About the organisation
An organisation working with Aboriginal and Torres Strait Islander peoples applied to the ACNC for charity registration. The organisation’s governing document stated that its purpose was to relieve the poverty, distress, or disadvantage of Aboriginal and Torres Strait Islander peoples by supporting social and economic development.
To achieve its purpose, the organisation stated it would provide vocational training and training in core life skills to Aboriginal and Torres Strait Islander peoples.
Additionally, the organisation stated it would promote Aboriginal and Torres Strait Islander culture and encourage participation in the arts – including literature, music, the performing arts, and visual arts.
About the application
The organisation applied to be registered with the following subtypes:
- advancing education
- advancing social or public welfare, and
- advancing culture.
The organisation’s governing document contained clauses requiring it to operate on a not-for-profit basis, and to provide surplus assets to a charity upon winding up.
Its governing document and associated submissions demonstrated that it complied with the ACNC Governance Standards.
About the registration process
The ACNC reviewed the organisation’s registration application which included its governing document and description of activities.
We needed more information about its plans before we could register the organisation as a charity.
Our concerns
The organisation stated that it planned to work with, and ultimately purchase, another business in order to carry out its purposes. The business manufactured cultural items and artwork and was owned by one of the organisation’s Responsible People.
This raised concerns that the Responsible Person in question may receive impermissible private benefits in the form of a financial gain from the purchase of the business. It also prompted concerns about the organisation’s compliance with the ACNC's Governance Standards – particularly in relation to the disclosure and management of conflicts of interest.
The ACNC is aware that many communities are close-knit, and that close relationships between people connected to a charity are common – for example, in First Nations communities, in culturally and linguistically diverse communities, and in remote and regional areas.
Working together with people and organisations that are known and trusted, and who have cultural legitimacy, can sometimes bring about benefits for charities and support them to effectively achieve their purposes.
Therefore the reason we made further enquiries was so we could gain a better understanding of the organisation, meaning we could better assess its entitlement to registration, and provide it with effective guidance and education if needed.
Private benefits occur when a charity's resources are used to benefit people other than the charity’s beneficiaries.
Private benefits can be obtained through money, goods, services or anything else a charity has or provides.
The fact that a charity's work benefits individuals is not necessarily a problem. But it becomes a problem if the charity is no longer pursuing solely charitable purposes, or if its purposes are for private (not public) benefit.
Charities must be for the public benefit, meaning they must benefit the general community or a section of the general community. A charity may only confer private benefits if those benefits are incidental or ancillary to achieving its charitable purpose.
An organisation that exists solely for private benefit cannot be a charity.
Discussions with the organisation
We sought more information from the organisation about how it planned to work with the business to deliver programs, and also about the proposed terms for purchase of the business, considering the business was owned by one of the organisation’s Responsible People.
Understanding the nature and scope of the collaboration would help us to determine if the organisation had a non-charitable purpose or proposed to confer private benefits that were not merely incidental or ancillary to achieving its charitable purpose.
We also asked the organisation to explain:
- the nature of any potential related party transactions between itself and the business, and
- how it was going to disclose and manage any conflicts of interest that may arise due to the business being owned by one of the organisation’s Responsible People.
For small charities, a related party is generally a person or organisation that is connected to the charity and has significant influence over it.
For medium and large charities, a related party is more formally defined through Australian Accounting Standards. That definition is a broader one encompassing individuals and organisations that have links to the charity in question.
For charities of all sizes, a related party transaction is a transfer of resources, services, or obligations between related parties.
Related party transactions are common and are not necessarily a problem in and of themselves. However, related party transactions can give rise to conflicts of interest which need to be disclosed and managed.
For a charity's Responsible People, a conflict of interest occurs when their personal interests conflict with their responsibility to act in the best interests of their charity.
ACNC Governance Standard 5 requires charities to take reasonable steps to ensure their Responsible People comply with a range of duties. These include acting honestly in the best interests of the charity, and disclosing material conflicts of interest.
Through email and telephone communication, it became clear that the organisation’s Responsible People were unsure how to identify and manage conflicts of interest.
We provided guidance to the organisation regarding how to identify a conflict of interest and appropriate measures for managing different kinds of conflicts of interest, including related party transactions.
We also provided information about how the organisation could ensure that any private benefits that occurred were incidental to achieving its purposes.
For example, a charity is more likely to demonstrate it is furthering its charitable purpose if any transactions are on commercial, arms-length terms, or if the terms are more favourable to the charity. Conversely, it is less likely to be found to be furthering its charitable purposes if such transactions were on terms more favourable to the other party involved.
The outcome
Following our discussions with the organisation, it advised us it no longer planned to purchase the business.
The organisation also confirmed that it would not collaborate with the business, or any other private businesses belonging to its Responsible People, to deliver its programs.
We accepted that these changes to the organisation’s proposed activities meant we no longer had any concerns in relation to non-charitable purposes or compliance with Governance Standard 5. We then registered the organisation as a charity.
To be entitled to charity registration, an organisation is not required to avoid conflicts of interest and related party transactions. There are a number of reasonable steps they can take to manage their governance obligations and ensure they are pursuing solely charitable purposes.
In this case, for example, the organisation could have put in place measures to disclose and manage the conflicts of interest and to enter into the transaction on an arms-length basis (or terms more favourable to it).
Alternatively, the organisation could have continued to work with the business to deliver its programs after putting in place governance measures to manage the conflicts of interest and ensure it remained focused on its charitable purposes.
The organisation could have explored the options and determined whether it was paying market rates (or less) for the services provided by the business, when compared to other service offerings available, if any.
More detailed guidance on these topics can be found on the ACNC website: