Prudential targeted review: Capital expenditure

Insights report

Introduction

We do targeted reviews to increase provider awareness of their financial and prudential responsibilities. These reviews help us to identify risks and improve compliance across the aged care sector.

This targeted review focused on educating and supporting providers that use refundable deposits for capital expenditure.

Capital expenditure is when providers use refundable deposits to invest in new residential aged care infrastructure such as buying land and building new facilities. You can read more about capital expenditure on our Permitted use of refundable deposits page.

Background

Providers of residential and flexible aged care that hold refundable deposits must comply with their prudential responsibilities under the:  

Providers also need to report on how they manage refundable deposits.

From March to July 2024, we reviewed a sample of providers from New South Wales and Victoria to assess their understanding of their capital expenditure responsibilities.

Our findings help us identify risks and develop targeted education materials.

Our findings

Our review found that most providers didn’t use refundable deposits for capital expenditure. Instead, they chose to bank refundable deposits and use other financial resources, such as loans, to fund their capital works.

Only one provider in this review used refundable deposits to fund the construction of a new aged care facility. We were pleased to see this provider complied with the requirements for permitted uses of refundable deposits.

While most providers were compliant, we found some providers who didn’t:

fully understand their financial and prudential obligations
have clear processes for deciding on how to use refundable deposits for capital expenditure
separate refundable deposits and operating funds in their accounting practices, making it difficult to tell the difference between funds used for operating expenses and those used for capital works
have a strong reconciliation process for refunding refundable deposits
develop appropriate processes for making decisions about using refundable deposits for capital expenditure
include processes for addressing non-compliance with their governance procedures
keep enough records of past uses of refundable deposits for capital expenditure
correctly report capital expenditure in their Annual Prudential Compliance Statement (APCS).

During the review, we provided education to help providers understand their prudential responsibilities. This included guidance on permitted uses, governance and best practice.

Things to consider

Do you know you can use refundable deposits for permitted uses, such as expanding, improving or constructing a new residential or flexible aged care home?
Do you have an organisational plan with clear capital investment objectives?
Do you have a strong and effective governance and records management system?
Do you have enough liquidity to refund future refundable deposits on time?
Do you have processes to make sure you can correctly refund future refundable deposits?
Are your capital expenditure costs clearly separated from your operating costs?
Do you record all capital expenditure in your APCS, if you’ve used refundable deposits or not?

Commission actions

We will provide further guidance on the permitted uses of refundable deposits, to help you understand your obligations.
We will carry out more targeted reviews on the Governance Standard to help support compliance improvements across the sector. 
We will use the information we collect to improve our systems to identify risk, which improves our ability to detect and address possible areas of concern.