New ACNC reporting requirements for related party transactions
In our experience most charities have a policy for dealing with conflicts of interest, but not many are across the related party transaction requirements under Chapter 2E of the Corporations Act 2001 (Cth) (the Corps Act) or Australian Accounting Standards AASB124 (if applicable to them). The Australian Charities and Not-for-profits Commission (ACNC) has also now announced new related party transaction reporting obligations applying from the 2023 reporting year.
New ACNC reporting obligations
The ACNC defines related parties differently, depending on the size of a charity.
Small charity (annual revenue under $500,000)
For a small charity, a related party is a person or organisation that is connected to the charity and has significant influence over the charity. This includes:
- a charity’s Responsible People and their close family members
- a charity’s senior management and their close family members, and
- other people or organisations that can influence a charity’s decision-making.
Importantly, to be a related party, a person or organisation must have significant influence over the charity’s strategic and financial decisions. Simply being an employee, contractor or volunteer in a charity does not make someone a related party.
From the 2023 reporting year, small charities will be required to disclose reportable related party transactions to the ACNC in their Annual Information Statement. This will include, for example:
- fees paid to a related party for providing goods or services to the charity
- loans from/to a related party
- salary/wages paid to a related party’s relative(s)
- transfer of charity property or assets to a related party
- charity goods or services provided at a discount to a related party
- significant use of charity property by a related party, and
- investment in a related party.
The ACNC has also indicated that some other types of transactions may also be reportable:
- because of their size
- if the terms and conditions are different to the terms and conditions that would apply to similar transactions with other unrelated parties, or
- if information about those transactions would affect a stakeholder’s understanding of its operations or its financial performance and position.
Medium and large charities (annual revenue of $500,000 or more)
The ACNC has adopted the definition from AASB 124 for medium and large charities.
In summary, a related party is:
- a person that is connected to the charity, such as a Responsible Person or a close member of their family, that has control or joint control of the charity
- an organisation that is connected to the charity and has control or significant influence over the charity, such as a parent entity of the charity
- an organisation that the charity has control or significant influence over, such as a subsidiary entity
- any organisation and the charity that are members of the same group (for example, fellow subsidiaries)
- a member of the charity’s key management personnel (people with authority and responsibility for planning, directing and controlling the activities of the charity directly or indirectly) or a close member of their family
- an associate (an entity over which the charity has significant influence) or joint venturer (an entity that shares control of an arrangement with the charity and has rights to the net assets of the arrangement).
It is important to contrast the definitions used for charities classed as small versus medium to large. Medium to large charities will have to cast a wider net as they will also have to consider who they have control of or significant influence over.
Medium and large charities are required to disclose ‘material’ related party transactions in the Annual Information Statement and financial reports. A related party transaction is not considered material if it:
- does not substantially influence a charity’s decisions or activities, or
- does not affect someone’s understanding of the charity or its finances if the information is omitted.
It is noted that ‘material’ is not defined by the ACNC and will depend on the circumstances of the charity and transaction. It does not have a specific dollar value or threshold and is unique to each charity. For example, a $10K payment may be material to a charity that turns over $500K but is immaterial to a charity that turns over $10M.
Approval process for related party transactions for charities that are public companies
Chapter 2E of the Corps Act applies to charities that are incorporated as public companies (e.g. a company limited by guarantee) and affects the decision-making process for related transactions involving a financial benefit to a related party. These rules are designed to protect members’ interests.
The requirements for a public company to give a financial benefit to a related party of the public company are that:
- the company’s members must approve the transaction in the way provided in section 217 to 227 of the Corps Act, OR
- the financial benefit must fall within one of the exceptions in sections 210 to 216 of the Corps Act.
The Act broadly defines what is considered a ‘financial benefit’ given to a related party. It does not necessarily need to involve money. Instead, it may involve items of value, such as property, assets or supplying/receiving services. A common example is a charity that allows a Board member to use their office space or premises. The charity would normally charge people for use of the same space but has allowed the Board member to use it for free. Whilst no money has changed hands there is a clear financial benefit.
Generally, once members have given their approval to give the financial benefit to the related party, the benefit must be bestowed within 15 months of approval.
Exceptions to requirements for member approval
The exceptions to the requirement for member approval in these circumstances include, in summary, if the transaction:
- is on arm’s length terms (i.e. if the terms would be reasonable in circumstances where the public company and the related party were dealing at arm’s length, or if the terms are less favourable to the related party)
- is for reasonable remuneration or reimbursement
- is for indemnities, insurance or particular legal costs for officers
- is for a total amount of less than $5,000
- provides a benefit to a closely held subsidiary of the public company
- provides a benefit to members that does not discriminate unfairly, or
- is court ordered.
What you should do
If your charity does not yet have a policy on managing conflicts of interests and related party transactions, we recommend it implement one. Having clear and well defined policies ensures all those who work for a charity (paid or volunteer) can identify, record and report on these transactions in a consistent manner. This is a critical part of any charity’s governance and helps ensure trust and confidence in the charity sector.
If the Corps Act applies to your charity and you breach the related party transactions provisions, civil and criminal penalties can apply.
Please contact For Purpose Advisory at contact@forpurposeadvisory.com.au and Accounting For Good at support@accountingforgood.com.au if you need help ensuring compliance or with policies and procedures.
This publication was authored by Hannah Rose from For Purpose Advisory and Carol Tran from Accounting For Good. It is for general guidance only and any opinions expressed are the opinions of the authors. The content and any links are current as at the date it was published and For Purpose Advisory/Accounting For Good take no responsibility for any changes to the links or accuracy of the content. Legal advice should be sought before taking action in relation to any specific issues mentioned in this publication.