What you need to know about retirement villages

By Sean Howard , Technical Services Manager

Retirement villages are communities which generally provide accommodation, facilities and services to people who are over 55 and retired from full-time employment. Accommodation ranges from independent living in self-contained units to assisted living in serviced units.

In this month’s article we will look at the various occupancy and ownership structures of retirement villages, fees and charges payable by residents, homeownership rules for Centrelink and moving from the retirement village into residential aged care.

Occupancy and ownership structures

There are various occupancy and ownership structures for retirement villages including:

• Leasehold where the resident leases a unit from the village operator. The lease is usually for 99 years or more and is registered with the Land Titles Office.
• Loan and licence arrangement where the resident provides the village operator with an interest free loan in exchange for a license to occupy a unit (mainly offered by not-for-profit organisations). The licence is not registered with the Land Titles Office.
• Strata title where the resident purchases a unit from the village operator or previous resident (mainly offered by for-profit organisations). The resident is the registered owner with the Land Titles Office.
• Company title where the resident purchases shares in a company which owns the retirement village. The shares give the resident the right to occupy a unit in the retirement village.
• Unit trust where the resident purchases units in a trust and the trustee owns the retirement village. The units give the resident the entitlement to occupy a unit in the retirement village.
• Rental arrangement where the resident rents a unit from the village operator under a residential tenancy agreement.

The most common form of occupancy and ownership structure is leasehold and loan and licence arrangement which makes up 84% of total retirement villages. Strata title makes up 11% and company title and unit trust make up 3%*.

Fees and charges

The occupancy and ownership structure of the retirement village determines the fee and charges payable by residents. Although there are different names for the fees and charges under each structure, they can generally be broken down into the entry price, ongoing costs and exit fee.

Entry price

Residents will pay the entry price when moving into a retirement village. The entry price is a one-off payment negotiated between the resident and the village operator or previous resident.

The national average entry price for a two bedroom independent living unit is currently $516,000. The average entry price compared to the median house price in the same postcode is 52% although this varies from state to state*.

Where the structure is strata title, the resident will pay the agreed purchase price to the village operator or previous resident. The resident may also pay stamp duty on the purchase price of the unit at settlement.

Where the structure is leasehold or loan and license, the resident will pay the village operator an entry contribution or interest free loan. If the structure is leasehold, the resident may also pay stamp duty on the entry contribution depending on the state.

Ongoing costs

Residents will be asked to pay for ongoing maintenance costs which cover managing the retirement village and maintaining facilities. The ongoing maintenance costs are usually based on the annual budget for the retirement village and divided among the residents.

Residents may have to continue paying for ongoing maintenance costs after they move out of the retirement village until a new resident moves in. There are limits to the ongoing maintenance costs payable after the resident moves out depending on the state.

Residents may also pay for the cost of separately metered services including phone, electricity, gas and water. Alternatively, the village operator may have a shared meter for these services where the costs are divided among the residents.

Retirement villages may also offer additional services including meals, cleaning, laundry and personal services at an additional cost. Additional services are usually offered on a user-pays basis where the resident only pays for what they use.

Where the structure is strata title, the resident will also pay levies to the owner’s corporation which cover the cost of managing, maintaining and insuring common property. The village operator may combine the levies with the ongoing maintenance costs.

Exit fee

A resident may be asked to pay an exit fee, also known as a departure fee or deferred management fee, when they move out of the retirement village. The exit fee is usually calculated as a percentage per year of either the entry price or resale price up to a maximum percentage.

Where the exit fee is calculated as a percentage of the entry price, the village operator is entitled to the accrued percentage of the entry price and usually a proportion of any capital gain accrued.

Where the exit fee is calculated as a percentage of the resale price, the village operator is entitled to the accrued percentage of both the entry price and any capital gain accrued.

Exit entitlements must be paid to the resident within certain timeframes regardless of whether a new resident has moved into the retirement village depending on the state.

Example 1

Harry is single and is living in a retirement village with an entry price of $300,000. The exit fee is 5% of the entry price per year up to a maximum of 20%. 50% of any capital gains is also payable to the village operator on resale.

Harry moves out of the retirement village after 3 years and the resale price is $400,000

Exit fee: $300,000 × 5% × 3 = $45,000

Maximum exit fee: $300,000 x 20% = $60,000

Capital gain: ($400,000 - $300,000) x 50% = $50,000

Total fees: $45,000 + $50,000 = $95,000

Harry’s exit entitlement will be $305,000

Example 2

Jennifer is single and is living in a retirement village with an entry price of $400,000. The exit fee is 5% of the resale price per year up to a maximum of 20%.

Jennifer moves out of the retirement village after 5 years and the resale price is $500,000.

Exit fee: $500,000 x 5% x 5 = $125,000

Maximum exit fee: $500,000 x 20% = $100,000

Jennifer’s exit entitlement will be $400,000

Homeownership rules

To determine whether a resident is considered a homeowner for Centrelink purposes, the entry contribution (EC) is compared with the Extra Allowable Amount (EAA). The EAA is the difference between the homeowner and non-homeowner lower assets test thresholds (currently $242,000).

The following table summarises the rules for determining whether a resident is considered a homeowner or non-homeowner for Centrelink purposes when living in a retirement village.

Where a resident is considered a non-homeowner, they may be eligible to receive Rent Assistance to pay for the ongoing fees. The resident must be receiving a Social Security payment including the Age Pension or Disability Support Pension to be eligible to receive Rent Assistance.

Example 3

Phillip is single, aged 75 and recently sold his home. He moves into a retirement village with an entry contribution of $400,000.

The entry contribution is greater than the extra allowable amount therefore Phillip is considered a homeowner and the entry contribution will not be assessed under the assets test.

Vacating the retirement village to move into residential aged care

If a person moves from a retirement village into residential aged care, it is important to consider how the retirement village will be assessed for Centrelink and aged care purposes. A person usually does not have the option to keep their unit and receive rent after they move out.

For Centrelink purposes, where a person was considered a homeowner when living in the retirement village, they will continue to be considered a homeowner and the refundable amount of the EC not assessed after they move out until the earlier of their unit being sold or two years.

For couples, where the spouse continues living in the retirement village and is considered a homeowner, the person moving into residential aged care will also continue to be considered a homeowner and the refundable amount of the EC not assessed.

For aged care purposes, the unit in the retirement village is assessed similar to that of a former home had the person moved directly into residential aged care. The following table summarises the aged care assessment of the unit when a person moves into residential aged care.

* Price Waterhouse Cooper Property Council Retirement Census 2022

** Entry contribution is not deemed under the income test

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