Last Friday, 6 July 2012, Federal Treasury released the second draft of the Australian Charities and Not-for-profits Commission (ACNC) Bill and immediately referred it and associated Bills to the House of Representatives Standing Committee on Economics for an inquiry. The Government also announced it is still their intention to introduce this legislation into Parliament in August this year in order that the commencement date of 1 October for the ACNC to be established as the national regulator is achieved.
The revised Draft Bill essentially maintains the core proposals of regulation and financial reporting set out in the earlier draft although with some very important changes and exemptions to apply compared to previous announcements. We welcome these changes as they address many of the concerns we raised in our earlier submissions. This includes certain exemptions for elements of religious organisations. Nevertheless we continue to have concerns about a number of key aspects of the revised Bill.
The Draft Bill introduces many new terms and concepts which require further consideration before we can provide detailed commentary on all the impacts that may arise. It is a far more extensive Bill than the initial draft and sets out in greater detail the powers of the Commissioner to regulate Charities, the penalties for non-compliance as well as onerous responsibilities for those that govern charities. It also seeks to make a stronger link between the tax concessions which are regulated by the Australian Taxation Office (ATO) and the contents of this legislation. Importantly we have not yet seen a draft of the associated regulations and as you will see below their absence leaves a lot of gaps in terms of a comprehensive understanding of the implications of this Draft Bill.
Among many important new concepts included in the draft Bill are;
- an exemption to certain aspects of the governance and financial reporting requirements for what are defined as Basic Religious Charities. This is an important exemption but importantly there are many elements of religious organisations that will not qualify.
- allowing for the lodgment of one financial report for a group of registered entities with common and central governance arrangements through the introduction of Collective and Joint Reporting. This will require entities to apply to the ACNC for approval. From our initial review the qualification criteria would appear somewhat restrictive.
If the Bill is enacted in its current form it will mean that all Charities will be regulated by the ACNC from 1 October 2012 with all current Charities being registered with the Commission from that date. Other key dates that arise from these proposals include;
- all Charities will be required to lodge an Annual Information Statement with the Commission for the year ending 30 June 2013 and following years.
- the governance requirements of the Bill will apply from 1 July 2013. Charities will be required to comply with these requirements for registration, and thus also tax concession purposes.
- the first financial year when the financial reporting requirements will apply for medium (greater than $250,000 revenue) and large (greater than $1m revenue) Charities will be for the year ending 30 June 2014.
We also note the introduction into the Bill of a range of provisions for which the ACNC have discretionary powers to limit or request information from Charities. We are concerned that this discretion may not provide an equitable playing field and we encourage additional classifications within the legislation to help better address the matters giving rise to these discretions.
Key Changes Proposed
Given the significance of the changes and the matters still to be considered by us in greater detail we have not sought to set out in this paper the full implications for Charities of this Draft Bill. Rather from our initial overview we provide a summary below of a number of key changes and observations. These key changes include matters relating to:
- Financial Reporting;
- Collective and Joint Reporting;
- Annual Information Statements;
- Governance Arrangements;
- Responsible Entities;
- Exemptions for Basic Religious Charities;
- The ACN Register; and
- The concept of Report-Once, Use-Often.
The details in relation to these matters are outlined in the following paragraphs.
- The first financial report required to be lodged with the ACNC will be in respect to financial year ending 30 June 2014 and lodgement must occur within 6 months of that date. For entities with a year-end other than 30 June, it is currently unclear if the first year of lodgement will be for the year-ending before or after 30 June 2014.
- A substituted accounting period must be advised to the ACNC by a registered entity within 6 months of registration. Current entities with a financial year-end other than 30 June are to be grandfathered to allow their present financial year to continue. For entities that have no current requirement to lodge financial reports with a regulator it is unclear how these grandfathering provisions will apply.
- While audits of registered entities will still be required to be performed by a registered company auditor, where reviews of medium-sized entities are allowed these can be performed by a member of a professional accounting body. The latter were previously also required to be undertaken by registered company auditors.
