The Australian Charities and Not-for-profits Commission began operating in December 2012. Following the Australian Charities and Not-for-Profits Commission Act 2012 and related changes to the tax laws, “charities” that fall within the scope of this act must be registered by the Commission in order to be eligible for tax concessions. To become and remain registered, a charity must comply with the Governance Standards set out in the Regulations.
The purpose of this article is to set out the legal implications for charities of various kinds (companies limited by guarantee, incorporated associations and charitable trusts) in order to identify actions that a registered charity will need to take to comply with the new standards.
Charities that have previously been registered with the ATO will be registered with the Australian Charities and Not-forprofits Commission (Commission).
Until 1 July 2017, registered charities are exempted from the requirements of the standards where the charity’s constitution “prevents” the charity from complying. Nevertheless, such a charity must comply with the particular requirement “as far as possible” without breaching its constitution. This requires registered charities to identify any inconsistency between their constitution and the standards, and then to consider the extent to which it is possible to comply.
From 1 July 2017, registered charities must amend their constitutions to be consistent with the standards. This obligation appears to apply regardless of whether a charity has the power to amend its constitution. In case of a company limited by guarantee or incorporated association, this power is vested in the members by law. In the case of a charitable trust, the power to amend may be vested in the courts under State legislation (if the trust instrument does not give plenary power to the trustees). Given substantial lack of clarity in the governance standards, it would appear prudent for registered charities to ascertain the processes and lead time necessary to change their constituent documents, and then to wait and see how the standards are interpreted over the next few years before initiating any amendments.
The article also considers whether a registered charity should seek to amend its constitution (or in the case of a charitable trust its trust deed) to insert: “in addition to any duty applying to directors (or trustees as the case may be) at law or in equity, the directors (or trustees) must comply with the duties specified in Standard 5 of the Governance Standards contained in Subdivision 45-B of the Australian Charities and Not-for-Profits Commission Act 2012 (ACNC Act)”.
Standard 1 - Purposes and NFP nature of a registered entity
A registered charity must demonstrate at all times that it is complying with its purposes and its character as a NFP entity.
Of course charities are already bound to do this. At present, companies limited by guarantee, incorporated associations and charitable trusts must all pursue charitable non-profit purposes to comply with their constituent documents. Compliance is a legal matter to be determined by the courts. This standard therefore has no impact on a charity’s governance. However, the legal effect of Standard 1 is to add to existing governance obligations a condition of eligibility for registration as a charity that is assessed solely by the Commission.
There has been repeated litigation over recent years as a result of the ATO wishing to constrain activities that it considers go beyond permissible NFP purposes. The ATO has lost many of those cases. For example in Federal Commissioner of Taxation v Word Investments Limited (2008) 236 CLR 204, the High Court determined that commercial activities are permissible where the sole purposes of those activities is to apply the income generated for charitable purposes.
In Aid Watch Incorporated v Commissioner of Taxation  HCA 42, the High Court held that generating public debate concerning foreign aid directed to relief of poverty is a charitable purpose because it was beneficial to the community. Interestingly, section 45-10(6) of the ACNC Act prohibits the governance standards from limiting the ability of registered charities from commenting on, or advocating for, change in a law or policy. However, the comment or advocacy must still further the purpose of the charity and accordingly, the Commission retains discretion to find that the activities are not sufficiently connected to the charities NFP purposes.
Additional reforms are in progress to replace general law concepts of charitable purposes with a statutory definition (exposure draft is open for submissions until 3 May 2013) and to introduce statutory provisions to tax commercial income of NFPs. The start date for the new taxation provisions has been deferred to 1 July 2014 (draft legislation is not yet available).
It is apparent that an administrative decision by the Commission will ultimately determine whether or not a particular charity is complying with its purposes. This increases compliance risk for registered charities especially because Standard 1 makes none of the distinctions that have been found relevant in other contexts, e.g. there is often a distinction between core purposes, predominant purposes and ancillary purposes. If a charity disagrees with a decision of the Commission it can appeal the decision for internal review, and then to the Administrative Appeals Tribunal. The charity has the burden of proving that the decision made by the Commission should not have been made or should have been made differently.
