The Australian Government has released its Consultation Paper on the proposed governance standards to apply to all not-for-profits registered with the Australian Charities and Not-for-profits Commission.

Registration with the Australian Charities and Not-for-profits Commission (ACNC) is a necessary prerequisite to obtaining tax concessions. Charities at the time the ACNC commenced have been automatically registered by the ACNC. All registered charities must comply with specified governance standards (and external conduct standards if the entity undertakes foreign activities). The new standards will come into effect from 1 July 2013. Proposed governance standards have been released and the public consultation period has ended. Proposed external conduct standards have yet to be released for comment.

Effect of the governance standards

Compliance with the prescribed governance standards is a condition of eligibility. An entity wishing to be registered with the ACNC will not be entitled unless it complies. The ACNC can impose a range of sanctions against a registered charity which fails to comply with the governance standards. While the expressed purpose of the standards is laudable – to simplify existing governance requirements applying to charities under the Corporations Act and State laws – the governance standards, in the form released for comment, create complexity and uncertainty.

Proposed standards

The Consultation Paper has proposed six governance standards on the following topics:

1. Purposes and not-for-profits (NFP) nature of a registered charity

A registered charity must be able to demonstrate that it is complying with its purposes and its character as a NFP entity. The proposed standard duplicates other legal requirements applying to companies limited by guarantee under the Corporations Act and to charitable trusts under the general law. The standard is expressed in different terms to existing requirements and so will create uncertainty. The effect of this standard is to give the ACNC the power to scrutinise a registered charity’s activities to determine whether activities pursued by that charity properly fall within its purposes.

2. Accountability to members

The proposed standard requires that “reasonable steps” be taken by a registered charity to ensure that it is accountable to its members and that members have an adequate opportunity to raise any governance concerns. This standard will not apply to charitable trusts as they do not have members. Registered charities that are either companies limited by guarantee or incorporated associations are currently bound by accountability requirements in either the Corporations Act or the relevant Incorporated Associations legislation. For example, statutory provisions exist to give members the right to call for a general meeting. The Corporations Act is to be amended from 1 July 2013 to exclude the application of these provisions to registered charities. Thus current specific statutory provisions will be replaced with the “reasonable steps” standard. This will create uncertainty about members’ rights and what they must do to exercise their rights.

3. Compliance with Australian laws

A registered charity must not engage in conduct that “may be dealt with” as a criminal or civil penalty matter involving possible penalties exceeding $6,600 or imprisonment for a term exceeding 12 months. The effect of this draft standard is to expose the charity to legal sanction by the ACNC in addition to the legal liability at law and before guilt is legally determined by due process of law. On one view, those matters ought to be left to the appropriate law enforcement agency, and a charity like any other citizen ought to be entitled to the presumption of innocence.

4. Responsible management of financial affairs

Registered charities must take reasonable steps to ensure that their financial affairs are managed “in a responsible manner”. Registered charities that are either companies limited by guarantee or charitable trusts are currently bound by either the Corporations Act, the general law or State legislation with regard to financial management. The Corporations Act is to be amended from 1 July 2013 to exclude the application of certain provisions, e.g. the prohibition on insolvent trading. Thus current specific statutory provisions will be replaced with the “responsible management” standard. This will create uncertainty about the obligations of directors and trustees of charities and what they must do to comply with the conditions of registration as a charity.

5. Suitability of directors and trustees

Reasonable steps must be taken by a registered charity to ensure that its directors or trustees are not disqualified under the Corporations Act from managing a corporation or disqualified by the ACNC. The ACNC does not have power under its Act to disqualify directors or trustees, but the proposed governance standard purports to give the ACNC this power.

6. Duties of directors and trustees

Registered charities must take “reasonable steps” to ensure that their directors or trustees comply with duties that are largely based on existing directors’ duties in the Corporations Act and trustee duties under the general law and State legislation:

  • 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, and
  • to ensure that the charity does not trade while insolvent.

These duties are imposed directly on the registered charity rather than on the directors or trustees themselves. However, the Corporations Act is amended to “turn off” corresponding duties of directors. Despite this, general law duties, including fiduciary duties, would remain and it is unclear as a result what duties directors owe corporate charities.

Four defences are provided in the standard for charities that might otherwise breach the governance standards. The charity has a defence against a claim by the ACNC that the charity has not complied with the standard if the director or trustee:

  • relied in good faith on information received
  • acted in good faith believing the action to be in the best interests of the charity
  • had reasonable grounds to expect that the charity was solvent and took reasonable steps to prevent insolvent trading, and
  • was not involved at the relevant time due to illness or other good reason.

It is not clear why the charity should be subject to sanctions as a result of a director or trustee breaching duties to the charity. The effect of the standard on liability of directors is unclear, e.g. where some or all of its directors or trustees may have breached the duties, the standard and associated changes to the Corporations Act may result in revocation of the charity’s registration and tax concessions and leave the charity without a remedy against defaulting directors or trustees.

Enforcement of governance standards

The ACNC has a range of sanctions that can be imposed to enforce the governance standards, and ultimately the ACNC can deregister an entity, leading to a loss of tax concessions. However, for constitutional reasons, these powers can only be used on “federally regulated entities”, (i.e. trading and financial corporations such as companies incorporated under the Corporations Act). Individual trustees and trustees comprising individual trustees and public trustee corporations will clearly not fall under the ACNC’s jurisdiction. It is questionable whether incorporated associations will be “trading or financial corporations”. The Consultation Paper states that where the ACNC cannot directly enforce the governance standards, it will liaise with State regulators. However, State regulators will not have the power to enforce the ACNC’s governance standards.

Secondly, there is significant uncertainty regarding what enforcement steps the ACNC will take in particular circumstances. Although the Consultation Paper states that the governance standards are to be applied proportionately to each registered charity depending on the circumstances of that charity, this requirement has not been expressly included in the draft governance standards. Instead, the inherently vague and uncertain expression “reasonable steps” has been used throughout the draft standards. While the ACNC may intend to enforce compliance having regard to proportionality, the standards do not enshrine this principle, and registered charities will not know whether the steps they take will be considered to be reasonable having regard to their particular context. This raises the question whether the governance standards achieve their stated purpose of reducing the compliance burden on charities by reducing complexity under the current regulatory regimes of the States and the Commonwealth.