Medical Expenses Tax Offset: interest payable on an accommodation bond paid to an age care facility

Does interest, charged on an outstanding instalment of a lump sum accommodation bond owed by the taxpayer to the aged care facility of which they are a resident, qualify as a 'medical expense' for the purposes of subsection 159P(4) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The interest qualifies as a 'medical expense' for the purposes of subsection 159P(4) of the ITAA 1936 as it is a payment made to a private hospital in respect of an illness.

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 4 care.

The taxpayer signed a resident agreement with their care provider that contracted them to pay an accommodation bond of $200,000.

The taxpayer elected to pay the accommodation bond in the form of a lump sum, with $150,000 paid upon the commencement of their occupancy and a final instalment of $50,000 to be paid six months after that date.

Under the Aged Care Act, the care provider is entitled to charge the taxpayer a 'maximum permissible interest rate' of 9.51 per cent per annum on the $50,000 during the period in which it remains outstanding. Accordingly, the taxpayer paid the care provider total interest of $2,377.50 in the income year.

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).

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).

The interest paid by the taxpayer on the outstanding instalment of their accommodation bond is a 'payment' for subsection 159P(4) of the ITAA 1936 as it is in addition to the accommodation bond and will not be refunded.

An aged care facility that is an 'approved provider' under the Aged Care Act is considered to be a 'hospital' for the purposes of subsection 159P(4) of the ITAA 1936.

Where care is provided to an 'approved care recipient' in need of level 1 to 7 care under the Aged Care Act it is considered to be in relation to an 'illness'.

The test of whether or not the interest is 'in respect of' an illness is based on a common understanding of the phrase, as described in Case Q21 83 ATC 77; Case 85 26 CTBR (NS) 570: 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 the interest is incurred to enable the taxpayer to receive on-going care at the aged care facility and as such it is sufficiently connected to be considered 'in respect of' their 'illness'.

Accordingly, the interest charged on the outstanding instalment of the lump sum accommodation bond owed by the taxpayer to the aged care facility of which they are a resident qualifies as a 'medical expense' for the purposes of subsection 159P(4) of the ITAA 1936.