Not for Profit News October 2016 By William Buck on 01/10/16 - Mins to read: 12 minutes Welcome to the October Edition of Not For Profit News Packed full of useful information covering specific updates on financial reporting, education and tax as far as they affect the NFP sector as well as the latest on what the Australian Charities and Not-for-profits Commission has been up to. We very much hope that you enjoy the contents of this newsletter and your thoughts and comments are always welcome. NFPs expect to break even or lose money Almost half of Australia’s not-for-profit (NFP) organisations expect only to break even or make a loss over the next three years. This is a key finding of the 2016 NFP Governance and Performance Study conducted by research firm BaxterLawley on behalf of the Australian Institute of Company Directors (AICD). More than 1800 directors from a range of NFPs participated in the study, making it the largest survey of NFP governance in Australia. ‘There can be no doubt that NFPs do need to make a profit,’ said John Brogden, AICD’s managing director and CEO. ‘Profit is the foundation of building the long-term confidence needed for an NFP to achieve its purpose. ‘It’s alarming that some directors are saying the capacity of their organisation to meet their purpose will, in real terms, shrink moving forward. Directors and boards need to consider seriously their roles and drive the cultural change necessary to support the long-term financial strength of their organisations.’ Thirty-one per cent of respondents said their organisations had profit margins of more than six per cent in the past financial year. ‘Many NFPs are not just surviving, but thriving,’ said Mr Brogden. ‘However, responses to the survey indicate that directors’ understanding of their roles as financial stewards, is highly variable. NFPs’ making a profit can be a challenging concept for government and the broader community, but without long-term financial strength, the sector will not be able to deliver vital services.’ Other key findings include: The use of performance data to measure organisational success is gaining momentum Rates of mergers have not changed over the past year. Just over a third of directors (35 per cent) reported that their organisations had discussed a merger in the past 12 months NFP leaders have a negative perception of the sector. Despite 74 per cent of directors believing their NFP is efficient, only 32 per cent believe this to be true of the sector, and Only 15 per cent of respondents were paid a fee and 70 per cent are spending more than two days a month performing their duties. The study also highlights the relationship between the NFP sector and governments across Australia and the need for genuine partnerships. It shows that: More than half of directors believe that federal, state and territory governments are not consistent in their approach to contracting for services Two-thirds want more stability in government policy, and Fifty-five per cent want the administrative burden reduced. ‘We need to have a new conversation with governments about the way they fund and regulate the sector,’ said Mr Brogden. ‘Funding contracts are often short-term and prescriptive. Most stipulate how funds are to be spent and some even require that NFPs account for any profit they make or, worse, return unspent funds to government. ‘Government is rightly asking for improved governance among NFPs, but (they are) constricting their ability to achieve good governance through archaic funding practices.’ The report is available at aicd.companydirectors.com.au/nfpstudy16. Pascoe hails AICD report Commissioner of the Australian Charities and Not-for-profits Commission (ACNC) Susan Pascoe has hailed the AICD’s report as a substantial contribution to the NFP sector. ‘The (report) is an excellent addition to the body of research focussed on Australia’s not-for-profit sector,’ Ms Pascoe said. ‘Our experience at the ACNC demonstrates the relationship between good governance and the health of charities, and conversely, the link between dysfunction, mischief and failure of charities and the neglect of governance. It is heartening to see the perception of much better quality of governance by NFP directors in this report. ‘One of the figures that caught my attention was that 90 per cent of directors have undertaken formal or self-directed learning in the past year. This is very impressive and is a sign of the sector’s commitment to capacity building’. She added that the report also disproved the perception that the governance of NFPs was typically inferior to that of profit-making companies. The report says: ‘It was once commonly held that the governance of NFPs was generally poor compared with the for-profit sector, but side by side testing has repeatedly shown that this is not the case. In fact, some see NFP governance as more complex due to the need to achieve both mission success and financial strength, and the complex environments in which NFPs often operate.’ Commissioner Pascoe highlighted innovation as a key area of interest in the report. ‘The (report) contains very helpful advice for not-for-profit directors, funders and governments,” she said. ‘I encourage not-for-profit sector stakeholders to read it.’ Call to fix fundraising A powerful coalition of peak bodies is calling on Australian governments to provide charities and NFPs with a nationally-consistent fundraising regime that will deliver more than $15 million in savings a year for charities alone. NFPs are forced to waste significant amounts of time and money to meet outdated and fragmented fundraising laws that differ considerably across Australia. The AICD’s managing director and CEO John Brogden said that more than 600,000 NFPs operated in Australia, 10 per cent of which were charities. ‘Charities and other NFPs are wasting millions of dollars on outdated and unnecessary regulation – funds that should be going to Australians in need,’ he said. ‘Across Australia’s seven different fundraising regimes … there is variation in the requirements for fundraising at each stage, from when and if a licence is needed, to how long a licence is valid, right through to what must be reported and when. This duplication and confusion means charities and NFPs are having to spend time and money on red tape rather than pursuing their missions.’ Fiona McLeay, CEO of Justice Connect, said: ‘For smaller groups, it can be particularly difficult to navigate these complex laws. For larger ones, resources are redirected from service delivery to compliance, with spending on fundraising administration a significant deterrent to public giving. ‘There is a simple way to provide a better regulatory framework for fundraising – clarify and improve how it is covered by Australian consumer law and repeal existing inconsistent and out-of-date state and territory legislation.’ The federal coalition pointed out that an improved fundraising regulatory regime would deliver benefits to all Australians. The proposed reforms would protect charities and other NFPs from unnecessary costs as they tried to raise funds, support them to be more productive, including when they deliver government-funded services, and enable them to continue making a significant contribution to the economy and society. Governance Institute issues guidance The Governance Institute has issued new guidance on key issues facing not-for-profit entities. Its Good Governance Guide canvasses issues that need to be considered in structuring NFP boards to ensure that they achieve their aims while meeting ethical, legal and financial obligations. Under separate headings, the guide covers several things. One section covers a need to have clear boundaries between board duties and the day-to-day activities of an organisation, which are the responsibility of management. How does delegation work in these situations? Another part looks at the concept of stewardship and its responsibilities for those who control NFPs. A third advises on the need for NFPs to have clear policies and guidelines for managing volunteers, given that most NFPs operate with the assistance of volunteers. Management of conflicts of interest is also covered. Sports Commission issues governance guide The Australian Sports Commission (ASC) has released Governance Reform in Sport, calling for sports to take a unified approach to behaviour, processes and supporting systems. Building trust and national cohesion while improving sports’ commercial and financial positions are key objectives of the ASC’s next stage of governance reform. Building on ASC reforms over the past three years, the paper supports governance best-practice in areas such as board chairpersons elected by the board and not members, performance evaluation processes for boards, corporate rather than association structures, establishment of key board committees covering nominations, audit and risk, and board diversity and skill mix. The paper states the need for governance improvement in the context of the social, commercial and financial environments facing many sports. Integrity, safety and duty-of-care are of growing importance, and media deals for bigger sports are increasingly lucrative, which puts smaller sports at a competitive disadvantage. A highly competitive sponsorship market increasingly favours sports with big broadcast audiences, and economic pressures mean that sports cannot rely on government funding to bridge revenue gaps. The paper stresses that ‘good governance does not in itself guarantee success on the sports field, but its absence almost certainly guarantees failure’. Sporting organisations should understand that good governance is an enabler of performance, not a determinant. Australian sport is complex because of its federal structure, but the ASC hopes that the paper will assist sporting organisations at every level to take a uniform approach, building trust among key stakeholders. The paper encourages a unified and transparent approach to strategic planning, financial reporting, workforce management and commercial arrangements. It recognises that voting structures require flexibility suited to the individual characteristics of the sport. Myth busting on charity admin costs The ACNC has published new guidance to help the public and donors understand charity administration costs. The set of frequently asked questions (FAQs) under the rubric Charities and administration costs, highlights issues raised by the public and sets out the ACNC’s view. Charities and administration costs helps the public and donors understand what administration costs are, why they are an important part of running a charity, and why administration-cost ratios can be an unreliable way to compare charities. The new guidance also endeavours to correct common misconceptions. ACNC commissioner Susan Pascoe has encouraged donors to read the guidance. Each month, the commission receives about 60 to 70 queries about charities, a third of which originate from the public. Many are about charities’ expenses, which are commonly referred to as administration costs. There are no laws or regulations that specifically set out the amount charities can spend on what might be considered administration. There are also no clear definitions as to what should be considered ‘administration costs’ for accounting purposes. The bulletin aims to help the public and donors to understand what administration costs are, why they are necessary, and when they may be unreasonable and therefore warrant ACNC scrutiny. Simply having low administration costs does not necessarily indicate an effective, well-run