When a pensioner enters residential aged care, the family home stays exempt from the Age Pension assets test for two years, even if rented out, allowing considered decisions rather than crisis-driven ones. The aged care means test treats the home differently — exempt if a protected person remains, or capped otherwise. RAD versus DAP choice, super structure, and sale timing all affect both tests and need integrated planning.
When a pensioner enters residential aged care, two separate means-tested systems come into play simultaneously: the Age Pension means test administered by Services Australia, and the aged care means test administered by the Department of Health and Aged Care. Decisions about the family home, accommodation payment structure, and superannuation affect both systems — sometimes in opposing directions — and the choices made at or before entry shape financial outcomes for years. The two-year window built into the Age Pension rules is the most important planning lever available.
What is the two-year principal residence exemption?
Under the Social Security Act 1991, when a pensioner moves into residential aged care, the family home is generally exempt from the Age Pension assets test for a period of two years from the date of entry. Importantly, this exemption applies even if the home is rented out during that period — rental income is counted under the income test, but the property value does not affect the assets test for the two-year window. After that period, the home moves back into assets test assessment if no protected person continues to live there.
This creates a planning window. Rather than making forced decisions about the family home at the moment of aged care entry — when families are often managing a health or mobility crisis — the two-year exemption allows time for considered decisions. The home can be held, assessed, and a course of action determined without the asset test pressure that would otherwise apply.
Who counts as a protected person under the aged care means test?
The treatment of the family home under the aged care means test follows different rules. Under the Aged Care Act 1997, the family home is exempt from the Means Tested Care Fee (MTCF) asset assessment while a "protected person" occupies the property. Protected persons include the care recipient's spouse or de facto partner, a dependent child, an eligible carer who has lived in the home for at least two years providing care and is eligible for income support, and a close relation — such as a sibling or adult child — who has lived in the home for at least five years and is eligible for an income support payment.
Where a couple is involved and one partner enters care while the other remains in the family home, the home is exempt from the aged care means test for as long as the community-dwelling spouse continues to live there. This is one of the most favourable arrangements available, and it is one of the reasons why integrated planning for couples facing aged care entry requires careful analysis of both systems together.
For single residents, or couples where both partners enter care, the family home is included in the aged care means assessment at a capped value of $214,884 as at 20 March 2026 (My Aged Care, https://www.myagedcare.gov.au/means-assessments-residential-aged-care) — or net market value if lower. The cap is updated each March/September.
What is the hold-or-sell decision for the family home?
With the two-year Age Pension exemption in place, many pensioners benefit from holding the family home for a period rather than selling immediately on entry. During the two-year window, the home is exempt from the pension assets test (rental income, if any, is counted under the income test, but the property value is not). This can preserve higher pension entitlement while the family assesses what to do with the property.
Selling the home converts equity to cash, which is counted under both means tests. The cash can fund a Refundable Accommodation Deposit (RAD) — but the shift from homeowner to non-homeowner status also changes the applicable pension assets test thresholds. Non-homeowner thresholds are higher than homeowner thresholds, which partially offsets the loss of the home exemption, but the net effect depends on the individual's overall asset position and the specific sale proceeds.
How do RAD and DAP differ across the two means tests?
Accommodation in residential aged care is typically paid as a RAD (a lump sum deposited with the provider and refunded in full on departure), a DAP (a daily equivalent interest payment), or a combination. The choice affects both means tests differently.
A RAD paid to the provider is exempt from the aged care MTCF asset assessment — it has transferred into a provider-held balance excluded from the fee calculation. This generally reduces ongoing aged care fees for high-asset residents. However, the RAD balance continues to be counted as an asset under the Age Pension means test. A DAP, by contrast, leaves the capital in the resident's hands — counted under both means tests — while creating an ongoing daily accommodation charge. The RAD/DAP calculation depends on the resident's income and asset position, the provider's RAD price, and how the two means tests interact at that asset level. There is no universal answer; the right structure requires individual analysis.
How is superannuation treated at aged care entry?
How superannuation is structured at the time of aged care entry affects both systems. Super in accumulation phase is counted as an asset for both the Age Pension and the aged care means test. Super in pension phase (an account-based pension) is assessed differently — account-based pensions established before 1 January 2015 (grandfathered) are assessed under deduction rules rather than deeming for the Age Pension income test, which is often more favourable. Post-2015 account-based pensions are assessed under deeming.
For couples where one partner enters care, reversionary pension nominations on account-based pensions become significant — the pension can continue to the surviving partner on death, typically preserving grandfathering status if applicable.
