Issue
Do amounts retained from a lump sum accommodation bond, paid by a taxpayer as a resident of an aged care facility to their aged care provider, qualify as a 'medical expense' for the purposes of section 159P of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The amounts of the lump sum accommodation bond that are retained by the aged care provider qualify as 'medical expenses' for the purposes of claiming a medical expenses tax offset under section 159P of the ITAA 1936.
Facts
The taxpayer is a resident of an aged care facility that is an 'approved provider' under the Aged Care Act 1997 .
The taxpayer is classified under the Aged Care Act as an 'approved care recipient' in need of level 7 care.
The taxpayer signed a resident agreement with the care provider that contracted them to pay an accommodation bond of $100,000.
The taxpayer has elected to pay the accommodation bond in the form of a lump sum.
The care provider is entitled to retain $239 per month of the accommodation bond over a retention period of five years from the date the taxpayer entered the aged care facility.
Reasons for Decision
A tax offset is available for the cost of net medical expenses paid by a taxpayer in respect of themselves or their dependant. Net medical expenses are the total cost of the medical expenses less any refunds the taxpayer obtained, or could obtain, from Medicare or a private health fund (subsection 159P(1) of the ITAA 1936).
From the 2002-03 income year onwards, the tax offset is available to a taxpayer whose net medical expenses in the year of income exceed $1,500 and the amount of the tax offset is equal to 20% of that excess (subsection 159P(3A) of the ITAA 1936).
The term 'medical expenses' is defined to include payments made to a public or private hospital in respect of an illness (subsection 159P(4) of the ITAA 1936).
Consideration is first given as to whether or not the taxpayer's care provider qualifies as a 'hospital' in the sense meant by subsection 159P(4) of the ITAA 1936.
As the term 'hospital' is not defined for the purposes of section 159P of the ITAA 1936, reference is made to its ordinary meaning. The Macquarie Dictionary (Revised Third Edition) 2001 defines 'hospital' as: an institution in which sick or injured persons are given medical or surgical treatment.
Under the Aged Care Act, an aged care facility that is an 'approved provider' is entitled to receive Commonwealth funding on the basis that it will provide medical treatment and care to residents, depending on the assessed level of care required. Therefore, an aged care facility that is an 'approved provider' is considered to be a hospital for the purposes of section 159P of the ITAA 1936.
Next, the question of whether or not the amounts retained, by the approved provider from the lump sum accommodation bond, are payments 'in respect of an illness' must be addressed.
Firstly, it is clear that the retained amounts are 'payments' in the sense meant by subsection 159P(4) of the ITAA 1936 as these amounts will not form part of the accommodation bond ultimately refunded to the taxpayer. Unlike the accommodation bond itself, the retained amounts are not in the nature of a bond or loan and may be more properly classed as 'payments'.
Further, in terms of those payments being in 'respect of an illness', the accepted meaning of the term 'illness' is contained in Taxation Ruling IT 2359. Paragraph 5 of IT 2359 states: The terms 'illness' and 'operation' are not defined in the income tax law. The terms are not technical and are to be given the meanings which are ordinarily given to them.
Taxation Ruling IT 2359 goes on to endorse Dr Gerber's understanding of the ordinary meaning of 'illness', as stated in Case Q21 83 ATC 77; Case 85 26 CTBR (NS) 570 ( Case Q21 ): Illness is not defined in the Act. However, I do not accept that it is a term of art. Adopting a purposive construction, I find the term includes any condition marked by a pronounced deviation from the normal healthy state. If this is the correct view, illness must include any disorder of body, function or systems.
The classification of a care recipient under the Aged Care Act determines the Commonwealth subsidy to which an 'approved provider' is entitled in respect of that care recipient. The classification scale spans 1 to 8, with level 1 being the highest level of care and level 8 the lowest.
In respect of a care recipient who is classified as needing a level of care within the level 1 to 7 bandwidth, the 'approved provider' is entitled to an amount of Commonwealth subsidy calculated on a sliding scale. Where the care recipient is classified as needing level 8 care, the 'approved provider' receives no subsidy whatsoever.
It is accepted that the nature of care provided to a level 1 to 7 care recipient may be characterised as being in relation to an 'illness' because such care is necessarily provided to someone whose condition is not that of a healthy state.
Conversely, the nature of care provided to a level 8 care recipient cannot be characterised as being in relation to an 'illness' because it is more in the nature of hostel services and has an insufficient connection to their state of health.
Finally, the test of whether or not the retained amounts are payments 'in respect of' an illness turns on the common understanding of this phrase. Again, Case Q21 provides guidance in the form of Mr Hogan's discussion of the scope of the phrase: The words 'in respect of' are difficult of definition but they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer.
It is accepted that where the retained amount is paid by a person needing level 1-7 care the payment is being made 'in respect of an illness' (Taxation Ruling IT 261).
Therefore, the amounts retained from the lump sum accommodation bond are payments by the taxpayer to a hospital in respect of an illness and accordingly they qualify as a 'medical expense' for the purposes of section 159P of the ITAA 1936.