‘More Than Good Deeds: What Makes an Organisation a Charity?’

Starting a charity is a meaningful way to create a lasting impact but it requires careful planning to ensure your organisation is able to comply with legal and governance standards. This is part one of our two part special on establishing a charity in Australia. This article will take you through the preliminary process of starting a charity including outlining what a charity is, the types of charities, DGR status, governance standards, directors duties and timelines you need to be aware of at the outset.

What is a charity?

A charity will always be a not-for-profit (NFP) organisation. But not all NFP organisations are charities.

The key difference between a charity and a non-charity NFP is the organisation’s purpose and legal governance. A charity is a specific type of NFP that exists primarily to advance the public benefit through activities like relieving poverty, advancing education or religion, or promoting other causes beneficial to the community. To be recognised as a charity, the organisation must be registered with the Australian Charities and Not-for-profits Commission (ACNC) and meet strict criteria to access tax concessions and public donations.

In contrast, a non-charity NFP organisation is a broader category that includes any entity that does not operate for the profit of its members. This includes organisations such as sporting clubs, professional associations and community groups.

The distinction between a charity and a non-charity NFP is important as it affects the organisation’s regulatory obligations, funding opportunities, and tax treatment.

NFPs, and thereby charities, are often incorporated as companies limited by guarantee, incorporated associations or unincorporated associations, though they can also exist as trusts, cooperatives and Indigenous Corporations.

Charity types

Governance arrangements for charities are regulated under different legislation depending on their incorporation form. For example, in Victoria any charity that operates as an incorporated association is regulated under the Associations Incorporation Reform Act 2012 (Vic). Similarly, an incorporated association in NSW will be regulated under the Associations Incorporation Act 2009 (NSW). An entity incorporated as a company limited by guarantee will be governed by the Corporations Act 2001 (Cth) (Corporations Act).

Cleardocs can help with the establishment of a company limited by guarantee so this article focuses on that form of charity and refers to directors rather than members of an association’s management committee members.

The ACNC oversees regulation of registered charities nationally. To be a registered charity an organisation must have at least one of the 12 charitable purposes, as outlined in the Charities Act 2013 (Cth). These charitable purposes form the basis for the charity subtypes which include advancing education, relieving poverty, promoting health and protecting the environment.

Beyond this there are 2 further specialised subtypes Public Benevolent Institutions (PBIs) and Health Promotion Charities (HPCs). These two substyles may qualify for enhanced tax concessions such as Deductible Gift Recipient (DGR) status which is discussed further below. 

Government controlled entities, political organisations and individuals (on their own) cannot be registered as charities even if they perform charity-like functions.

Note that to become registered, a charity must satisfy the ACNC that its purpose and proposed activities are charitable, that it is an NFP entity, that it will comply with prescribed Governance Standards and (if applicable) External Conduct Standards (these are discussed in more detail below), and that it has not previously been banned from being a charity. The application process is described in more detail below.

Deductible gift recipient or ‘DGR’ status:

In Australia, a limited set of eligible organisations can be endorsed by the ATO as a Deductible Gift Recipient. Not every charity will be eligible to be endorsed as a DGR, and some DGR entities are not charities (principally because they are charity-like government controlled entities which are not entitled to charity registration).

For a charity that wishes to raise funds from the general public, endorsement by the ATO as a DGR is an essential step because it entitles the endorsed organisation to receive tax deductible gifts and contributions from the public. This means that if a donor makes a donation of $2 or more to the endorsed charity, that donor can claim an income tax deduction in respect of that donation.

Another key benefit of DGR endorsement is that it provides a degree of credibility to the organisation and, in turn, a greater level of trust among the public. This is because DGR endorsement is highly regulated and is restricted to certain categories of organisations that provide a clear public benefit. If an organisation is endorsed as a DGR, they have satisfied a series of regulatory requirements administered by the ATO and the ACNC.

The ACNC is responsible for registering organisations as charities, and the ATO is responsible for endorsing organisations as DGRs.

Obtaining DGR endorsement can be a challenge

Applying to be endorsed as a DGR is often challenging. To be eligible for endorsement, an organisation must be registered as a charity with the ACNC, unless the organisation is:

• a government organisation;
• an ancillary fund; or
• specifically listed in the Tax Act.[1]

Again, not all charities registered with the ACNC are eligible for DGR endorsement; eligibility for DGR endorsement depends largely on the organisation’s purposes and activities.

This means that it is essential for a prospective charitable organisation to have an effective governing document (such as a company constitution) with provisions that support effective governance arrangements.

Gift funds

One key example of effective governance is the requirement for most (but not all) types of DGRs to maintain a ‘gift fund’. A gift fund is a special account that is set up in order to receive donations from the public. The gift fund can only receive gifts or contributions that are tax-deductible, and it must be used solely for the purpose for which the organisation is endorsed. However, not all categories of DGR are required to maintain a gift fund under the Tax Act (such as Public Benevolent Institutions).

Overall, charitable endorsement can be complex

The eligibility requirements contained in the Tax Act are complex, and there is no one-size-fits-all approach: specific DGR categories each have their own unique eligibility requirements. It is strongly recommended that organisations seeking to register as a charity, set up a gift fund and apply for DGR endorsement obtain legal advice about their governing documents and arrangements. This includes customers purchasing Cleardocs’ Public Company Limited By Guarantee product.

Regulation of charities under the Governance Standards

The Australian Charities and Not-for-profits Commission Regulations 2022 (Regulations) contain a series of six ‘governance standards’ that are designed to provide the public with a minimum level of assurance that a registered charity meets community expectations in relation to how a charity should be managed. At a high level, the governance standards require charities to:

• operate as not-for-profit organisations with a clear charitable purpose;
• be accountable to their members (including for the governance of the charity);
• comply with Australian laws;
• appoint suitable and ‘Responsible Persons / Entities’ to manage the charity;
• ensure those ‘Responsible Persons / Entities’ run the charity with integrity and financial responsibility (this is covered in more detail below); and
• where relevant, participate in redress schemes for past institutional child sexual abuse.

