Prudential targeted review: Permitted uses of refundable deposits for reasonable business losses

Insights report

Introduction

We do targeted reviews to help raise provider awareness of their financial and prudential responsibilities. The reviews help us to identify risks and improve provider compliance.

This targeted review focused on providers who reported reasonable business losses for their first year as an organisation in their Annual Prudential Compliance Statement (APCS).

Background

Providers of residential and flexible aged care that hold a refundable deposit, must comply with the prudential responsibilities in the:

Providers are also responsible for reporting reasonable business losses in their APCS as part of your disclosure obligations.

Providers can only use refundable deposits for business losses in their first year of operation. This starts from the date providers receive the residential care subsidy.

Our review was to make sure providers were using refundable deposits correctly and had a clear understanding of their prudential responsibilities.

We reviewed providers across Australia who reported reasonable business losses in their APCS in the 2021, 2022 and 2023 financial years. We assessed how they were complying with their prudential responsibilities and what they claimed as reasonable business losses.

Our findings

Some providers didn’t know that they must report business losses every year in their APCS.

We were pleased to see that compliance of the providers we selected was high overall.

Most had strong governance systems and written procedures for using refundable deposits for reasonable business losses. Common uses included:

regular building maintenance and repairs
pharmaceutical expenses
small level capital expenditure (for example, furniture and fittings)
IT equipment and software
goods to provide aged care.

These expenses are not usually permitted uses of refundable deposits after the first 12 months of a service’s operation.

We found and corrected some minor non-compliance with the Governance Standard and APCS reporting of reasonable business losses.

Common areas of minor non-compliance

Some providers had:

incorrectly reported the use of refundable deposits in their APCS but later changed their reports
gaps in their governance system and written procedures
no board approval or formal authority to use refundable deposits
financial reports that only showed total expenses a month after the refundable deposit was spent
gaps in the understanding of key staff responsible for tracking and controlling the use of refundable deposits.

Over half of the providers didn’t know that they needed to declare reasonable business losses every year in their APCS. This is whether they used refundable deposits or not.

Things to consider

Are you making sure you use refundable deposits correctly for reasonable business losses during your first year of operation?
Are you including reasonable business losses in your APCS every year?
Do your processes and procedures follow the Disclosure and Governance Standards?
Do you keep written documents showing that you comply with the Disclosure and Governance Standards?
Are the responsibilities of your key staff clearly explained in your governance system?
Are your staff trained and do they understand their APCS reporting responsibilities?
Have you identified key staff for APCS reporting and have you clearly defined their roles and responsibilities? Do these key people know and understand their responsibilities?

Commission actions

Providing you with more guidance and education on the Prudential and Governance Standards.
Doing more targeted reviews on the reasonable use of loans.
Using the information we collected to improve our systems that identify risk.