall. Therefore, it might be best to not use such funds to contribute towards the RAC.
  • Financial Benefit: Contributing towards the RAC will provide you with an effective guaranteed after-tax return equal to the Maximum Permissible Interest Rate (MPIR). Achieving such a return elsewhere is unlikely, making a RAC payment a favorable option on a risk-adjusted basis.

While making at least a partial RAC payment is often advantageous, it’s essential to consider your specific financial situation and the need for access to funds. Once made, RAC payments are not retrievable unless you leave the aged care facility.

At CoreValue we will help you navigate the complexities of aged care and find the best financial solutions for your family. If you have any questions or concerns regarding your situation, please call us on 1300 944 011 to speak to an aged care expert.
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