Charities and administration costs

Information for the public and charity donors

Australians are generous and give approximately $7 billion annually to charities. Charities are often offering services alongside ‘for profit’ organisations and the community expects the same quality, safety and professionalism from them. And, similar to commercial organisations, charities incur a range of costs in delivering quality services.

When people donate to charities, understandably, they want to know that their money will be used effectively and will make a difference to the cause that they support. A common way that people try to assess this is by examining the charity’s administration costs. While it is entirely reasonable to want to ensure that each dollar you give will be used well, properly assessing and comparing charity administration costs is difficult to do and can be misleading. 

Those assessing the administration costs of charities, may want to reflect that businesses and government agencies also incur administration costs in the regular pursuit of their purposes.  These legitimate expenses are a part of conducting themselves on a proficient footing. 

What these FAQ cover

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What are charity administration costs?

Administration costs – or ‘overheads’ as they are sometimes called – are commonly understood to be the ‘indirect’ costs incurred by an organisation. Many people think of a charity’s administration costs as being, for example:

  • employee salaries and other expenses
  • volunteer expenses (such as transport costs)
  • fundraising expenses
  • advertising costs
  • rent, bills (e.g. electricity, phone and internet, water), insurance
  • regulatory costs (e.g. licenses, fees, audits)
  • equipment and its upkeep or maintenance
  • office equipment (e.g. computers, paper, stationery), and
  • staff or volunteer training, learning and development.

For a charity, ‘direct’ costs are commonly understood to be the costs incurred when it is directly carrying out its charitable activities. These costs are often attributed specifically to particular activities. Many people think of a charity’s ‘direct’ costs as being, for example:

  • food and accommodation for people experiencing homelessness
  • medicine, vaccines and other medical supplies
  • supplies for people in disadvantaged areas (e.g. food and clothing)
  • staff hired for specific charitable activities (e.g. doctors, nurses, counsellors)
  • money for research into diseases, and
  • money for communities following a natural disaster (e.g. for necessary supplies or reconstruction.

Not all expenses fall neatly into clear categories such as ‘direct’ and ‘indirect’ costs, and identifying precisely what is and isn’t an ‘administration cost’ can be very difficult. In many cases, costs that may appear to be indirect or that are reported as administration are, in fact, integral to a charity’s service.

For example, car insurance and petrol expenses may sound like indirect administration costs, but for a charity providing essential health care services to people in remote rural communities, they are crucial to the direct delivery of its service.

Although these costs may be categorised alongside other administrative costs in a financial report, their importance to the delivery of the charity’s service means they are more direct than the category ‘administration’ suggests.

Why is it so difficult to identify charity administration costs?

In Australia there are no common charity accounting standards or definitions which prescribe the way charities must categorise particular costs. This means that the practices for formally recording costs (for example, in financial reports) vary greatly from one charity to another; what one charity includes in its broad category of administration will likely differ to that of another charity.

Indeed, in some countries there are examples of charities publicly reporting zero administration costs despite conducting a range of programs with paid employees. This is in reaction to pressure from donors to ensure their donations are only spent on programs or services, not on ‘administration’.  Of course by reporting costs in such a way they are not presenting a true and accurate picture of their operations.

Also, it is important to know that when looking at the financial reports of two charities, you may see similar costs treated in different ways. This can affect the amounts reported as ‘administration’ and, therefore, can affect the way you assess the charities’ effectiveness and efficiency. The charity you think is more efficient may simply be less transparent, or may be reporting their administration costs in a different way. Without common accounting standards, you are unlikely to be comparing apples with apples – it’s more akin to comparing apples with peacocks!

Furthermore, many costs can’t be easily isolated from a charity’s ‘direct’ service and set aside as ‘administration’. For many charities, delivering a service consists of a wide range of connected activities which incur a variety of costs – each one an important part of the overall service delivery. As such, determining exactly which activities are ‘administration’ and which are ‘direct’ service costs can be difficult.

For example, operating a free meal service for people experiencing homelessness in various locations would involve several activities for a charity. It would have to organise people and equipment, secure a location, shop for goods, organise transport, make sure it is meeting its legal requirements (e.g., council permits and insurance), and even promote the service in the local areas. Each of these activities is likely to incur a cost, yet each one is critical to the charity being able to deliver the service. It is difficult to determine precisely which costs are ‘administration’ and which are not. Also, how the charity categorises its costs in its financial report is unlikely to be the same as another charity doing similar work.

