Mortality from mental illnesses is increasing and, because they frequently occur early in the life cycle, they are the largest source of disability and reduced economic productivity of all non-communicable diseases. Successful mental health reform can reduce the mortality, morbidity, growing welfare costs and losses in economic productivity caused by mental illness. The government has largely adopted the recommendations of the National Mental Health Commission focusing on early intervention and stepwise care and will implement a reform plan that involves devolving commissioning of federally funded mental health services to primary health networks, along with a greater emphasis on e-mental health. Stepwise expanded investment in and structural support (data collection, evaluation, model fidelity, workforce training) for evidence-based care that rectifies high levels of undertreatment are essential for these reforms to succeed. However, the reforms are currently constrained by a cost-containment policy framework that envisages no additional funding. The early intervention reform aim requires financing for the next stage of development of Australia's youth mental health system, rather than redirecting funds from existing evidence-based programs. People with complex, enduring mental disorders need more comprehensive care. In the context of the National Disability Insurance Scheme, there is a risk that these already seriously underserved patients may paradoxically receive a reduction in coverage. E-health has a key role to play at all stages of illness but must be integrated in a complementary way, rather than as a barrier to access. Research and evaluation are the keys to cost-effective, sustainable reform.