What happens when one partner of a couple enters care?
Where one member of a couple enters residential aged care and the other remains at home, both systems apply specific couple provisions. The family home retains the protected person exemption under the aged care means test. The community-dwelling partner's assets and income are assessed under couple rules for both the Age Pension and the aged care means test. Planning needs to consider both partners' positions simultaneously rather than treating the entering partner in isolation.
What are the means-tested care fee caps?
Important: the MTCF framework only applies to residents who entered care BEFORE 1 November 2025. From that date, post-reform residents are subject to two new means-tested contributions under the Aged Care Act 2024 — see related aged-care-costs-pension-interaction and aged-care-means-tested-care-fee articles for full mechanics.
For pre-1 Nov 2025 entrants, the MTCF caps as at 20 March 2026 (Services Australia, https://www.servicesaustralia.gov.au/annual-and-lifetime-caps-for-your-aged-care-costs):
- Annual cap: $35,910.43
- Lifetime cap: $86,185.23
Both caps are indexed each March/September.
For high-asset residents, the MTCF can be substantial — but the caps mean exposure is bounded and predictable once the calculation is made. Specialist aged care financial advice at entry typically models the MTCF under different asset-structuring scenarios and identifies where restructuring produces meaningful fee reductions.
What is the planning priority?
For pensioners approaching aged care and the families supporting them, decisions made before or at entry — particularly about the family home, RAD structure, and super — have disproportionate long-term financial consequences. The two-year Age Pension exemption provides a genuine planning window that allows considered decisions rather than forced ones. A specialist aged care financial adviser with knowledge of both the aged care and Age Pension systems is the appropriate professional for this planning; the interaction between the two systems is complex enough that general financial advice is insufficient.
Sources
- My Aged Care — Means assessments residential aged care
- Services Australia — Annual and lifetime caps for your aged care costs
Key takeaways
- When a pensioner enters residential aged care, the family home is generally exempt from the Age Pension assets test for two years from entry — even if the home is rented out during that time, though rental income is still counted under the income test.
- The aged care means test treats the home differently: it's exempt indefinitely from the Means Tested Care Fee assessment while a protected person (spouse, dependent child, or an eligible carer or close relation meeting residency conditions) continues living there; otherwise it's capped at $214,884 (as at 20 March 2026) or net market value if lower.
- The RAD versus DAP choice affects each means test differently — a RAD is exempt from the aged care asset assessment but still counted for the Age Pension assets test, while a DAP leaves the capital counted under both tests while adding an ongoing daily charge.
- How superannuation is structured matters: accumulation-phase super is assessed as an asset under both systems, while a grandfathered pre-2015 account-based pension is assessed under more favourable deduction rules rather than deeming for the Age Pension income test.
- For couples, the community-dwelling partner's assets and income are assessed under couple rules for both systems, and both partners' positions need to be planned together rather than treating the entering partner in isolation.
Frequently asked questions
How long does the family home stay exempt from the Age Pension assets test after aged care entry?
Generally two years from the date of entry into residential aged care, under the Social Security Act 1991. This exemption applies even if the home is rented out during that period — the rental income counts under the income test, but the property's value doesn't affect the assets test for those two years. After that window, the home moves back into assets test assessment unless a protected person continues to live there.
Who counts as a protected person for the aged care means test?
Under the Aged Care Act 1997, a protected person includes the care recipient's spouse or de facto partner, a dependent child, an eligible carer who has lived in the home for at least two years providing care and is eligible for income support, or a close relation — such as a sibling or adult child — who has lived in the home for at least five years and is eligible for an income support payment. While a protected person remains living in the home, it stays exempt from the Means Tested Care Fee asset assessment.
Does choosing a RAD or DAP affect the Age Pension?
Yes, differently to how it affects aged care fees. A Refundable Accommodation Deposit (RAD) is exempt from the aged care Means Tested Care Fee asset assessment, which can reduce ongoing care fees — but it's still counted as an asset under the Age Pension means test. A Daily Accommodation Payment (DAP) leaves the capital in the resident's hands, counted under both means tests, while creating an ongoing daily charge. There's no universal right answer — it depends on the individual's asset position and the provider's RAD price.
Why does the two-year exemption window matter for planning?
Without it, families would often be forced to make major decisions about the family home — sell, rent, or hold — at the moment of aged care entry, typically during a health or mobility crisis. The two-year exemption removes the immediate assets-test pressure, giving time to properly assess the RAD versus DAP choice, superannuation structuring, and sale timing with specialist advice, rather than reacting under duress.