Charities sometimes undertake transactions with related people or organisations. It is important for charities to carefully manage these transactions and ensure that they transparent and the details of them are recorded appropriately. This factsheet provides general guidance for charities on developing policies and processes to be able to manage related party transactions.
Who are related parties?
Related parties are not defined in the ACNC legislation. The term 'related party' is defined by the Australian Accounting Standards Board (AASB) in AASB 124 Related Party Disclosures. The definition in AASB 124 refers to the following as related parties for a registered charity:
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, or a close member of their family, of the key management personnel of the charity (the people with authority and responsibility for planning, directing and controlling the activities of the charity directly or indirectly)
an associate (an entity over which the charity has significant influence) or joint venture (a joint arrangement whereby the charity with another entity or other entities have joint control of the arrangements and have rights to the net assets of the arrangement)
What are related party transactions?
Related party transactions are also not defined in the ACNC legislation. A related party transaction is defined in AASB 124 as a transfer of resources, services or obligations between a charity and a related party regardless of whether a price is charged.
Related party transactions can include:
purchases, sales, donations
receipt of goods, services or property
transfers of property including intellectual property
provision of employees on a paid or complementary basis
For more information, see AASB 124 Related Party Disclosures [PDF 551KB].
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. This service has been identified as a potential related party transaction and a conflict of interest. To manage this, the charity follows its policies and procedures for conflicts of interest and related party transactions. Following the steps outlined in the policies and procedures means that:
all board members will be aware of the relationship between the board member and the web design company
the related party transaction will be recorded in the charity’s register of interests and register of related party transactions
the board member with the potential conflict will not be involved in the charity’s decision to award the contract for the web design work
the board will obtain quotes from a few companies before making its decision as a way of assessing that the cost is of fair market value.
What does my charity need to do?
Registered charities must comply with the ACNC Governance Standards to maintain their eligibility for registration (with an exception for Basic Religious Charities). As part of this, Governance Standard 5 says that a charity must take reasonable steps to make sure its Responsible Persons meet certain duties, including:
to act honestly and fairly in the best interests of the charity and for its charitable purposes
not to misuse their position
to disclose any actual or perceived conflict of interest, and
ensure that the charity’s financial affairs are managed responsibly.
Conflicts of interest (whether actual or perceived) may arise where a related party has an interest that may conflict with the best interests of the charity. Where a Responsible Person has an actual or perceived interest with a related party, it may be difficult to demonstrate the duty to act in the best interests of the charity.
By having a related party policy or procedure, charities reduce the risk that their decisions may be influenced by the interests of others. A policy or procedure may also help to ensure that related party transactions do not take place without approval of the charity’s Responsible Persons.
Being transparent about these types of transactions helps to maintain and build trust and confidence in charities.
Related party disclosures for financial statements
Charities that are required to submit annual financial reports to the ACNC (and are ‘reporting entities’) must submit a general purpose financial statement that complies with all applicable Australian Accounting Standards. This includes complying with the standard on related party transactions, AASB 124 Related Party Disclosures.
Also for charities that prepare special purpose financial statements, it is best practice to disclose related party transactions in financial reports.
Note: The information on this page is for general guidance only. It does not constitute legal or other professional advice. Charities should consider obtaining independent advice from an accountant if they have any specific concern.