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Narrowing permitted uses of accommodation bonds - implications for providers

By Julie McStay26 Oct 2011

From 1 October 2011 changes to accommodation bonds (bonds) regulation implemented under the Aged Care Amendment Act 2011 (Cth) and User Rights Amendment Principles 2011 (No. 3), commenced. These changes (to be transitioned in over a two year period ending 30 September 2013) have implications for approved providers in the way they use and manage bonds and income from bonds. However in practical terms the changes will take effect gradually.

The stated aim of the Department of Health and Ageing (DoHA) is to address what it sees as the ‘risks associated with managing bonds’ given that as of 30 June 2010 providers held more than $10.6 billion in bonds on behalf of over 63,000 residents.

The changes include:

  • new limits on ‘permitted uses’ for bonds;
  • removal of restrictions on the use of accommodation charges, retention amounts and income derived from bonds;
  • new information gathering powers for DoHA to investigate the uses of bonds;
  • introduction of criminal offences for serious misuse of bonds; and
  • introduction of a new Governance Standard (from 1 February 2012).

Permitted uses of bonds

Initially intended to give providers a source of capital funding (particularly for improvement of infrastructure) in practice, bonds have come to be relied upon (often out of necessity) to finance operational expenses. As the provisions of the Aged Care Act 1997 (Cth) (Act) prohibited bonds being used for a purpose ‘not related to providing aged care’(1) (subject to prudential requirements) arguably, use for operational expenditure was not specifically precluded.

Subject to transition period provisions (discussed shortly), bonds charged on or after 1 October 2011 are only to be used for a ‘permitted use’ (2) . Permitted uses include:

  • capital expenditure;
  • investment in particular (risk managed) financial products;
  • making loans for capital works or investments (on a commercial basis, by written agreement);
  • refunding bond balances or entry contributions;
  • repaying debts accrued for:
    • capital expenditure;
    • refunding bond balances; or
    • providing aged care (where the debt was accrued prior to 1 October 2011); and
  • meeting reasonable business losses during the first 12 months of operation of an aged care facility.

This is because these losses are considered to be closely related to the initial capital investment, justifying the 12 month ‘amnesty’ to use bonds to support operational costs.
Of note, the list of permitted uses does not include operational expenses. Providers will not be permitted to use bonds to finance operational expenses such as routine repairs and maintenance (painting, plumbing, electrical work, gardening or vehicle leasing) or other day to day costs such as staff wages or the purchase of consumables.

Removal of some restrictions

In the past 57A-2(1)(l) and S57-2(1)(n) of the Act provided that accommodation charges, retention amounts and income from bonds could only be used to meet capital works costs, to retire debt relating to residential care or where no capital expenditure was needed, to improve the quality and range of aged care services. Providers may have considered this provision justification for using these funds for operational expenses. This section has been repealed. Removal of restrictions means that providers may use these monies for any purpose, including operational expenses.

Information gathering powers

DoHA will have extended information gathering powers where it is believed on reasonable grounds that a provider:

  • has not (or would not be able to) refund an accommodation bond balance (3);
  • is experiencing financial difficulties; or
  • has used a bond for a purpose other than a permitted use.
  • DoHA may only request information related to:
  • a provider’s suitability to provide aged care;
  • a provider’s financial situation;
  • the amount of bond balances;
  • how a provider has used a bond;
  • a provider’s policies and procedures relating to bonds; and
  • the roles and responsibilities of key personnel in managing bonds.

In practical terms the scope of this provision and apparent discretion afforded DoHA in terms of access to information would seem very broad.

Providers must comply with DoHA’s request for information within 28 days (or a shorter period if specified in the request). It is an offence for a provider (that is a corporation) not to comply with DoHA’s request. The maximum penalty is $3,000.

Penalties and criminal offences

The new provisions provide for penalties in the event of 'recklessness or negligence as to use'. The purpose is not to penalise key personal for innocent minor inadvertent misuse, or for working for a corporation which inadvertently misuses. The purpose is to address blatant misuse or disregard to the principles around permitted use.

Penalties will apply to a provider (that is a corporation) and/or to key personnel, if within 2 years after the use of a bond for other than a permitted use:

  • an insolvency event occurs; and
  • there has been at least one outstanding bond balance.

New Governance Standard

The new Governance Standard (effective 1 February 2012) will require providers to implement governance systems which ensure accommodation bonds are only used for permitted uses and are refunded in accordance with the timeframes required by the Act.

Transitional arrangements

Although the permitted use arrangements take effect from 1 October 2011, providers are given until 30 September 2013 to become familiar with the permitted use provisions and to adjust internal practices to comply (transition period).

To be clear, during the transition period providers may use bonds charged for entry on or after 1 October 2011 for both capital and non-capital purposes relating to providing residential or flexible aged care. The changes will only impact bonds for entry into care paid by care recipients after 1 October 2013 and are not retrospectively applied to bonds currently held.

Moving forward

This legislative change reveals a clear and strict future approach by government to permitted uses for bonds; governance of same and penalties for less than diligent compliance. However, the changes have been very widely considered and discussed by the industry with an apparent lack of consternation despite implications in terms of operational expenditure.

This may be because the removal of restrictions on the use of accommodation charges, retention amounts and income derived from bonds will help facilitate a flexibility to manage cash flow to offset the new limits on permitted uses for the 'lump sum element of the accommodation bonds' (4). It may also be because the transition period eases in the changes.

Further, despite the new penalties, these only apply if a bond balance cannot be repaid in circumstances of an insolvency event where a non-permitted use has occurred in the previous two years. As discussed, in our view the purpose is not to penalise key personal for innocent minor inadvertent misuse.

Although the transition period and the non-retrospective nature of the changes give providers time to adjust, if not already doing so, we recommend providers consider their business models, internal practices and processes around the use of bonds.

Hynes Legal is able to advise on the permitted uses of bonds and adjustments required to comply with these changes. We can also assist in the preparation of policies and procedures to address the new governance obligations.Should you require assistance with policies, procedures or staff training on professional boundaries please do not hesitate to contact Julie McStay.

Footnotes

(1) 57-2(1)(k) Aged Care Act 1997 (Cth), section now repealed.

(2) Protecting Residents’ Savings, A guide to the arrangements for accommodation bonds from 1 October 2011. 

(3) Accommodation bond balance being the bond less: retention amount; and amount owed to provider under accommodation bond agreement, resident agreement or extra service agreement (plus amounts representing interest on amounts specified in these agreements).

(4)  Protecting Residents’ Savings, Opcit at p13