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Ruling

Subject: Medical expenses tax offset

Question

Does the interest paid on a bank loan to finance an accommodation bond payable to an approved aged care provider qualify as a medical expense for the purposes of calculating your entitlement to a medical expenses tax offset?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a permanent resident of an approved nursing home.

You are an approved care recipient.

You were required to pay an accommodation bond to the nursing home.

You borrowed money from a bank to pay the accommodation bond and incur interest charges on the loan.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159P

Income Tax Assessment Act 1936 Subsection 159P(4)

Reasons for decision

Summary

The interest payments made to a bank are not payments to a public or private hospital in respect of an illness and therefore do not qualify as medical expenses for the purposes of calculating a medical expenses tax offset.

Detailed reasoning

Section 159P of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a tax offset is allowable to a taxpayer whose net medical expenses (that is, medical expenses less any amount paid or payable by Medicare or any other fund) in the year of income exceed a certain threshold.

For the year ended 30 June 2011 the amount of the tax offset was 20% of the excess of net medical expenses over the threshold of $2,000.

To qualify for the tax offset the medical expenses must be paid by a taxpayer who is an Australian resident in respect of themselves or a dependant.

The term 'medical expenses' is defined in subsection 159P(4) of the ITAA 1936 and includes payments to a public or private hospital in respect of an illness.

Hospital

As the term 'hospital' is not defined for the purposes of section 159P(4) of the ITAA 1936 reference is made to its ordinary meaning. The Macquarie Dictionary defines a hospital as an institution in which sick or injured persons are given medical or surgical treatment.

Taxation Rulings IT 261 and TR 93/14 provide guidance on whether nursing homes and hostels for aged or disabled persons are hospitals for the purposes of subsection 159P(4) of the ITAA 1936 and state that nursing homes and hostels which are approved by the Government are considered to be hospitals.

Under the Aged Care Act 1997 an aged care facility that is an approved provider is entitled to receive Commonwealth Government 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 subsection 159P(4) of the ITAA 1936.

In respect of an illness

The classification of an aged care recipient determines the Commonwealth subsidy to which an approved provider is entitled in respect of that recipient. The classification scale spans 1 to 8 with level 1 being the highest level of care and level 8 the lowest.

The nature of the aged care provided to a recipient who has been assessed at requiring care at levels 1 to 7 is considered to be in relation to an illness because such care is necessarily provided to someone whose condition is not that of a healthy state.

Your case

Your nursing home is an approved care provider and is therefore considered to be a hospital for the purposes of subsection 159P(4) of the ITAA 1936.

Whilst the nursing home is considered to be a hospital the interest payments on the loan to pay the accommodation bond are not payments to the nursing home. These interest payments are made to a bank which is not a hospital but a financial institution.

You have referred to ATO ID 2006/251 which states that interest payable on an accommodation bond to an age care facility is a medical expense for the purposes of subsection 159P(4) of the ITAA 1936. The situation presented in ATO ID 2006/251 is where the taxpayer paid the accommodation bond in instalments and the age care facility charged interest on the outstanding amounts. As it was the aged care facility who was the recipient of the interest payments the requirement of the payment being made to a public or private hospital was met.

Your case differs to that presented in ATO ID 2006/251 as you are making payments to a bank and not to the nursing home. It is considered that a payment of interest to a financial institution is not a payment in respect of an illness. Instead it is a payment for the use of the borrowed funds.

As stated above the interest payments to the bank on the loan are not payments to a public or private hospital in respect of an illness and therefore do not qualify as medical expenses under subsection 159P(4) of the ITAA 1936. As such they cannot be included in determining your entitlement to, or the amount of, a medical expenses tax offset.

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