Recommendation: Given the question of compliance with NFP purposes is no longer a matter to be determined by the courts according to law but a matter for administrative determination by the Commission, it is advisable for registered charities to review their current and any proposed new activities, especially those that will produce commercial income, in order to be assured there is sufficient connection with their charitable purposes.
Registered charities need to be vigilant regarding the risk that any activities they undertake may be questioned by the Commission and will need to be justified. Further legislative changes can be expected and a charity’s activities should be reviewed in light of those changes when they become known.
Standard 2 – Accountability to members
A registered charity must take “reasonable steps” to ensure that it is accountable to its members and that its members have an adequate opportunity to raise any governance concerns.
Charitable trusts are not covered by this standard as they do not have members. The Explanatory Statement indicates that companies limited by guarantee that are currently complying with the Corporations Act requirements and incorporate associations complying with their legislation should comply with this standard, i.e. without having to do anything further.
From 1 July 2013, existing requirements of the Corporations Act which give members the right to participate in governance, e.g. convene general meetings, will be “turnedoff” for registered charities. The reason is unclear, as Standard 2 does not give members any rights whatsoever. Further, unlike the Corporations Act provisions which cease to apply, corresponding requirements applying to incorporated associations under state legislation will remain in force.
The Commission believes that removing the strict requirements of the Corporations Act will provide “additionally flexibility” to registered charities that are companies limited by guarantee in deciding how best to be accountable to their members. In reality, however, this standard has replaced clear rights of members with an uncertain requirement, enforceable by the Commission as a condition of eligibility for registration as a charity. The resulting legislative muddle does nothing to enhance governance standards.
Recommendation: As with Standard 1 above, whether or not a charity is taking “reasonable steps” to comply with Standard 2 is a vague criterion that cannot be objectively determined. This is a matter for determination by the Commission. Compliance risk has, therefore, increased.
Companies limited by guarantee should review their constitutions in order to ascertain whether provisions relating to accountability to members are expressly stated in their constitution or simply refer to sections of the Corporations Act. Where mere reference is made to legislation, it may be the case that members are left without the statutory rights that have been “turned off”. If so, it may be advisable to reinstate the relevant provisions of the Corporations Act in the company’s constitution.
Standard 3 – Compliance with Australian laws
Registered charities must not engage in conduct that “may be dealt with” as a criminal or civil penalty matter involving possible penalties exceeding $6,600 or 1 year’s imprisonment.
As all legal persons in Australia must already comply with the law, this standard again adds another layer of compliance for registered charities and, most importantly, it lowers the threshold at which a registered charity’s compliance with conditions of registration can be questioned by the Commission.
This standard presents a risk to registered charities that they could be found to have breached the standard even though no criminal or civil proceedings have been brought or even alleged against the registered charity. Indeed, this standard effectively negates the presumption of innocence and gives the Commission broad powers to act where it believes the registered charity “may” have acted in a way that breaches Australian laws.
Recommendation: There is an increased need for all registered charities to implement legal compliance programs that can demonstrate the registered charity (and its directors or trustees) took due diligence to ensure that it would comply with the law. Depending on the activities of a registered charity, it may be necessary to consider the compliance risk relating to, e.g. fundraising activities, interstate activities of incorporated associations, and occupational health and safety requirements. In any event, registered charities must remain cognisant of the risk that notwithstanding an absence of issues raised by a law enforcement body, the Commission can still find a registered charity has breached Standard 3.
Standard 4 – Suitability of responsible entities
A registered charity must take “reasonable steps” to “ensure” that its directors or trustees are not disqualified under the Corporations Act or disqualified by the Commission (and if so, to remove that director or trustee).
The standard fails to recognise that removal of directors is governed by the Corporations Act, and removal of trustees is governed by the terms of the trust deed and state law. Removal is generally not included in the unilateral power of the charity. This is a bridge that can be crossed when it arises. The Explanatory Statement indicates that registered charities would be expected to obtain declarations from officers that they are not disqualified and to search the disqualified persons registers.
Recommendation: Companies limited by guarantee and incorporated associations should put in place processes to search the disqualified persons registers and obtain declarations from officers at the time of each officer’s appointment and any subsequent re-appointment. Trustees of charitable trusts should similarly carry out regular searches to demonstrate ongoing compliance.
