On 17 December 2012 Treasury released a Consultation Paper on minimum governance standards for entities registered with the Australian Charities and Not-for-profits Commission (ACNC), as well as draft Regulations and an Explanatory Memorandum on financial reporting obligations and annual information statements for such entities. 

The ACNC is also going to be offering direct consultation at road show events to explain these proposals, and the timing and venue of those events will be outlined in due course on the ACNC website.

Written submissions on both proposals must be made by 15 February 2013. The following provides a summary of the proposals in the Consultation Paper on the minimum governance standards and of the draft Regulations regarding the reporting requirements, to assist you to determine whether your organisation should consider making a submission to Treasury.

Overview

From 1 July 2013 entities registered with the ACNC will have obligations to take reasonable steps to comply with minimum governance standards, although there is a further lead in time of 18 months post 1 July 2013 if changes are required to internal procedures to meet these standards, and four years post 1 July 2013 if changes are required to constituent documents to meet these standards.

Generally from the 2013-2014 financial year (other than in relation to certain annual information statements as is described further below), registered entities must also comply with certain financial reporting and annual information reporting obligations under theAustralian Charities and Not-for-profits Commission Act 2012 (ACNC Act).

Non-compliance with either of these requirements may expose a registered entity, or potentially any of its responsible entities (such as directors and trustees), with enforcement action being taken against them by the ACNC Commissioner – although the Consultation Paper and Explanatory Memorandum emphasise that the ACNC is only likely to use significant powers in the case of persistent serious non-compliance.

Currently only charitable entities are registered with the ACNC (as described in our earlier Alert, Legislation passes to enable a new era of regulation of the not-for-profit sector), but in future, following further consultation by the ACNC, these proposals may affect all entities registered with the ACNC, including not for profit entities which will in time be brought under the purview of the ACNC.

Proposed Minimum Governance Standards

The Consultation Paper proposes the following minimum governance standards be met by registered entities, other than "basic religious charities". A "basic religious charity" is a narrow category of entity, and is as defined here.

For all other registered entities, the proposal is that "reasonable steps" must be taken by registered entities to ensure those on their governing body at least comply with the minimum governance standards. As long as reasonable steps are taken, the standards will not considered to be breached.
The proposed minimum governance standards relate to the following:

Purposes and not-for-profit (NFP) or charitable character of an entity

The objective of this governance standard is to require registered entities to commit to a NFP/charitable purpose.  This includes requirements to have constitutions that are consistent with NFP/charitable purposes and to make information regarding the entity's purposes and activities publicly available. As is noted in the Consultation Paper, such a governance standard should be met by registered entities in any event in their constituent and other material, as this standard must be met to continue to retain charitable status for the purposes of accessing tax concessions.

Accountability to members

This governance standard will require registered entities to take reasonable steps to ensure that they are accountable to their members and that members have a reasonable opportunity to raise concerns about the governance of the entity. The idea is to promote transparency. The Consultation Paper states that steps such as holding annual meetings where members can participate and providing members with an annual report may be sufficient to meet this standard.

Compliance with Australian laws

The aim of this governance standard is to ensure that a registered entity's ongoing operations and assets are protected through compliance with Australian law.  It prohibits registered entities from committing an indictable offence or engaging in other specified punishable conduct.  The standard will permit the ACNC to take certain regulatory action against a registered charity where there is non-compliance.  However the Consultation Paper states that this standard should not be breached unless the registered entity itselfmight be charged with an offence that is indictable or liable to a civil penalty of more than 60 penalty units under Australian law.

Responsible management of financial affairs

This standard requires registered entities to take reasonable steps to manage their financial affairs in a way that effectively furthers its purposes and protects its resources from misuse. The Consultation Paper states that procedures limiting sign offs for bank accounts or the ability to write cheques, and requirements for approval of expenditure should be reasonable steps to meet this standard.  Equally, meeting the ACNC's new financial reporting standards (discussed further below) will be a factor.

Suitability of responsible entities

The standard provides that responsible entities of registered entities (such as directors and trustees) must not include persons disqualified from the management of corporations (by the ACNC or under the Corporations Act 2001 (Cth)).  It also permits the ACNC to disqualify certain entities from managing registered entities in particular circumstances. 