- We note the removal of small (revenue less than $250,000 per annum) Deductible Gift Recipient entities (DGRs) from the requirement to have a review of their financial reports undertaken. This was a requirement of the earlier Draft Bill and is a very welcome change in reducing the burden on small entities. As with other charities, entities with DGR status will now be reporting based on their turnover levels
- In respect to determining the size of an entity for reporting purposes, while the basic revenue criteria remain the same, the ACNC will have the ability to consider an entity to be small in certain circumstances even though for a particular year it may not meet this definition in terms of revenue criteria alone.
- While it is expected that financial reports to be lodged with the ACNC will need to be prepared in line with Australian Accounting Standards, the regulations are to contain more specific details on the accounting framework to be adopted in these financial reports. The requirement to apply Australian Accounting Standards was specifically set out in the first Draft Bill but this has now been removed.
- The original draft Bill required an auditor to form an opinion on whether the registered entity kept all other records required by the Act. This has been amended to now require the auditor to form an opinion on the records required to be maintained by the Part of the Bill relating to record keeping and reporting only. This is a significant amendment and addresses our concerns as to the onus the earlier proposals would have placed on the auditor and the impact on compliance costs.
Collective and Joint Reporting
- The Bill allows for the lodgement of one financial report for a group of entities with common and central governance arrangements. This is known as collective or joint reporting and requires application to the ACNC for approval. While this is a welcome proposal for many of our clients, our initial review of the criteria to be met indicates some concern that it may not adequately cater for many of the different structures and arrangements currently in place.
Annual Information Statements
- An Annual Information Statement will be required to be lodged by 31 December 2013 for all registered entities in respect to the financial year ending 30 June 2013. We expect the details required to be included in these statements to be set out in the regulations.
- We note that Information Statements are to be lodged for the year before financial reports are required and in respect to a period prior to the governance standards commencement date of 1 July 2013. Given that these Information Statements are to form the basis allowing the Commissioner to assess an entity's compliance with the Act we foresee conflicts in these differing commencement dates. These concerns are heightened given that it is still the Government's intention to have a 'Statutory Definition of Charity' in place to also commence on 1 July 2013.
- The Draft Bill sets out a framework to allow for minimum governance and external conduct standards to be applied to registered entities, although the detailed requirements thereof are to be contained in the regulations, a draft of which is still to be released for consultation purposes. It is expected that these standards will differ based on the reporting thresholds.
- The governance standards include matters such as specific issues to be addressed in an entity's governing rules. The external conduct rules relate primarily to activities undertaken by a charity outside Australia. This includes ensuring that charities are not a means of support for overseas criminal or terrorist activities.
Responsible Entity to replace Responsible Individual
- The Bill introduces the concept of a Responsible Entity, and their officers, as being responsible for the governance of a registered entity. This is a significant change, and given the narrower definition our initial observations are that this is an improvement from the initial Draft Bill. Nevertheless, given the references in the Bill to the concept of a Primary Entity and the onerous responsibilities placed on the officers of a Primary Entity it will be important that registered entities consider carefully the impact of these requirements on their own particular structures and circumstances.
Basic Religious Charities
- The Bill has exempted Basic Religious Charities from its governance and financial reporting requirements. Importantly this exemption does not include the requirements of the external conduct standards referred to above or those of a registered entity to maintain certain records. The latter includes financial records 'thorough enough' to enable financial statements to be prepared and records that explain a charity's operations. These records must be maintained for 7 years and be sufficient to enable the Commissioner to undertake an assessment of the entity in terms of registration entitlements, other requirements of the Act and any assessment carried out by the ATO in respect to compliance with Taxation Law.
- Given the exemption of Basic Religious Charities from the governance standards, we note that this does not appear to extend to the requirement to have such an entity's governing rules available on the public register. It is unclear how the apparent conflicts in these requirements will operate in practice.
- In defining this new concept of a Basic Religious Charity importantly we note that it excludes DGRs and those in receipt of any Government funding. It also excludes entities currently registered under a number of other Acts including companies and incorporated associations.
- A Basic Religious Charity will still be required to be registered if they have an ABN and will thus need to lodge an Annual Information Statement. We are yet to see what this Statement will be required to contain although noting that earlier drafts included some basic financial information. We assume that a revised form of Information Statement will exclude such financial information for entities considered to be Basic Religious Charities.