Standard 5 – Duties of responsible entities
Registered charities must take “reasonable steps” to ensure that their directors or trustees comply with the duties specified in Standard 5.
The standard imposes an obligation on the charity not on the directors or trustees. The intent is that if the charity does not comply with the standard the Commission has the power to impose sanctions on the charity. The standard requires charities to impose on directors and trustees a number of duties corresponding to existing directors’ duties in the Corporations Act and trustee duties under the general law and State legislation.
The standard therefore serves no purpose with regard to governance.The duties specified in the standard are:
- to act with due care and diligence in the best interests of the charity
- not to misuse their position or information obtained through their position
- to disclose material personal interests to other directors and the members of a corporate charity (in the case of charitable trusts, the trustees must disclose material personal interests to the Commission)
- to ensure the charity’s financial affairs are managed in a responsible manner, and
- to ensure that the charity does not trade while insolvent.
In the case of companies limited by guarantee, Corporations Act duties and disclosure of material personal interest provisions are being “turned-off” on 1 July 2013. However, the Corporations Act duty to prevent insolvent trading remains in effect. Although directors will remain bound by general law and fiduciary duties, they will no longer be subject to the main statutory duties under the Corporations Act. Again, the reasoning of this reform is unclear. Directors’ duties under the Corporations Act are “turned-off” but Standard 5 does not impose duties on directors. This standard imposes an uncertain and vague requirement and it is not clear whether registered charities will need to amend their constitutions to effectively reinstate the Corporations Act duties which have been “turned-off”. Absent this, the legal rights and remedies of charities against directors or trustees are diminished by the changes.
The South Australian Incorporations Act 1985 (section 39A) already imposes duties that are closely aligned to existing Corporations Act duties. Until 1 July 2017, incorporated associations can rely on the duties set out in the relevant incorporated associations legislation. The Regulations expressly provide that where the directors of an incorporated association comply with existing obligations under incorporated associations legislation, the charity is taken to be complying with Standard 5 for the duration of the transitional period. The position regarding incorporated associations appears to be diametrically opposed to the position regarding companies limited by guarantee under the Corporations Act.
In relation to responsible management of financial affairs, the Explanatory Statement and the notes in the Regulations indicate that “reasonable steps” may include ensuring appropriate insurance is maintained. The legal implications of charities imposing such a duty on directors are unclear but could be far-reaching. Under previous law, the fundamental principle of corporate law is that directors are not responsible in the same way as, e.g. trustees for the investment of company funds. In the case of charitable trusts, Standard 5 fails to recognise that the trust is not a legal entity. The trustees are the relevant legal entity. They are personally liable for debts incurred (thus in the case of trusts there is no need for, or relevance of, the concept of trading while insolvent). In relation to investment duties of trustees, there is a specific regime established under State trustee legislation which specifies in detail the duties of trustees regarding financial management and liability (and defence) for breach of duty. Standard 5 creates uncertainty whether registered charities must re-write these statutory duties.
Further, Standard 5 creates uncertainty whether directors of charities which are companies limited by guarantee now are to be made subject to personal duties in relation to financial management similar to those applying to trustees.
Recommendations: Companies limited by guarantee should review their constitutions to establish whether provisions which deal with directors’ duties and disclosure of material personal interests become ineffective as a result of the Corporations Act provisions being “turned-off”. It may be necessary for companies limited by guarantee to amend their constitutions so that the statutory duties are reinstated in their constitution. In this way, a company limited by guarantee can ensure that its directors and officers are subject to the required duties in Standard 5.
The apparent need for companies limited by guarantee to review directors’ duties raises a conflict of interest and will require that directors obtain independent advice as to their exposure.
Given the legislative muddle, it would be imprudent and unreasonable for registered charities to take action to amend constitutions without full understanding of the implications for directors, the possible impacts on directors and officers insurance, and the interaction with general law duties and defences. In particular, we do not believe it is appropriate at this time for a charity to amend its constitution or trust deed to impose on directors or trustees duties in the terms specified in Standard 5.