Related party transactions are common and not necessarily a problem. Often they bring benefits to a charity (for example, discounted goods or services), but they can also give rise to conflicts of interest and there is a risk that they may not be in the best interests of the charity.

It is important for a charity to carefully manage any related party transactions to ensure that they are transparent, free from conflicts of interest, and in the best interests of the charity.

An important part of managing related party transactions is maintaining good records. A charity must be aware of its record-keeping obligations when reporting on related party transactions.

What is a related party?

We define a related party differently according to charity size. We use a simplified definition for small charities, and for medium and large charities we use the definition from the Australian Accounting Standards (AASB 124).

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
  • other people or organisations that can influence a charity’s decision-making.

Importantly, simply being an employee or volunteer in a charity does not make someone a related party. To be a related party, they must have significant influence over the charity’s strategic and financial decisions.

For medium and large charities, a 'related party' is defined in AASB 124 Related Party Disclosures.

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).

What is a related party transaction?

A related party transaction is a transfer of resources, services, or obligations between related parties. It does not have to include financial payment.

A related party transaction can include:

  • purchases, sales or donations
  • receiving goods, services or property
  • leases
  • transferring property, including intellectual property
  • loans
  • guarantees
  • providing employees or volunteers
  • a Responsible Person of a charity providing professional services (for example, accounting or legal services) at a discounted rate or for free.

Example of a related party transaction

A charity is planning to launch a new website. One of the companies being considered to create the website is managed by the daughter of a director of the charity. The charity identified this as a potential related party transaction and a conflict of interest. To manage it, the charity will follow its policies and procedures for conflicts of interest and related party transactions. Doing so means that:

  • all directors will be aware of the relationship between the web design company and the director whose daughter manages the company
  • the related party transaction will be recorded in the charity’s register of interests and register of related party transactions
  • the director with the potential conflict will not be involved in the charity’s decision to award the contract for the work
  • the board will get quotes from a few companies before making its decision as a way of assessing that the cost is of fair market value or is on terms beneficial to the charity.

What a charity should do to manage related party transactions

Maintain a register

We recommend that each charity records related party transactions in a register.

For each related party transaction, the register should keep enough information about the related party and the transaction to allow the charity to make disclosures in line with its requirements.

We have a template register of related party transactions for small charities.

Have an appropriate policy and procedure

We recommend that each charity has a policy and procedure for dealing with related party transactions. A policy and procedure will help ensure that the charity discloses related party transactions and records them appropriately.

A policy and procedure will also clarify who should and who should not be involved in making decisions about related party transactions. This will reduce the risk that the charity’s decisions are influenced by the interests of others.

Manage conflicts of interest

Governance Standard 5 requires a charity to take reasonable steps to make sure its Responsible People meet certain duties, including:

  • to act honestly and fairly in the best interests of the charity and for its charitable purposes
  • to not misuse their position
  • to disclose any actual or perceived conflict of interest
  • to ensure that the charity’s financial affairs are managed responsibly.

Conflicts of interest (whether actual or perceived) may arise when a related party has an interest that may conflict with the best interests of the charity. If a Responsible Person has an interest with a related party, it may be difficult to demonstrate that they are acting in the best interests of the charity.

The Responsible People of each charity should declare any potential conflicts of interest and the charity should record these in a register. When it is time for the charity to make a decision, anyone with a conflict (whether actual or perceived) should not be involved in the decision-making process. See more about managing conflicts of interest.

Related party disclosures for financial statements

Charities that prepare General Purpose Financial Statements must comply with all applicable Australian Accounting Standards. This includes the standard on related party transactions, AASB 124 Related Party Disclosures (or the equivalent requirements in AASB 1060 General Purpose Financial Statements - Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities).

For charities that prepare Special Purpose Financial Statements, it is best practice to disclose related party transactions in financial reports. And from the reporting period for the 2023 Annual Information Statement, it is a requirement.

Reporting related party transactions for 2023

Charities will be required to report related party transactions in the 2023 Annual Information Statement.

This means charities will need to keep records of related party transactions from the start of their 2023 reporting period. For many charities, this is from 1 July 2022.

The reporting requirements differ according to charity size.

For the 2023 Annual Information Statement onwards, small charities are only required to disclose ‘material’ related party transactions.

Material related party transactions

Whether a related party transaction is material depends on:

  • the amount of the transaction
  • the nature of the transaction
  • the charity’s specific circumstances.

A single transaction may be material because of its size, or it may be material because it is one of several similar transactions which, collectively, comprise a large amount.

A transaction is more likely to be material if its terms and conditions are different to the terms and conditions that would apply to similar transactions with other unrelated parties. An example may be when a related party provides free or discounted goods or services to the charity.

The materiality of a related party transaction is determined in the context of a charity’s specific circumstances and does not have a dollar value.

When reporting, a charity should consider whether excluding information about a related party transaction would affect a stakeholder’s understanding of its operations or its financial performance and position.

