Prudential targeted review: complex corporate structures and related-party arrangements

Insights report

Introduction

The Commission does targeted reviews as part of our strategy to raise provider awareness of financial and prudential obligations.

These reviews help us to identify risks and assess a provider’s understanding of their financial and prudential responsibilities. They also play an important role in our work to improve provider compliance and build a strong aged care sector.

This targeted review focused on residential aged care providers with complex corporate structures and related-party arrangements. A related party is a company, organisation or person that has control or influence in the financial decisions a provider makes.

Our findings show how these structures can affect financial and prudential compliance. This includes how refundable deposits are used and liquidity management.

Background

Providers may use or be part of complex business structures and related party arrangements for different reasons.

Providers with these structures often have financial relationships with related parties. This might be something like paying management fees and rent or providing loans to other organisations or people. These financial dealings may be part of their normal operations. However, if the related party doesn’t repay a loan on time it could be difficult for providers to refund refundable deposits or cover the costs of delivering care.

With this review, we wanted to better understand the affects these arrangements have. A better understanding of these arrangements helps us to identify and address risks. This then helps us to make sure providers comply with their prudential responsibilities and stay financially viable.

Our approach

Our review looked at the different related-party arrangements that providers use in their business models. The main types of related-party transactions are for:

loans made by providers to related organisations and individuals
management fees charged by a parent organisation or a corporate services organisation to a provider
rent arrangements between providers and related-party property owners. This operating Company/Property Company structure (usually called OpCo/PropCo) is where the operator (the provider) is the tenant and the property owner is a related party.

Our findings

Related-party loans

The review found that of all residential aged care providers:

47% had related-party arrangements
36% had related-party loans
25% engaged in related-party management fees.

Related-party loans aren’t always clear and transparent. Providers don’t have to submit financial statements to us for related-parties, parent entities or subsidiaries. This can make it difficult for us to work out:

the terms and how easy it is for providers to recover related-party loans
the provider’s liquidity and financial viability
the provider’s ability to refund refundable deposits.

The affect related-party arrangements have on the sector and stakeholders varies. Providers can have issues complying and being financially viable when:

they can’t refund refundable deposits when they’re due
refundable deposits fund related-party loans for uses that aren’t permitted
related party loans aren’t made on a commercial basis. This can affect the provider’s ability to repay the loan.

Related-party management fees and rent

In some corporate structures, companies that supply services may charge the provider management fees. These services can include:

human resources management
financial and accounting services and the upkeep of information
communications
technology systems.

Sometimes the provider runs the service and another company owns the property. In these situations, a commercial leasing arrangement would be in place.

There is risk that management fees and related-party rent arrangements aren’t based on commercial terms. This means that they may not be value for money. This can affect the amount of money a provider has to deliver high-quality care.

Things to consider

Do your loans to related-parties using refundable deposit funds meet your regulatory requirements? Do you do this on a commercial basis?
Have you included the minimum amount of liquidity you need to make sure you can refund refundable accommodation deposits on time in your Liquidity Management Strategy?
Are your agreements with related-party arrangements transparent and well documented?
Are you making sure that rental agreements and management fees offer value for money?

Things we will consider

To improve our provider risk profiles we need to work with providers to understand their complex corporate structures and related-party loan arrangements.
We will give providers guidance and education on using related-party arrangements.
We may ask for information from providers that use complex corporate structures on their loan agreements and management fees during compliance activities like audits.
We will use information from financial submissions to help us analyse complex corporate structures and identify compliance and financial viability risks.