charity. Similarly, having higher administration costs does not necessarily indicate that a charity is ineffective and poorly run. A more important consideration is the effectiveness of the charity. Is it doing important work for the community and making a positive impact? It’s the question donors should ask. Administration-cost ratios as a measure of charity effectiveness are particularly flawed due to NFPs’ inconsistency in accounting practices. ‘The ACNC believes that there should be a dedicated accounting standard that applies to the not-for-profit sector with clear guidelines that set out how charities report different income and expenses,’ Ms Pascoe said. ‘Other commonwealth jurisdictions already have accounting standards specifically for not-for-profit organisations, and we will continue to advocate for their introduction here in Australia.’Charities and administration costs can be accessed at acnc.gov.au/admincosts. Related party transactions Related-party transactions – purchases, transfers, loans and leases to a person or organisation connected with a registered charity – can be a tricky part of managing a registered charity’s finances. Good governance means managing with care such transactions to ensure that they are transparent and appropriately recorded. The ACNC has published new guidance on the topic at acnc.gov.au/relatedparty. ACNC urges charities to submit early AIS's The ACNC has urged charities to submit their annual information statements early. It adds that its website provides guidance and that advisors may be contacted on 13 22 62 or email@example.com. Most charities are required to submit by 31 December, but, as in previous years, the due date will be extended by a month. Charities may use their portals to submit. Guidance on submissions may be found on acnc.gov.au/reporting. Red tape reduction for selected ancillary funds The Australian Taxation Office (ATO) and the ACNC are working together to reduce the administrative burden on charities, recently announcing that ancillary funds registered as charities now need to report only once. ‘Ancillary funds were previously required to report their annual return to both the ATO and the ACNC,’ said ACNC commissioner Susan Pascoe. ‘By collaborating with the ATO, we’re ensuring that ancillary funds only need to report once using the ACNC’s online annual information statement. We will then share the information … with the ATO.’ Commissioner Pascoe said that by working together, the ATO and ACNC will save about 3000 charities from duplicating their reporting. ‘Additionally, I am granting an extension of time for ancillary funds to complete their 2016 (statements) to align with the fund-return deadline of 28 February 2017.’ About 300 ancillary funds are not registered as charities and they must continue to report to the ATO using the form available on ato.gov.au. Meeting standards The commission has released a factsheet Mapping the ACNC governance standards to the CMA Standards Council Principles and Standards. If your registered charity complies with the council’s principles and standards it will meet ACNC governance standards. The CMA Standards Council is part of Christian Ministry Advancement Ltd (incorporating Christian Management Australia), a charity seeking to help the Christian NFP sector to govern, lead and manage their organisations more effectively. The council is not tied to any church, denomination or organisation. It is completely interdenominational, and its community represents the wide spread of the Christian faith in Australia. It is not underwritten by any business, foundation or organisation. Its nine principles and 54 standards are a governance benchmark applicable to churches, charities, schools, hospitals and other organisations. The council issues accreditations to organisations that apply its edicts. AFIC enters into a voluntary undertaking with ACNC The ACNC has formalised an agreement with the Australian Federation of Islamic Councils (also known as Muslims Australia) to appoint an independent auditor to examine the charity’s governance and record-keeping practices. AFIC voluntarily entered into an enforceable undertaking with the ACNC, a summary of which is published on the ACNC’s website at acnc.gov.au/compliancedecisions. ACNC assistant commissioner David Locke explained that an enforceable undertaking specifies a series of actions that a charity agrees to take to comply with its obligations under the ACNC Act and Regulation. ‘The enforceable undertaking is a formal mechanism the ACNC can use to ensure a charity takes certain steps to satisfy their obligations as a registered charity,’ Mr Locke said. ‘It is enforceable (by law).’ ‘Where appropriate the ACNC works with charities to address concerns and to ensure charities understand and comply with their obligations. However, we will act swiftly and firmly where vulnerable people or significant charity assets are at risk, where there is evidence of serious mismanagement or misappropriation, or if there is a serious or deliberate breach of the ACNC Act. ‘The ACNC has a range of formal powers it can use, including warnings, directions, removing responsible persons, enforceable undertakings and revocation. ‘AFIC is working with the ACNC, and we are pleased that they are doing so and that a comprehensive and independent audit will be conducted in relation to the concerns identified. We consider this as a positive step in increased accountability and transparency for AFIC.’ Newly elected AFIC president Keysar Trad and his committee confirmed AFIC’s commitment to working with the ACNC to address concerns. Mr Trad said that the enforceable undertaking would ‘ensure that the organisation would continue to meet its obligations as a registered charity. ‘We at AFIC aim for the highest level of transparency, accountability and integrity in our dealings. We welcome the independent audit and the opportunity to work with the ACNC. ‘AFIC has already taken some steps to address the ACNC’s concerns. Specifically, AFIC is in the process of separating itself from the schools which it previously held responsibility for managing.’ What is a charity? Across Australia, no single definition of ‘charity’ exists. In addition to common-law definitions, the terms ‘charity’, ‘charitable purpose’ and ‘charitable status’ occur in 172 pieces of commonwealth, state and territory legislation. Forty-five of them define the terms. The ACNC has released A Common Definition of Charity, which discusses the implications of moving to a single definition of ‘charity’, which the commission backs. The paper surveys the definitions in each jurisdiction and assesses the impact of a single definition on the community, charities and relevant local, state, territory and Federal Government agencies engaged in charity regulation. ACNC assistant commissioner David Locke, said: ‘The ACNC has prepared this paper and engaged in this discussion to promote the reduction of unnecessary regulatory obligations – which is an object of the ACNC Act. We will continue to work with our colleagues in the Commonwealth Government, and state and territory regulators, to find red tape-reduction opportunities.’ ACNC proposes AIS changes The ACNC is proposing to change 2017 annual information statements, which are due in December next year or June 2018 for most registered charities. The commission proposes to simplify and clarify the 2017 questions and improve the collection process. Core components are unchanged to provide stability, and adjustments follow factors outside the commission’s control, such as government-policy changes. The statements include mandatory and optional questions about activities and basic financial information. The consultation survey will closes on 4 October. For more information visit acnc.gov.au/2017AISconsultation. NFP income recognition rules closer New income-recognition requirements for NFPs have been released for comment as ‘fatal flaw’ draft standard Income for Not-for-Profit Entities. It will replace AASB 1004 Contributions. Reporting income will more closely reflect economic realities by providing for greater deferral. Income recognition will depend on whether there is a liability or other performance obligation (a promise to transfer a good or service) related to the cash or grant received. Another major change is to measurement requirements for assets. Currently, only assets acquired by NFPs at nil or nominal consideration must be fair-valued. The new standard broadens this to require fair-value measurement of assets for which consideration is significantly below the asset’s fair value (including peppercorn leases). It will apply to transactions where the difference between fair value and the consideration is principally to enable an NFP entity to further its objectives (that is, it doesn’t include trade discounts and distress sales). New NFP-specific guidance for AASB 15 Revenue from Contracts with Customers will assist with identifying a contract with a customer in an NFP context. It helps entities identify enforceable agreements, how to identify whether a performance obligation exists, and how to allocate transaction prices to performance obligations. Extensive guidance and a wide range of examples have been developed to illustrate how the new requirements would work. Significant transitional relief has also been provided, as well as a one-year extension of the effective date. The draft is available for ‘fatal flaw’ comment until 21 October, and the final standard will be released in December. It will be effective from 1 January 2019, early application permitted. Late charities get red marks The ACNC has endorsed thousands of late-filing charities with red marks. The marks show up on the register – more than 3500 charities are more than six months late with their annual reports. Ms Pascoe said that most of the charities had had to submit 2015 annual information statements by 31 January. ‘Submitting (a statement) each year is a legislative requirement for registered charities,’ she said. ‘This group has failed to meet that obligation and are now more than six months overdue (and will have) a red mark on their register listing.’ Once the charity submits its overdue 2015 Annual Information Statement, the red mark will be removed. The data each charity provides is published on the register at acnc.gov.au/charityregister, enabling those who want to give time and money to a charity to undertake their own due diligence. The public, volunteers and philanthropists should see red marks as a warning that a charity is not meeting its obligations. Ms Pascoe warned that continued non-compliance could result in greater consequences. ‘Registered charities that continually fail to meet their reporting obligations may receive penalty notices from the ACNC,’ she said. ‘Under the ACNC Act we have the power to issue financial penalties (of) up to … $4260 per charity.’ In mid-August, the commission issued its first penalty warning notices and are planning to issue more shortly. Charities failing to make two successive reports are double-defaulters, a ground for revocation. More than 500 double-defaulter charities had their registrations revoked in recent weeks and will lose tax concessions. Charities can check their reporting due dates by checking their entry on the register at acnc.gov.au/charityregister or by logging into their portals at charity.acnc.gov.au. They can find further information about the 2015 Annual Information Statement at acnc.gov.au/2015AIS. A list of charities more than six months late with their reporting is available on the ACNC website at acnc.gov.au/redmark.