“Show Me the Money”: The New Aged Care Liquidity Standard

Aged care providers are about to face stricter financial rules.

The new Financial and Prudential Standards are here, and liquidity requirements are front and center.

The new Standards simplify the existing framework by replacing four existing standards (Liquidity, Governance, Records, and Disclosure) with three updated ones:

• Financial and Prudential Management Standard;
• Liquidity Standard; and
• Investment Standard.

This alert focuses on the Liquidity Standard.

The Liquidity Standard will apply to all residential aged care providers, including those who do not take RADs. One of the biggest changes is the introduction of a minimum liquidity amount, which must be at least equal to the sum of:

• 35% of the previous quarter’s cash expenses;
• 10% of RADs held at the end of the previous quarter (if any); and
• 10% of retirement village payment amounts held at the end of the previous quarter (if any – RV Requirement).

There has been a lot of commentary about this new test but what is missing from the discussion?  This is just the minimum requirement. Providers must also be able to demonstrate to the ACQSC that they have enough liquidity to:

• meet financial obligations as they fall due;
• refund any RADs expected to fall due in the next 12 months; and
• deliver safe and quality care.

Previously, providers only had to maintain “sufficient liquidity” to refund RADs. Most banks already require a 10% liquidity buffer, but these new rules go much further— introducing a minimum liquidity floor accompanies by an additional qualitative, more subjective test.  In our view, this is going to create uncertainty on both the provider and regulator side for some time as they (and the courts) grapple with differing views of, for example, how much liquidity is required to ensure ‘delivery of safe and quality care’.   We encourage providers to give this feedback to the ACQSC before the consultation period ends on 7 March 2025.

A few additional points to consider:

• For residential aged care providers, the July 2026 transition to payment in arrears will need to be factored into liquidity calculations from at least Q1 2026/27 (if not earlier).
• The RV Requirement is not yet precisely defined in the Rules, but it should prove to be a relief for providers with lease-for-life retirement villages, as premiums would otherwise be caught by the cash requirement at 35%.
• The Standards focus on the registered provider’s expenses—not those of related entities. However, the ACQSC will be scrutinising related party arrangements to assess how liquidity risk is managed across group structures.
• Providers relying on related party or alternative cash access arrangements outside of quarterly financial reporting may face registration conditions requiring them to pre-emptively report changes to the ACQSC that could impact compliance.
• Operators running multiple businesses within a single entity must demonstrate how they are managing liquidity risk across all operations, not just aged care.
• Understanding exactly what cash expenses are and when they fall due will be key to accurate reporting and ensuring the cost base is not overstated.

The ACQSC has emphasised that the new liquidity rules are tailored to aged care using actuarial modelling. The modelling is based on recent financial data and estimates the level of liquid assets providers need to survive financial stress scenarios. These scenarios included high inflation periods and revenue impacts from COVID-19.

What’s less clear is whether and how this modelling factored in the real-world impact on capital investment. In the short term, will we see:

• residential aged care developments slow even further? —a major concern given how few new beds are coming online compared to projected demand
• business valuations impacted?
• some smaller operators exiting the sector altogether?

Providers have until 7 March 2025 to provide feedback to the ACQSC on these changes by:

• Completing the survey; or
• Sending a written submission to New_FP_Standards@agedcarequality.gov.au.

For a discussion about the requirements under the new Aged Care Financial and Prudential Standards, your governance systems in general, or approaches to limit the risks to your organisation, contact Amber Crosthwaite at 9288 6931 or amber.crosthwaite@lavan.com.au.