Duties of responsible entities

The object of this standard is to ensure that responsible entities of registered entities conduct themselves in a manner that would satisfy minimum standards.  The minimum standards are proposed to generally be equivalent to duties imposed on directors under the corporations law (such as the duties to act with reasonable care and diligence; to act in good faith and in the best interests of the entity; to disclose conflicts of interest).  All of these matters should be recorded in general terms in constituent material in any event.  The Consultation Paper does note that these standards may differ depending upon the size of the responsible entity, and calls for comment on that aspect.  There are also a number of protections that will be deemed to arise, including for example the existing defences available under corporations law, and including where responsible entities act in good faith.

Although it is proposed such governance standards be effective from 1 July 2013, if changes are required to meet these standards there is a transitional period of 18 months post 1 July 2013 for registered entities to make changes to internal procedures, and four years post 1 July 2013 for registered entities to make changes to constituent documents.

It should also be noted that the Consultation Paper notes that further work is being carried out consulting State and Territory Governments with a view to reducing any duplication of governance standards between Federal and State/Territory law.

Proposed Reporting Requirements

Registered entities have obligations to prepare and lodge annual information statements and financial reports to the ACNC which will be publicly accessible on the information portal to be maintained by the ACNC. The reporting obligations are proportional to the size of the registered entity as measured by its annual revenue according to accounting concepts. All registered entities are required to lodge an annual information statement. However, only medium and large registered entities are required to lodge financial reports. Basic religious entities are not required to comply with the reporting requirements but may do so if they wish.

The size and respective reporting obligations of registered entities are summarised in the following table:

All registered entities will be required to lodge an annual information statement setting out how their operations are carried out to meet their charitable/NFP purposes from the first financial year ending on or after 30 June 2013.  Annual information statements will be due for lodgement 6 months after the end of the registered entity's financial year (this is by 31 December2013 for 30 June balancers). 

For small registered entities, the annual information statement will include basic financial information about their income and assets.  Medium and large registered entities will be required to prepare financial reports as required by the Regulations for their first income year ending on or after 30 June 2014 and these will be due for lodgement 6 months after the end of the entity's financial year (this is by 31 December 2014 for June balancers). Medium registered entities may have their financial reports audited by a registered company auditor or reviewed (which is less onerous and does not need to be undertaken by a registered company auditor and is less costly to prepare). Large registered entities must have their financial reports audited.

The draft regulations prescribe that the financial reports of entities registered with the ACNC are to be in accordance with the accounting standards issued by the Australian Accounting Standards Board, unless the ACNC legislation provides otherwise.

The draft Regulations specify that a financial report consists of:

• the registered entity's financial statements for the year;
• the notes to the financial statements; and
• the responsible entities' (such as directors and trustees') declaration about the statements and notes, and on the solvency of the entity.

The particular accounting standards that will apply to the registered entity will depend upon whether or not they are considered to be a 'reporting entity'. or not for accounting purposes.  AASB standard 1053 defines a reporting entity as one where there are "users who rely on the entity's general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources."  Reporting entities are required to prepare a general purpose financial report (GPFR), which fully applies all the accounting standards, or they can choose to adopt the Reduced Disclosure Requirements, which are less onerous.  Non-reporting entities are only required to prepare a special purpose financial report to meet the needs of specific stakeholders but can choose to prepare a GPFR if they wish.  

Registered entities that are structured as companies limited by guarantee will not experience much change in terms of their financial reporting requirements under the draft Regulations.  However, for the many other entities that are not structured as companies limited by guarantee, the financial reporting obligations are likely to increase their compliance costs.  The AASB and the ACNC are expected to work together to develop guidance for registered entities on their financial reporting obligations.

The ACNC Act also enables the Commissioner to accept financial reports that are not in accordance with the accounting standards in certain circumstances.  The ACNC may allow joint or collective reporting. Joint reporting enables entities to report as charitable groups.  Collective reporting enables reporting along certain lines of activity, rather than on an entity-by entity basis. Also for a transitional period that applies until the 2015 financial year, the ACNC Commissioner will accept reports prepared under Australian laws to an Australian government agency even where those reports are not in accordance with AASB standards (for example, reports prepared by independent schools in accordance with the Schools Assistance Act 2008). This is to enable the ACNC to address potential reporting duplication until it is well–established as a 'one-stop-shop' regulator.

What is next?

Registered entities should review their constitutions, and internal policies and procedures to ensure that they are consistent with the proposed minimum governance standards and should take action to make any necessary changes to prevent non-compliance and potential enforcement action being taken against the registered entity or any of its responsible entities.  Registered entities should also consider their financial reporting obligations and take advice to ensure prepare appropriate financial reports. 

Minter Ellison's NFP team includes experts in governance, tax and accounting compliance experts.  Please do not hesitate to contact us if we can be of assistance to your organisation.