Further changes in the not-for-profit sector: introduction of ACNC Governance Standards

In our ClearLaw January 2013 article (Further changes in the not-for-profit sector: introduction of ACNC governance standards), we discussed changes in the not-for-profit (NFP) sector, including the establishment of the Australian Charities and Not-for-profits Commission (ACNC).

As part of these changes, new ACNC Governance Standards are set to apply from 1 July 2013 onwards to charities registered with the ACNC.

Charities must comply with these Governance Standards to be and remain registered with the ACNC and obtain tax concessions from the ATO.

This article summarises the new Governance Standards.

Who do the Governance Standards apply to?

The standards apply to 'registered entities', being all entities registered with the ACNC as a charity.

Why were the Governance Standards introduced?

Currently, the obligations imposed on a charity's governing body depend on:

• the type of entity (for example, charities which are companies are subject to corporations law);
• any affiliation the charity may have with a peak body with a code of conduct (for example, the Australian Council for International Development); and
• the sector in which the charity operates (for example, the education sector has governance requirements which charities must comply with to operate in that sector).

Accordingly, some charities are subject to a considerable range of governance obligations, whereas others are relatively unregulated.

The Governance Standards seek to improve accountability and consistency across the NFP sector by applying a set of governance obligations to all charities registered with the ACNC.^[1]

So, do the Governance Standards relieve charities from any existing governance obligations?

As reported in ClearLaw January 2013, the Federal Government previously announced that the Governance Standards would apply to charities in exchange for relief from some obligations charities currently owe under federal laws.

The Governance Standards, in their current form, do not provide any such relief. They expand charities' obligations in a key way. One of the Governance Standards relates to the conduct of, in the case of a charity which is a company, the company's directors (this is known as 'Standard 5'). Whereas directors' duties under corporations law apply to directors themselves, the Governance Standards apply to registered charities.

For a charity which is a company, this means the company is responsible for taking reasonable steps to ensure its directors comply with the duties referred to in Standard 5 - and may face penalties if they do not.

To balance this, the Governance Standards contain 4 broad protections for registered charities from the conduct of responsible entities (for a charity which is a company, its directors) which may otherwise breach Standard 5. For instance, if the charity is a company, these protections may protect the company:

• when a director makes a decision in good faith and in the best interests of the company (the so-called 'business judgment rule', as found in corporations law); and
• when a director cannot take part in the management of the company at the relevant time due to illness or some other good reason.

If a registered entity can establish any of the 4 protections, they are considered to have complied with Standard 5.

What happens if a registered entity doesn't comply with the Governance Standards?

Registered entities must comply with the Governance Standards in order to:

• be and remain registered as a charity with the ACNC; and
• obtain charity tax concessions from the ATO - the ATO will not register an NFP for charity tax concessions unless the ACNC has first registered it as a charity.

If a registered entity does not comply with the Governance Standards, then the ACNC has a broad range of enforcement powers - including issuing formal warnings and requiring a registered entity to give undertakings.

What are the Governance Standards?

There are 5 Governance Standards.

The Governance Standards refer to 'responsible entities'. Responsible entities are generally individuals and organisations who manage charities, such as directors (for registered entities which are companies) and trustees or directors of trustees (for trusts).

Standard 1: Purposes and not-for-profit nature of a registered entity

Standard 2: Accountability to members

This standard only applies to registered entities with members, such as companies limited by guarantee. It does not apply to entities without members, such as charitable trusts.
 

Standard 3: Compliance with Australian laws

Standard 4: Suitability of responsible entities

Standard 5: Duties of responsible entities

How do registered entities comply with the Governance Standards?

The Governance Standards specify broad outcomes, but do not clarify how a registered entity can achieve these outcomes. The ACNC has announced it intends to guide registered entities on how to understand and comply with the Governance Standards. This process should start in the next few months.

That said, it is clear that the Governance Standards generally require registered entities to take 'reasonable steps'. What are 'reasonable steps' for a particular registered entity will depend on factors such as:

• the entity's size;
• the extent to which it receives donations, grants and other money from the public and/or the government; and
• the nature of the entity's activities.

The ACNC has stated that, generally, the larger a registered entity is and the more public money it receives, the higher community expectations are that the organisation is operating efficiently and in accordance with its purposes. Therefore, these entities will need to do more to satisfy the Governance Standards.

When do the Governance Standards commence?

The governance standards will apply from 1 July 2013 - provided Parliament confirms them.

Not all entities will have to comply from 1 July 2013 onwards. There are 2 broad categories of registered entities which may be exempt from complying with the Governance Standards until 2017:

• If the governing rules of the registered entity prevent compliance with the Governance Standards - then the registered entity is exempt until 1 July 2017, provided that they comply with the Governance Standards 'as much as possible' without breaching their rules. Such entities will need to amend their governing rules prior to 1 July 2017.
• If the registered entity is an incorporated association under a state or territory law which contains duties for responsible entities - then the registered entity is exempt until 1 July 2017, provided that it complies with the state or territory law. However, if the relevant state or territory amends its laws to align with or adopt Standard 5, then the registered entity will be subject to Standard 5 as made.

What happens next?

Between now and 1 July 2013, we will see:

• whether Parliament approves (or disallows) the Governance Standards - potentially delaying the introduction of the Governance Standards; and
• how the ACNC will guide registered entities to understand and comply with the broadly-expressed Governance Standards.

Our ClearLaw January 2013 article flagged the introduction of both governance and external conduct standards. The external conduct standards were to deal with matters external to Australia, such as ensuring funds being sent outside Australia by registered entities are used for legitimate purposes. The government has not yet published the content of any ACNC external conduct standards.

I am involved in running a charity - what do I need to do?

If your charity is registered with the ACNC, you should prepare for the new Governance Standards by considering whether your charity already does or can comply with the Governance Standards. At a minimum, you should review the charity's purposes, governing rules and policies, to see whether these are consistent with the Governance Standards. If you are unsure, you should obtain legal advice.

More information from Maddocks

Contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Tax and Revenue or General Commercial teams.

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