Shouldn’t there be a consistent standard way that charities report their costs?

Yes. The ACNC believes that there should be a dedicated accounting standard that applies to the not-for-profit sector with clear guidelines that set out how charities report different income and expenses. This exists in a number of other countries, including the United Kingdom and New Zealand. The ACNC will continue to advocate for such a change. In the meantime, without a consistent standard way of reporting, the public will continue to find it very difficult to compare one charity’s financial reports with those of another. This is one of the reasons why we have produced this guidance.

Shouldn’t a charity keep its administration costs as low as possible?

All charities must use their funds to further their charitable purposes. In managing their finances, charities should exercise proper care and diligence and not be wasteful – this includes spending on administration. Wherever possible, a charity should use funds in a way that maximises its impact and makes a difference for the people it was established to benefit.

Low administration costs alone do not necessarily indicate an effective or well-run charity. Similarly, higher administration costs do not necessarily indicate that a charity is ineffective or poorly-run. There are inefficient charities with poor outcomes that report low administration costs, and there are charities that spend more on administration and have efficient programs and successful outcomes. In deciding which charities to support, you should look at the work that charities do and the impact that they have.

Often charities that invest sensibly in what is often considered administration – IT systems, training staff, planning services, internal systems to measure the impacts of programs – are the charities that can deliver better outcomes and have longer-lasting impacts on the community.

Although the ACNC recognises that administration costs are not a reliable way to measure a charity’s performance, we do expect that all charities use their funds responsibly in the best interests its beneficiaries. Charities are required to keep proper financial records and need to be able to account for and justify their spending.

For example, a charity working to alleviate poverty in conflict zones overseas will have additional expenses in delivering its services. The administration costs of such a charity are likely to be higher than those of a charity working locally in an inner-city neighbourhood. Successfully delivering services in difficult circumstances requires qualified staff, thorough training processes, strong project management and constant auditing and evaluation of programs. A charity that cuts costs on these essential aspects of operations, and reports lower administration costs as a result, may expose itself to fraud and struggle to deliver the same successful long-lasting outcomes.

Aren’t administration costs just taking money away from the cause?

It is reasonable for donors to want their donations to go directly to a charity’s cause; after all, it is the cause that often inspires the donation. However, the reality is that all charities spend money on administration – without it, they wouldn’t be able to operate. Thinking of administration costs as being separate from a charity’s cause can be misleading as it fails to consider the aspects of a charity’s operations that enable it to provide services.

When thinking of donating to a charity, consider your donation to be a contribution to the charity’s overarching purpose which helps its beneficiaries. Rather than asking yourself, “how much of my donation is going to the charity’s specific project ?”, consider asking “what impact is the charity having on its stated cause, and do I want to support its work?”

How much can charities spend on administration?

All charities incur administration costs. Even small volunteer-led charities that employ no staff and have no property will incur costs, for example simple things such as stationery or travel expenses.

Charities that promise “every dollar will go to X” are not helping the sector or the public to understand these matters.

While such a promise may be superficially appealing to a donor, it does not mean that the charity is actually any more efficient than another charity, or that it has a greater impact. They are saying they’ll fund administration costs out of different income streams, but this may be a somewhat artificial construct. Another charity that does not make the same solicitation statement may actually be much more efficient and have a greater impact with the same donation.

There are no laws or regulations that govern the amount that charities can spend on administration. Some charities will need to spend more on administration than others – for example, a small community environmental group would likely spend less on administration than a health care provider which needs to cover employee salaries, insurance and equipment. As such, it is difficult to set a threshold amount that charities can spend on administration as each charity’s needs will differ according to its unique situation, purposes and activities.

While there is no regulatory limit on the amount that charities can spend on administration, the ACNC expects that a charity’s board will manage its funds responsibly, in accordance with the ACNC’s Governance Standards. Charities must always operate as not-for-profits and the responsible persons of a charity have a duty to act in the best interests of the charity – including when managing its finances. Unreasonable amounts spent on administration without proper justification would indicate to the ACNC that a charity’s responsible persons are not acting in the best interests of the charity.

Charities should be able to explain their administration costs to their members, donors or the public with reference to their purposes and activities. Being transparent by explaining costs and providing examples of successful outcomes can demonstrate the effectiveness of a charity’s work and responsible financial management.

