Ley said the 12 month extension – worth almost $300 million – would allow frontline services to continue to be delivered while work progressed on the current Mental Health Review.
Ley thanked the sector for their patience and said negotiations would commence immediately, with priority placed on frontline services.
"The Abbott Government is committed to working with the mental health sector to deliver effective, efficient and high-quality services," Ley said.
"We are also committed to building a world-class mental health system, which is why we commissioned the Mental Health Review.
"This review will allow Government to form long term plans to ensure our high-quality mental health services continue to provide the right care, at the right time in the right setting.
"However, most people also recognise that to achieve this, improvements need to be made in the way mental health is organised and funded in Australia and it's important this opportunity for positive reform isn't rushed.
"Therefore extending funding for another 12 months will provide frontline mental health services with clarity and certainty while we work through the complex issues raised in the review."
Ley said the Abbott Government had tasked the Mental Health Commission to complete a review into the mental health sector following an election commitment.
Ley said the Government was currently working through the findings of the review and it would be released soon.
