A T O home
Legal Database
Access the database 
Browse database
View last document
Quick access 
View legislation
View a document
Email Cross Reference Material Previous/Next Section Contents Previous/Next Result
Printable version

ATO Interpretative Decision

ATO ID 2003/360 (Withdrawn)

Income Tax
Medical expenses tax offset: amounts retained from lump sum aged care accommodation bonds

Attention This ATO ID is withdrawn. Guidance on the Net Medical Expenses Tax Offset can be found at Medical expenses on the ATO website (QC 31918).
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 11 August 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


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)?


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.


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.

Date of decision: 24 April 2003

Year of income:Year ended 30 June 2003
 Year ending 30 June 2004

Legislative references:
Income Tax Assessment Act 1936
   section 159P
   subsection 159P(3A)
   subsection 159P(1)
   subsection 159P(4)

Related Public Rulings (including Determinations)
Taxation Ruling IT 261
Taxation Ruling IT 2359

Related ATO Interpretative Decisions
ATO ID 2001/621

Other references
Aged Care Act 1997
The Macquarie Dictionary (Revised Third Edition) 2001

Aged care expenses
Medical expenses
Medical expenses rebates

Siebel/TDMS reference number: 3484558;1-8EB6R9S

Business line: Small Business/Individual Taxpayers

Date of publication: 15 May 2003

ISSN: 1445-2782

ATO ID 2003/360 (Withdrawn) history   Top  
   Date   Version 
   24 April 2003   Original statement   
 You are here ®  11 August 2017   Withdrawn   


Top of page
More information on page