For example, a new charity set up to help combat drug addiction reported high administration costs in its first year.Some members and donors expressed concerns that it was spending too much on administration. The charity made the effort to explain on its website and in its annual report that establishing its programs and internal systems cost a significant amount initially, but the costs were necessary for to support its sustainability and effectiveness. The charity was able to provide clear justifications for the initial amount it spent on administration and why those costs were furthering its long term charitable purposes.

Are ratios or percentages of funds spent on administration a fair way to measure a charity?

The ratios or percentages of funds that a charity spends on administration can offer some insight into its management.

For example, a charity that spends most of its funds on administration would likely raise concerns, as would a charity that claims to have no administration costs at all. However, there are many variables that affect ratios and percentages and they can be an unreliable way to measure a charity’s performance.

Setting ratios or percentages as standard benchmarks often ignores charities’ unique situations and needs, and fails to consider the differences in charities’ financial reporting. Some charities, because of the nature of their work, will need to spend more on administration costs than others. Applying a uniform ratio or percentage figure as a benchmark against which charities’ spending on administration can be measured will look much better for some charities and worse for others. This can lead to unfair assumptions about a charity’s management and overall performance.

For example, a charity set up to distribute grants for medical research is able to operate effectively with few staff and low reported administration costs. Because the charity doesn’t undertake the research itself – it distributes grants for other charities to conduct research – it doesn’t have the costs that other charities have. In its financial report, the costs it reported as administration added up to less than 10%, whereas the costs reported as going directly to its cause totalled more than 90%. In contrast, one of the medical research institutes that received one of the grants reported a greater percentage spent on administration. Due to the nature of its work, the research institute reported administration costs of approximately 35%. These costs included money spent on critical elements such as researchers and medical equipment.

While percentages may not be a reliable tool for measuring charity performance, the ACNC recognises that there can be instances where ratios or percentages indicate unreasonable or disproportionate spending on administration. Where there is evidence that a charity’s spending on administration is unreasonable, the ACNC can review its operations and management.

Can you compare charities using a ratios or percentages spent on administration costs?

Looking solely at ratios or percentages spent on administration costs won’t provide the details needed for a fair comparison, particularly with charities doing different work. Administration costs differ greatly and are affected by a wide range of factors, including, for example:

  • Charity size: some charities are big with extensive programs and operations, and the related economies of scale while others are smaller with narrower focuses;
  • Charity location: some charities operate in low-cost areas, while others are located in more expensive cities; some charities operate nationally or internationally, while others operate in a single location;
  • Charitable purposes: some charities work with high profile or popular causes and can attract funds easily, whereas others are focussed on causes with lower profiles and need to work harder on fundraising and awareness;
  • Charity life-cycle: some charities are new and have a lot of start-up costs, and others have been around for a long time with established processes and a strong base of supporters and donors;
  • Charity activities: some charities engage in direct charitable work and incur a range of costs, while others act as grant-making or fundraising bodies which distribute funds and do not engage in direct work.

Using ratios or percentages of administration costs as a point of comparison is unreliable as they don’t indicate the extent to which a charity is achieving results and making a difference in the community.

For example, two charities working to support victims of abuse in the same city have different administration percentages in their financial reports. Charity A spent 30% on administration last year, whereas Charity B spent only 10%. However, Charity B has no long-term strategic plan, its staff turnover is high, it is in financial trouble and is considering merging or winding up. Meanwhile, Charity A is sustainable, well-managed and has plans to expand its services to neighbouring areas. The story of Charity A’s successful outcomes and positive impact and Charity B’s struggles is not told with simple administration cost percentages.

Can charities employ people? Shouldn’t charities just be run by volunteers?

In Australia, approximately 44% of all charities are operated solely with volunteers – most of these being small organisations. However, 56% of all charities do need paid employees to be able to deliver their services. Charities are fully entitled to employ staff and it would be impossible for many of them to operate without doing so.

Operating in a not-for-profit manner does not mean that a charity can’t employ people. While volunteering is a great asset to the community and builds connectedness between individuals, it is fair to expect that people are paid for the work that they do – including when they are working for a charity. The work of many charities requires qualified staff and these people need to earn a living. Charities would not be able to attract the quality staff they need to carry out their work if they were not allowed to pay people fair wages for their skills, knowledge and experience.

How much should a charity spend on salaries for its staff?

The amount that a charity spends on staff salaries is decided by the charity’s governing body (its board, committee, or trustees) and will depend on the skills and experience of the individual, as well as the charity’s purposes and activities. Staff salaries should be appropriate for the work and should be considered in the context of the charity’s activities and purposes.

