19 September, 2018
The proposals are open for submissions until 21 September
What you need to know
In August the Federal Treasury released proposed regulations creating new conduct standards for Australian charities that operate overseas.
The Treasury also released a consultation paper setting forth its proposed implementation of reforms to deductible gift recipients (DGRs), requiring most DGRs to register as charities.
What you need to do
The proposed reforms impose new regulatory burdens on some charities and DGRs, so all not-for-profit entities should review the changes and consider whether they are impacted.
Charities and DGRs should consider making a submission on the proposals before consultation closes on 21 September.
New conduct standards for charities with overseas activities
In an exposure draft of the Australian Charities and Not-for-profits Commission Amendment Regulations (No. 2) 2018, the Treasury has proposed four new “external conduct standards” for charities (the Standards).
The Standards apply to charities registered with the ACNC which operate outside Australia or collaborate (informally or formally) with a third party which operates outside Australia.
Under the Standards, an entity will be taken to operate outside Australia if its operations are wholly or partly outside Australia. However, activities outside Australia that are incidental to the operation and activities of the entity in Australia will not on their own indicate that the entity operates outside Australia. For example, a charity acquiring supplies for its Australian activities from overseas sellers would be incidental to its Australian operations.
Like the current governance standards, the Standards will be enforced through self-assessment and through the ACNC's monitoring powers. Subject to the ACNC's general compliance approach, an entity may be refused registration or have its registration revoked for non-compliance with the Standards.
The Standards can be summarised as follows.
Standard 1: Activities and control of resources
Broadly, this standard requires that a charity takes reasonable steps and/or maintains reasonable internal controls to ensure its overseas activities, use of resources and provision of resources to overseas third parties are consistent with the entity's purpose and character as a not-for-profit.
The standard also requires that charities comply with, and maintain reasonable internal controls to ensure compliance with, Australian laws relating to money laundering, financing of terrorism, sexual offences against children, a variety of human rights crimes, international sanctions, taxation and bribery.
The steps a charity must take to comply with this standard will depend upon its circumstances. Larger charities or those with resources overseas may have to take more steps to comply.
Standard 2: Annual review of overseas activities and record-keeping
This standard requires that a charity obtains and keeps records needed to prepare a summary of its operations and activities outside Australia on a country by country basis, for each financial year in which it:
- operated outside Australia; or
- gave resources to third parties outside Australia or for use outside Australia (except resources provide to other charities registered with the ACNC).
Information required to be kept relating to an entity's overseas operations and activities includes:
- how the activities and operations enabled a charity to pursue its objectives;
- details of procedures used to monitor the operations and activities;
- a list of overseas third parties the charity worked with; and
- details of claims of inappropriate behaviour by the charity’s employees or responsible entities outside Australia, and subsequent actions taken by the charity.
A charity will need to include the summary of its overseas operations in its annual information statement if required by the Commissioner. It is expected that the ACNC will release guidance on the records that should be obtained and kept.
Standard 3: Anti-fraud and anti-corruption
This standard requires that a charity take reasonable steps to:
- minimise risks of corruption, fraud, bribery or other financial impropriety by entities and persons it operates through or with overseas (eg employees); and
- identify and document any actual or perceived material conflict of interest for entities or persons it operates through overseas.
Standard 4: Protection of vulnerable individuals
This standard has two limbs. First, a charity must take reasonable steps to ensure the safety of vulnerable individuals outside Australia who are provided with services or benefits by the charity or a third party it is collaborating with.
Second, a charity must take reasonable steps to ensure the safety of vulnerable individuals outside Australia whom the charity (or a third party it collaborates with) has engaged/employed to provide services or benefits on its behalf.
Vulnerable individuals refers to children and those who cannot take care of or protect themselves, for example, due to age, illness, trauma or disability.
Interpretation of the standards
The Standards must be interpreted in accordance with the objects of the Australian Charities and Not-for-profits Commission Act 2012 (Cth) as well as the matters that the Commissioner of the ACNC must consider in exercising powers, including regulatory necessity, proportionate regulation and the unique role not-for-profit entities play in Australia.
Consultation paper on deductible gift recipient reforms
The Treasury has also released a consultation paper for the implementation of its reforms to DGR status and obligations, which were first announced in December 2017.
These reforms relevantly include:
- a requirement that most non-government DGRs register as a charity or be operated by a registered charity from 1 July 2019. Only DGRs specifically listed in the Income Tax Assessment Act 1997, or those exempted by the Commissioner of Taxation, will not need to register as a charity; and
- the abolition of some requirements for public funds.
Charitable registration
The consultation paper indicates that a small subset of DGRs will be affected: only 11 of the current 51 DGR categories do not require charitable registration, and only 20% of the DGRs in these 11 categories are not currently registered as charities. A list of the 11 categories is provided in the consultation paper.
For current DGRs that are not registered as charities at 30 June 2019, the consultation paper proposes the following transitional arrangements. From 1 July 2019 to 30 June 2020, these DGRs will need to apply for registration as a charity but will have access to a streamlined registration process. In this process, the DGR will only have to provide "basic information" (being the information that is displayed on the ACNC's register, the DGR's purposes and its governing documents). These DGRs will not have to report to the ACNC as a charity until 1 July 2020.
DGRs that have previously had their charitable registration involuntarily revoked, or had an application for registration refused, will not be able to use the streamlined registration procedure.
Similarly, entities that that are not DGRs at 30 June 2019 will not be able to use the streamlined transition process if they become a DGR between 1 July 2019 and 30 June 2020.
The Commissioner of Taxation will have a discretion to exempt DGRs from charity registration if they:
- are endorsed or seeking endorsement under one of the 11 categories that does not currently require charitable registration;
- are prevented from registering due to exceptional circumstances (which are limited in nature);
- operate as not-for-profits;
- comply with all other requirements of DGR status under the relevant category;
- have in place sufficient internal controls and governance procedures, based on the size and activities of the entity; and
- comply with any additional matters determined by regulations.
However, even exempt DGRs will face obligations and reporting requirements similar to registered charities.
Abolition of two public fund requirements
The consultation paper also details two changes to the requirements for public funds. First, the managing committee of a public fund will no longer need to have a majority of members with a degree of responsibility to the general community.
Second, a DGR will no longer need to have a separate public fund for each of its different DGR purposes. Instead, it may receive all deductible funds into one bank account, so long as it can separately account for donations made for each DGR purpose.
The consultation paper contemplates that these changes will not significantly reduce the standards of transparency and accountability for public funds, as the requirements will in effect be replaced by the requirement to register with and report to the ACNC.
Opportunity for submissions on the changes
Affected charities and DGRs have time to make submissions on the effects of these changes, which close on 21 September.
The proposed changes may impose new regulatory burdens on some charities and DGRs. All entities that may be impacted should review the proposals and make submissions on areas of concern.
For further information, please contact:
Ian Kellock, Partner, Ashurst
ian.kellock@ashurst.com