- The Commissioner's powers as set out in the Bill to be able to replace a Responsible Entity of a registered entity in particular circumstances do not extend to a Basic Religious Charity. Nevertheless, given the number of religious entities that will not meet the definition of a Basic Religious Charity, we are concerned as to the extent of the powers of the Commissioner in this regard.
- The entitlement to registration provisions of the Bill have been significantly revised and now focus solely on Charity as the type of entity that can be registered along with the following sub-types:
- Those whose purpose is for the relief of poverty, sickness, the needs of the aged, advancement of education, advancement of religion and that are otherwise
- beneficial to the community;
- Entities whose principal activity is to promote the prevention or control of diseases of human beings;
- Public Benevolent Institutions; and
- Entities with a charitable purpose described in Section 4 of the Extension of Charitable Purpose Act 2004 (provision of child care services).
- The Draft Bill provides greater clarity as to the information that will be included on the register for each charity. This register will be maintained on the internet and includes the charity's governing rules. There is discretion in the Bill for the withholding of certain information from public access but we note that the Basic Religious Charity exemption does not extend to the ACN register.
- The Bill sets up a framework for introducing the concept of 'Report-Once, Use-Often' which would allow for the use by other Government bodies of information lodged with the ACNC. This would enable reliance to be placed on this information by other Government bodies as well as on compliance by the registered entity with the governance and external conduct standards set out in the Bill. Given the work still to be done in this area and notwithstanding the proposed framework, this concept remains, on the ACNC's own admission, aspirational only even though ultimately it is the key to the successful introduction of a national NFP regulator if it is to benefit the sector rather than just be an added burden.
So what remains?
The following key matters as set out in the earlier draft Bill are also contained in the revised Bill in much the same form:
- Registered entity requirements will still revolve around an entity's Australian Business Number (ABN).
- The focus of the initial regulatory requirements will be in respect to endorsed Charities only.
- From 1 October 2012 new applications for registration as a charity and thus entitlement to tax concessions will be to the ACNC, although the ATO will still govern tax compliance in respect to these matters.
- For financial reporting and audit purposes, other than the removal of the requirement for small DGR entities to have their financial reports reviewed, the revenue criteria for determining the reporting classification of entities remain as follows
- Small < $250,000
- Medium >$250,000 < $1m
- Large > $1m
- Large entities will be required to have their financial reports audited.
- Medium sized entities will be required to have their financial reports reviewed only.
- Audits need to be undertaken by registered company auditors.
- All registered entities will be required to lodge an Annual Information Statement.
- Certain details, including financial reports lodged, an entity's governing rules and details of each responsible entity will be available on a public register to be maintained by the ACNC.
- In regulating charities the ACNC would in certain circumstances have the ability to revoke a charity's registration.
- An auditor or reviewer will be required to declare annually to the registered entity their compliance with the applicable code of professional conduct. This code includes the requirement to be independent of the registered entity being reviewed or audited.
Making Your Concerns Known
Given that the revised Draft Bill continues with the broad thrust of the original intentions, although with some key amendments and exemptions, it will be important for all charities to review how the proposals may impact their particular circumstances. Given the tight timeframe planned for the introduction of the Bill it will be important to commence this review as soon as possible so that the necessary systems and procedures are put in place early to ensure the requirements are appropriately addressed.
Furthermore, if additional concerns remain with the revised Bill it is important that submissions are made as a matter of urgency to the Parliamentary inquiry in order that they are given due consideration by regulators before the Bill is tabled in Parliament in August 2012 as planned.
We will be undertaking a further detailed review of the Draft Bills and raising any concerns we identify with regulators prior to 20 July 2012. If you would like to provide us your feedback prior to that date on any matters you would like further consideration given to please contact your Moore Stephens relationship partner or the authors of this article below.
In the meantime we can arrange for a member of the Moore Stephens NFP specialist team to meet with you to discuss and plan for issues you may need to address once these reforms are in place, assuming the Government's planned timetable is adhered to and that the proposals are implemented as intended.
Please click here for the link to the Federal Treasury website where further details can be reviewed.
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