The Role of ''Responsible Persons / Entities''

A Responsible Person or Entity is someone who has a role in the governance of a charity; usually a charity company director. These individuals are required to fulfill a number of duties which apply to, and prescribe the expectations for, their actions. The expectations for Responsible Persons come from a number of sources, both under the common law and legislation. Principally, directors duties are set out under the Corporations Act; and the duties of a member of an association’s management committee is set out in the State or Territory associations legislation.

Responsible Persons charities should be alive to duties under Governance Standard 5 which include:

• to act with reasonable care and diligence;
• to act honestly and fairly in the best interests of the charity and for its charitable purpose;
• to not improperly use their position or information gained;
• to disclose conflicts of interest (this is discussed further below);
• to ensure that the financial affairs of the charity managed responsibly; and
• to not allow the charity to operate whist insolvent.

Unlike their for-profit counterparts, charity directors must tailor their actions to reflect the purpose of their organisation. This distinction brings with it a heightened responsibility to act in the best interests of the charity and maintain public trust. One area where this responsibility is particularly evident is in the management of conflicts of interest.

Managing conflicts of interest

One key duty under Governance Standard 5, is the obligation to disclose and manage conflicts of interest. This is a matter the ACNC has paid increasing attention to in recent years. Conflicts of interest can arise in both a realised and perceived form. A realised conflict occurs when a director stands to gain personally or professionally from a decision made by the charity. A perceived conflict, however, may exist even where no actual benefit is received—if the circumstances suggest the possibility of undue influence or bias, the ACNC may still question how the organisation intends to manage the situation.

The mere inference of a conflict is sufficient to warrant scrutiny. This means charities must be proactive in identifying and addressing potential conflicts before they escalate. Where conflicts cannot be easily resolved—for example, where family members are working collaboratively on a charitable enterprise—directors are responsible for outlining the process that will be taken to manage the situation. This may include documenting the nature of the relationship, disclosing it to the board, and ensuring that affected individuals recuse themselves from relevant decisions. One thing to consider is ensuring that the majority of a charity’s Responsible Persons are not related by family. This can avoid the inference altogether.

External Conduct Standards

In addition to the Governance Standards, a charity with an overseas focus in its activities must comply with a series of ‘External Conduct Standards’. The External Conduct Standards emphasise compliance with Australian laws relating to:

• money laundering;
• the financing of terrorism;
• sexual offences against children;
• slavery and slavery-like conditions;
• trafficking in individuals and debt bondage;
• people smuggling;
• international sanctions;
• taxation; and
• bribery.

To meet the ACNC Governance Standards and External Conduct Standards, it is strongly recommended that a prospective charity implements clear governance measures tailored to its size, complexity, and activities. This includes maintaining up-to-date policies and procedures that reflect its charitable purpose, ensuring responsible people are suitable and understand their duties, and keeping accurate records of decisions and finances.

For an organisation intending to operate overseas, additional steps are needed—such as conducting annual reviews of overseas activities, implementing anti-fraud and anti-corruption controls, and safeguarding vulnerable individuals. Charities should also ensure transparency and accountability, especially when using complex structures or sending funds abroad, and be prepared to demonstrate compliance if requested by the ACNC.

Practical Application - How long does the process of registering a charity take?

If you are considering applying to register a charity, it is important to be aware of the time commitment involved. The registration process is not brief—it requires careful preparation of the relevant documentation and a sustained effort in responding to queries from the ACNC. Applicants should be prepared for a detailed and sometimes lengthy engagement with the Commission, as each submission is assessed to ensure the organisation meets the legal requirements for charitable status.

Below is a typical process undertaken in the registration of a charitable enterprise:

1. Steps leading to Incorporation: Involves establishing a new entity specific to the charitable enterprise. Tasks at this stage include drafting a constitution that clearly outlines the organisation’s charitable purpose and addresses any DGR requirements, if applicable. Once finalised, the constitution is submitted to ASIC for incorporation. This process typically takes around three weeks to settle the constitution, followed by an additional two to four weeks to receive incorporation confirmation from ASIC.
2. Confirmation of Incorporation and ACNC Application: Following confirmation of incorporation from ASIC, the next step involves submitting an application to the ACNC for registration as a charity. This requires completion of a detailed questionnaire covering the organisation’s operations, structure, and procedures. It is essential that these elements are developed prior to submission, as the ACNC places greater weight on established processes rather than aspirational goals or planned activities. Particular attention should be given to this stage, as it provides an opportunity to clearly communicate the organisation’s intentions and charitable purpose. The application process typically takes around two weeks.
3. Further queries or delivery of outcome: The ACNC may either be satisfied with the application and make a decision based on the information provided, or request further details. This stage is typically the longest in the registration process, as it can involve multiple rounds of queries and submissions. The timeframe can vary significantly, ranging from approximately four weeks to over twelve months, depending largely on the quality and completeness of the initial application.
4. Beginning Charitable Operations and DGR registration: Once an outcome is achieved with the ACNC, operations may commence. If approved for DGR status, the next step involves applying to the ATO for DGR registration. This process typically takes between two to four weeks.

At Maddocks, we are well positioned to attend to all of your queries, and provide you with an array of charitable advice to ensure that your organisation is appropriately structured for success. Please contact our Charities team for more information.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

[1]Income Tax Assessment Act 1997 (Cth) (Tax Act).