Examples of related party transactions that are generally material:

  • a loan to a related party by the charity (whether or not interest is charged)
  • the sale of charity assets to a company controlled by a committee member of the charity
  • fees paid for professional services provided by a board member of the charity
  • salary or wages for a close relative of a charity board member
  • sales of goods or services to the charity by a company controlled by a close relative of one of the charity’s board members
  • significant use of a charity’s property (even if there are no fees involved)
  • lease agreements between related parties.

Case studies of material related party transactions

  1. A charity’s Responsible Person is also a director of a web development company, ABC Web Pty Ltd. The charity paid ABC Web Pty Ltd $2,000 to update the charity’s website. ABC Web Pty Ltd provided the service under normal commercial terms and conditions.
  2. The daughter of a charity’s president was employed by the charity as a part-time finance officer. The charity paid her a total salary of $12,000 in the financial year.
  3. A charity paid total rent of $9,000 for office space owned by one of the members of its management committee. The rent charged was 20% below the market rates for this type of office space in the area.

Related party transactions that are not material

A related party transaction is not material if:

  • it does not have a major effect on a charity’s decisions or activities
  • it would not affect a stakeholder’s understanding of the charity or its financial performance and position.

Examples of related party transactions that are generally not material:

  • a gift of a box of chocolates to charity board members to say thank you for their pro-bono service
  • donations received by the charity from related parties
  • reimbursement of reasonable out-of-pocket expenses incurred by a related party in their duties for the charity
  • volunteer services provided by a related party that are the same as (or similar to) services provided by the charity’s other volunteers
  • a related party receiving goods or services from the charity as a beneficiary on the same terms as other beneficiaries
  • a related party buying goods from the charity on the same terms offered to the public.

Medium and large charities are required to disclose ‘material’ related party transactions in the Annual Information Statement and financial reports.

They do not have to report ‘immaterial’ related party transactions.

Material related party transactions

Information in a financial report is considered ‘material’ if omitting, misstating or obscuring it could reasonably be expected to influence someone using that information to make a decision.

It depends on the size, nature and circumstances of the transaction.

To determine when and how to disclose related party transactions, medium and large charities should refer to AASB 124 Related Party Disclosures or AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (paragraphs 189-203 and Appendix A).

Examples of related party transactions that are generally material:

  • a loan to a related party by the charity (whether or not interest is charged)
  • the sale of charity assets to a company controlled by a committee member of the charity
  • fees paid for professional services provided by a board member of the charity
  • salary or wages for a close relative of a charity board member
  • sales of goods or services to the charity by a company controlled by a close relative of one of the charity’s board members
  • significant use of a charity’s property (even if there are no fees involved)
  • transactions that have a material effect on the charity’s financial statement
  • lease agreements between related parties.

Related party transactions that are not material

A related party transaction is not considered material if it:

  • does not substantially influence a charity’s decisions or activities
  • does not affect someone’s understanding of the charity or its finances.

A charity does not need to report a related party transaction that is not material.

Examples of related party transactions that are generally not material:

  • a gift of a box of chocolates to charity board members to say thank you for their pro-bono service
  • donations received by the charity from a related party
  • reimbursement of reasonable out-of-pocket expenses incurred by a related party in their duties for the charity
  • volunteer services provided by a related party that are the same as (or similar to) services provided by the charity’s other volunteers
  • a related party receiving goods or services from the charity as a beneficiary on the same terms as other beneficiaries
  • a related party buying goods from the charity on the same terms offered to the public.

What needs to be in the financial statements

Medium and large charities must provide details of related party transactions in their financial statements in accordance with the requirements of AASB 124 or AASB 1060.

This applies whether the charity prepares Special Purpose Financial Statements (SPFS) or General Purpose Financial Statements (GPFS).

Note: The ACNC Commissioner exercised discretion that allows charities that prepare SPFS for the 2023 reporting period to not provide a comparative figure of related party transactions from the 2022 reporting period. See more information about AASB 1060 for Special Purpose Financial Statements

AASB 124 and AASB 1060 require, at a minimum, disclosure of the following details of related party transactions in the financial report:

  • the nature of the relationships with related parties
  • the amount of the related party transactions
  • the amount of outstanding balances, including commitments, and:
    • their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement and
    • details of any guarantees given or received
  • provisions for doubtful debts related to the amount of outstanding balances
  • the expense recognised during the period in respect of bad or doubtful debts due from related parties.

Related party transactions for certain charities

Basic Religious Charities

Basic Religious Charities are not required to answer financial information questions in the Annual Information Statement or submit financial reports.

This means that Basic Religious Charities are not required to report related party transactions.

However, if a medium or large Basic Religious Charity chooses to submit a financial report, it must comply with the same requirements as other medium or large charities, including requirements to report related party transactions.

Ancillary Funds

The Ancillary Fund Guidelines specifically prohibit certain related party transactions.

In addition to this guidance, trustees of Ancillary Funds must also follow the Ancillary Fund Guidelines for Private Ancillary Funds or Public Ancillary Funds when contemplating transactions.

Companies

If a charity is a ‘public company’ registered with the Australian Securities and Investments Commission (ASIC), there may be additional related party transaction requirements that apply under the Corporations Act 2001.

Find out more about related party transaction requirements for public companies.