The aims of this paper are to analyse changes in dependency of residents in residential aged care homes consequent upon the passing of the Commonwealth Aged Care Act in late 1997, and to establish the extent of resultant changes in the dynamics of residential aged care. The paper outlines the major changes brought by the Aged Care Act, and evidence for the effects of these changes is examined to test the hypothesis that changes in dependency generated changes in turnover and length of stay. The findings show that the proportion of admissions classified at higher categories of the Resident Classification Scale has increased over time, and that the trend to higher classification is even more pronounced by the time residents separate. As funding of residential aged care is based on resident dependency, change in dependency and in the dynamics of the aged care system have potentially significant consequences for Commonwealth funding of providers to ensure care can be provided commensurate with resident needs. The conclusions take up a number of implications of the findings for future policy in relation to planning and funding of residential aged care as a new resident funding system based on the Aged Care Funding Instrument (ACFI) is phased in from mid 2007.