In many cases, to attract qualified, skilled and experienced people, charities need to be able to offer competitive salaries. Without offering reasonable remuneration, charities are likely to struggle to find the people they need to help deliver services. However, the members of the governing body of the charity have a duty to be careful with its finances.

The salaries that they agree the charity can pay should be appropriate for the duties of the job and compare reasonably with rates in comparable charities and government agencies .

Are there limits to what a charity CEO can earn?

The salary of a charity CEO is determined by the charity’s governing body (its board, committee or trustees) unless it is specifically set out in the charity’s governing documents (its constitution, rules or trust deed). Similar to those of other staff members, the salaries of senior management positions, such as the CEO, should be appropriate for the level of responsibility, the size of the organisation, and work asked of the individual. Charities should be mindful that these salaries are drawn from the public purse, donations or income earned by the charity.

Some charities are extremely large with large budgets and operations across state and international borders, and their managers are expected to be expert and highly proficient, so it is appropriate that they be reasonably remunerated.

These salaries should be benchmarked carefully by comparison to salaries within the charity sector and within the government sector to ensure that the charity is being prudent with its funds while offering reasonable remuneration for a difficult job.

Precisely what an appropriate salary is will be the decision for a charity’s governing body, and it should be considered carefully along with a range of factors, including the charity’s budget, its goals, and its size and complexity. Ultimately, registered charities must be accountable to their members, and the governing body must act in the best interests of the charity, in line with its charitable purpose, when making decisions about salaries.

How about board members? Can a charity pay its board?

Charity board members in most charities are unpaid. However, some charities may take a decision to remunerate board members as well as operational staff. If a charity decides to pay it board members, this should be done with due consideration of its reputation as well as public opinion on the use of donations. Any such remuneration should be reasonable, justifiable and properly approved within the organisation.

In some cases, charities have considered reasonable remuneration for board members as a way to ensure greater accountability. This may be appropriate for some charities given their circumstances. However, the ACNC expects that the governing bodies of all registered charities are accountable and acting in the best interests of the charity whether or not the responsible persons receive payment.

Does the ACNC have a role to play in investigating claims of high administration costs or salaries?

Charities are independent organisations and it is not the role of the regulator to second guess the decisions that boards make on these matters; boards have a wide discretion. However, if there is evidence that administration costs or salaries are unreasonably and inexplicably high, given the circumstances of the charity and its activities, the ACNC may look into the operations to establish that the charity continues to be run in accordance with the ACNC Governance Standards. The ACNC considers all the factors that may affect the perception of high administration costs or salaries in assessing such situations.

The ACNC takes concerns of financial mismanagement seriously and has a range of powers that it can use – from education and directions through to penalties and revocation of charity status – when addressing such instances.

Should administration costs influence a decision to donate to charity?

When considering a donation, it is best to do some research. It is reasonable to be concerned about your donation and to want to see it used effectively and not be wasted. However, it is important to remember that administration costs are common to all charities and the amount spent on these costs will depend on the nature of the charity’s purposes and activities.

When considering a donation, think about the nature of the charity's work, its beneficiaries and the impact it is having, rather than focusing solely on its administration costs. If you think the charity is doing good work and achieving results with its funds, then it is worth supporting.

Many charities have information on their websites about the work that they do and the results they are achieving. It may be worth looking into a charity’s programs, evaluations, research papers and annual reports to help you make a decision to donate. The ACNC Charity Register also has information about charities’ purposes and activities, and is freely available to the public.

More information

The ACNC acknowledges that this set of FAQs contains information also contained in the factsheet it produced jointly with The Australian Centre for Philanthropy and Nonprofit Studies at the Queensland University of Technology,

External resources

ATO: Guidance for non-profits

Not-for-Profit Law's Information Hub, including information on:

Fundraising Institute of Australia 

Defining and Accounting for Fundraising Income and Expenses: Executive Summary : ACPNS Current issues Information Sheet by McGregor-Lowndes, Poole, Flack and Marsden (2014)

Defining and Accounting for Fundraising Income and Expenses by McGregor-Lowndes, Poole, Flack and Marsden (2014)

Variations in Overhead and Fundraising Efficiency measures: The Influence of size, age and Subsector by Hager, Pollak and Rooney (2001)

Attention - Important information!This page contains links to external websites. Any external links used by the ACNC are inserted for convenience and do not constitute an endorsement or recommendation of any material at those sites. Information and resources provided by the ACNC is for general information only and is not intended to be a substitute for professional advice regarding your charity's particular circumstances.