You Have a Covenant You Didn't Negotiate, and Your Own Wage Rises Just Raised It
You Have a Covenant You Didn't Negotiate, and Your Own Wage Rises Just Raised It
The aged care Liquidity Standard is calculated every quarter from figures you supply yourself. That makes it behave like a covenant — and it moves when your cost base moves.
Most finance leaders in aged care can tell you their bank covenants from memory. Far fewer can tell you their minimum liquidity amount, which is odd, because for many providers the MLA is the more operationally demanding of the two: it's recalculated every quarter, it's derived from data you hand over as a matter of routine, and there's no relationship manager to call.
The Liquidity Standard commenced on 1 November 2025 under the Aged Care Act 2024. It applies to non-government providers registered in category 6 — including those that hold no refundable deposits at all. In July 2026 the Aged Care Quality and Safety Commission started a targeted review on it, contacting providers specifically to find out whether they understand their obligations under the new Act. That review is running now, and the Aged Care Financial Report, with audited general purpose financial statements, is due 31 October with no provision for an extension.
This is a good week to know your number.
What the Standard actually asks for
There are four obligations, and they're more specific than the summaries usually suggest.
Calculate two numbers every quarter. Your default MLA, using the formula set out in the Standard, and your evaluated MLA, based on your own financial circumstances. Then decide which one you're going to maintain — that decision is your "chosen MLA method." If the default is adequate for your organisation, your evaluated MLA can simply equal it, but you still have to have done both.
Maintain a written liquidity management strategy. Reviewed and updated at least once each financial year. It has to state both MLAs for the current quarter, your chosen method, and how you'll maintain that liquidity — and it has to include a statement from the governing body that it is satisfied the strategy meets the objectives of the Standard. That last requirement puts the board inside the control, not adjacent to it.
Assess your liquidity status each quarter as part of preparing your Quarterly Financial Report. Not a separate exercise — inside the QFR process.
Notify the Commission if you fall below your chosen MLA. The obligation to raise your hand is yours.
The threshold moves because your costs moved
Here is the mechanism that makes this different from a bank covenant, and it's the whole reason this post exists.
The default formula is anchored to the previous quarter's cash expenses. The Commission does not publish the percentages on its Liquidity Standard page, so the figures below come from its public consultation summary report and contemporaneous sector reporting: 35% of prior-quarter cash expenses, plus 10% of refundable deposit balances, plus 2% of refundable independent living and retirement village amounts — reduced from a proposed 10% after sector feedback — with trade receivables brought into the calculation. The Commission indicated at the time that no further changes to the formula would follow. Run your own number through the Commission's liquidity calculator rather than any published summary, including this one.
Now put that alongside the past twelve months. The aged care work value case delivered its final tranche on 1 August 2026, the last of three instalments of award increases. Those increases flow into cash expenses. Cash expenses drive the default MLA. Which means the amount of liquidity you are required to hold has been ratcheting upward, quarter by quarter, as a direct consequence of a wage outcome you had no ability to decline.
Nobody made a decision. No transaction occurred. The same balance sheet that comfortably met the threshold in March can sit below it in December, purely because the base underneath it grew. That is an unusual risk shape, and it doesn't show up in the ratios most boards look at monthly.
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Every quarter
Frequency of recalculation, anchored to the previous quarter's cash expenses — so the threshold tracks your own cost base upward.
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31 October
ACFR due with audited general purpose financial statements. No provision exists under the Act or Rules for a later date.
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Default or evaluated: a choice most providers haven't consciously made
The evaluated MLA is the escape valve, and it's underused because it looks like paperwork.
If you don't hold the default amount but can demonstrate reliable access to alternate sources of liquidity — lines of credit, related-party loans — you can submit an evaluated MLA notification showing you can still meet your financial and refunding obligations, deliver safe and quality care, and absorb an unexpected financial shock. The Commission has updated that notification form with instructions and worked examples specifically to make it easier to complete.
The strategic question is not "which number is lower." It's what each choice costs you. Holding the default is simple and entirely legitimate, and it ties up cash that could fund a refurbishment. Adopting an evaluated MLA frees capital and buys you an obligation to justify a judgement, in writing, every quarter, to a regulator currently running a review on exactly this topic. Both are proper answers. What isn't a proper answer is never running the evaluated calculation at all — because the Standard requires both numbers to be calculated each quarter regardless of which one you go on to maintain. Defaulting by omission isn't a choice, it's a gap, and it's the one I'd expect the current targeted review to surface most often.
What the Commission found last time it looked
There's a useful precedent here. The Commission ran a targeted review of 30 providers against the previous Liquidity Standard between October and December 2024, and published its insights in 2025. Most providers complied. The gaps it found were almost entirely documentary — and while that review tested the old minimum liquidity level rather than today's MLA, the documentation expectations carried straight across.
Providers who didn't state their minimum liquidity level in their strategy. Providers who recorded an intention to maintain it but never a dollar figure. Providers who left out the calculations behind the number, or where the funds were held and in what form, or evidence the level had actually been maintained. Strategies that hadn't been reviewed, or that cited the wrong legislation. Corporate groups with no documented approach to how each entity meets its own obligation.
Read that list and a pattern emerges: the providers weren't short of cash. They were short of proof. That is a different problem, and one a finance function can fix in a fortnight — which is exactly why it's frustrating when it isn't.
Where AI is useful in this, narrowly
Nothing about the judgement here can be automated, and shouldn't be. The mechanical layer underneath it can be helped.
Reconciling QFR line items back to ledger balances each quarter is a matching problem. So is building the four- or eight-quarter trend of default MLA against actual liquid holdings — the view that would have shown the ratchet coming rather than reporting it after the fact. So is checking that the liquidity management strategy still references the right figures, chosen method and legislation: a consistency check across a document and a data set, and a reasonable thing to ask a tool to flag.
What stays human: the evaluated MLA judgement, the assessment of whether alternate liquidity sources are genuinely reliable, and the governing body's statement. Those are attestations, and an attestation with no identifiable person behind it isn't worth anything to anyone.
Four things worth doing before 31 October
1. Run both calculations for the current quarter, using the Commission's own liquidity calculator rather than a spreadsheet someone built in 2025. State the chosen method explicitly.
2. Plot the last four quarters of default MLA against actual liquid holdings. One chart. If the two lines are converging, that's the finding, and it's a board paper.
3. Read your liquidity management strategy against the Commission's own checklist, which sits in the Liquidity Standard fact sheet. The 2024 review's findings are effectively a list of what it will be marked against.
4. Model the threshold forward, not backward. Project the default MLA for the next four quarters on your own cost forecast and see where it lands. A covenant you can see coming is a planning problem; one you discover at quarter end is something else.
Do you know what your minimum liquidity amount will be in December?
If you know this quarter's but not next quarter's, you're reporting the covenant rather than managing it. PFL provides senior-level outsourced finance, management reporting, and AI automation for Australian NFP, NDIS, and SME organisations — including prudential reporting that ties back to the ledger.
Talk to PFL →Aged Care Quality and Safety Commission — Liquidity Standard
ACQSC — Public consultation summary report: The new Financial and Prudential Standards
ACQSC — Prudential targeted review: Liquidity Standard (insights report)
ACQSC — New Financial and Prudential Standards
Australian Ageing Agenda — Liquidity standard reduced for ILUs
Department of Health, Disability and Ageing — Aged Care Financial Report Guidance and FAQs 2025-26
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