News & Insights

The Commonwealth Government is currently seeking stakeholder views on exposure draft legislation which will implement two key reforms that increase the reporting obligations of charities in respect of related party transactions.

The proposed reforms arise from the Government’s agreement to recommendations 14 and 15 in the Australian Charities and Not-for-profits Commission Legislation Review 2018 and will require:

1. certain charities to disclose the aggregate remuneration paid to responsible persons and senior executives; and
2. all registered charities to disclose related party transactions.

The reforms are proposed to be implemented in the Australian Charities and Not-for-profits Commission Amendment (2021 Measures No. 3) Regulations 2021 (Cth) (New Regulation).

spotlight on inappropriate transactions of charities

The issue of inappropriate related party transactions and failure to properly manage conflicts of interest are among the most common risks that charities encounter and are a common theme in ACNC compliance actions. A decision by a charity to enter into any transaction must be made in the charity’s best interests and for the benefit of its beneficiaries. The decision must not be for the private benefit of a board member or an entity related to a board member.

These new disclosures will be prominently featured in each charity’s annual information statement, making it easier for the Australian Charities and Not-for-profits Commission (ACNC) and the public (including donors and grant-makers) to identify inappropriate transactions and for the ACNC to take compliance action where necessary. Disclosure of these transactions is aimed at ensuring that they are subject to greater scrutiny, thus hopefully deterring inappropriate related party transactions (sometimes referred to as self-dealings) from being undertaken in the first place.

new disclosure of remuneration paid by charities

From 1 July 2022, large charities (having over $3 million annual revenue under newly raised thresholds) that prepare special purpose financial statements and have more than one “Key Management Personnel” will be required to report aggregate remuneration amounts paid to board members and senior executives in their ACNC Annual Information Statement. Charities paying excessive and unreasonable remuneration to board members and/or senior executives could have their charity registration revoked. Where a charity is paying a management body for management services this arrangement must also be reported.

“Key Management Personnel” is a term used in AASB 124 Related Party Disclosures (AASB 124) and includes any person having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including board members and executives.  Given the breadth of this term, each charity must decide for itself which roles have the degree of control and seniority to fall within the ambit of “Key Management Personnel”.

new reporting obligations of related party transactions

From 1 July 2023, all charities (other than basic religious charities) will be required to report “Related Party Transactions” in their annual reporting to the ACNC.

“Related Party Transactions” is defined in AASB 124 as a transfer of resources, services, or obligations between an entity and a related party regardless of whether a price is charged.  Related party transactions capture the provision of goods and services, leases, loans, hiring of staff or guarantees between the charity and:

• Key Management Personnel (or their close family members); and/or
• a related entity (such as subsidiaries or a parent company).

The New Regulations will specifically require medium and large registered charities to include certain related party disclosures in their special purpose annual financial reports. The ACNC is separately proposing that small charities will be required to report related party transactions as part of their Annual Information Statements.  Charities that are found to have been inappropriately transacting with related parties – intentionally or unintentionally – could face compliance action from the ACNC.

Medium and large charities preparing general purpose annual financial reports are already required to make the necessary disclosures of related party transactions.

what about basic religious charities?

Whilst these reforms will not require Basic Religious Charities to submit financial statements, if a Basic Religious Charity chooses to submit financial statements, it will be required to comply with the same requirements as other charities.

various policies and procedures may need to be updated to ensure compliance

With the introduction of the New Regulation, charities should consider reviewing their policies and procedures and any related party arrangements to ensure they are managing conflicts of interests and related party transactions in a manner that can withstand both regulatory and public scrutiny. The new reforms will commence as early as 1 July 2022, meaning charities have only a short time to establish systems and processes for capturing related party transactions.

Conflict of interest policies and procedures, codes of conduct, and employee contracts may all need to be updated to ensure compliance with the New Regulation and many existing related party arrangements reconsidered or better documented to reflect arm’s length arrangements.

We are currently working with charities to review all aspects of their charity and governance compliance. Please contact our NFP lawyers if you would like assistance to ensure your charity is ready to comply with these new reporting requirements.

Hannah Fraenkel will be presenting on these new requirements and the issue of conflicts of interest at the upcoming 3rd Annual Law of Religious Institutions Conference. Please contact us at NFP@mk.com.au if you would like a copy of Hannah’s comprehensive and insightful paper.