By James Beck
Since our last newsletter, three important pieces of legislation have passed through the Commonwealth Parliament and the Australian Charities and Not-for-profits Commission’s (ACNC) governance standards have commenced. As such, we briefly discuss each of these developments below.
Definition of a charity
The Charities Bill 2013 (Cth) and Charities (Consequential Amendments and Transitional Provisions) Bill 2013 (Cth) were both introduced into the Commonwealth Parliament on 29 May 2013. The two bills were assented to less than two months later on 27 June 2013 as Acts 100 of 2013 and 96 of 2013, respectively.
The Charities Act 2013 (Cth) introduces a statutory definition of charity that is intended to provide greater clarity and certainty for charities, the public and regulators in determining whether an entity is charitable and consequently reduce the need for costly litigation. The Act defines ‘charity’ and ‘charitable purpose’ for the purposes of all Commonwealth legislation.
The Charities Act definition is:
charity means an entity:
- that is a not-for-profit entity; and
- all of the purposes of which are:
- charitable purposes that are for the public benefit; or
- purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and
- none of the purposes of which are disqualifying purposes; and
- that is not an individual, a political party or a government entity.
A ’charitable purpose’ includes:
- advancing health;
- advancing education;
- advancing social or public welfare;
- advancing religion;
- advancing culture;
- promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;
- promoting or protecting human rights;
- protecting the safety of the general public;
- preventing or relieving the suffering of animals; and
- advancing the natural environment.
Purpose may also be a ‘charitable purpose’ if it is beneficial to the general public or if it may be regarded as similar to, or within the spirit of, any of the above purposes.
The Charities (Consequential Amendments and Transitional Provisions) Act 2013 makes consequential amendments to 13 Acts and the Charities Act 2013, repeals the Extension of Charitable Purpose Act 2004, and makes transitional arrangements for the registration of new subtypes of entities with the ACNC and to preserve the charitable status of certain entities.
Importantly, organisations that are already recognised as having a charitable purpose prior to the introduction of the Act will continue to be recognised as charities in accordance with section 12(k) of the Charities Act. For more on the recognition of existing charitable purpose see Item 7 of Schedule 2 to the Charities (Consequential Amendments and Transitional Provisions) Act 2013.
Financial reporting requirements
Also in June 2013, Select Legislative Instrument 2013 No. 124 (Cth) amended the Australian Charities and Not-for-profits Commission Regulation 2013 (Cth) to specify the requirements for annual financial reports for the 2013-14 financial year and later years.
The requirements set out in the Regulation for the annual financial report consist of the following three elements:
- the financial statements for the year;
- the notes to the financial statements; and
- the declaration made by the responsible entities about the financial statements and the notes.
The financial statements and notes, in most cases, need to comply with some or all of the accounting standards issued by the Australian Accounting Standards Board (AASB).
Under the ACNC Act, only medium and large registered entities are required to provide annual financial reports to the ACNC, although small registered entities may choose to do so. Further, the requirement to prepare a financial report is also not mandatory for a basic religious charity (a special category of charities as defined in 205-35 of the ACNC Act) regardless of its size.
The first annual financial reports will not be due until 31 December 2014, or six months after the end of an approved substituted accounting period that commences after 1 July 2013.
Introduced in the Australian Charities and Not-for-profits Commission Amendment Regulation 2013 (No. 1) (Cth), the governance standards for charities registered with the ACNC, with the exception of basic religious charities, commenced operation on 1 July 2013.
The governance standards are:
- Standard One: Purposes and Not for Profit nature of a registered entity
Charities must be Not for Profit and work towards their charitable purpose. They must be able to demonstrate this to the ACNC and provide information about their purpose to the public.
- Standard Two: Accountability to members
Charities must take reasonable steps to be accountable to their members and provide their members adequate opportunity to raise concerns about how the charity is governed.
- Standard Three: Compliance with Australian laws
A charity must not commit a serious offence (such as fraud) under any Australian law or breach a law that may result in a penalty of 60 penalty units ($10,200) or more.
- Standard Four: Suitability of responsible entities
Charities must check that their responsible persons are not disqualified from managing a corporation (under the Corporations Act 2001 (Cth)) or currently disqualified from being a responsible person for a registered charity by the ACNC Commissioner. Charities must take reasonable steps to remove responsible persons not meeting these requirements.
- Standard Five: Duties of responsible entities
Charities must take reasonable steps to make sure that the members of their governing bodies know, understand and carry out their legal duties:
- exercise powers and discharge duties with the degree of care and diligence of a reasonable person in that position;
- act in good faith, in the best interests of the charity and to further its purpose;
- not misuse their position;
- not misuse information obtained in the performance of their duties;
- disclose perceived or actual conflicts of interest;
- ensure the charity’s financial affairs are managed responsibly; and
- not allow the charity to operate while insolvent.
As the standards are ‘minimum level’ requirements, meeting leading practice standards will ensure compliance. For example, introducing a board charter, or reviewing and amending an existing board charter, so it incorporates good practices areas such as:
- Relationship with members
- Director selection processes
- Board composition
- Board roles and responsibilities
- Directors’ duties under the governance standards
- Relationship between the board and management
- Delegation of authority by the board to management and board committees
- Board procedures.