This brief submission outlines key areas of concern for the Community Council for Australia (CCA) in relation to proposed related party transaction disclosure requirements.

CCA welcomes the opportunity to engage with The Australian Charities and Not-for-profit Commission (ACNC) on this important issue.

CCA has consulted with our members (see listing in Appendix 1) in framing this submission, however, it is important to note that this submission does not override the policy positions outlined in any individual submissions from CCA members.

In general terms, CCA is supportive of the proposed changes, but with the proviso that unintended consequences, including more onerous reporting and potentially restricting in-kind and at-cost support to charities, are factored into the implementation of the proposed measures.

The content of this submission includes a brief background to CCA, some key issues relating to the proposed new related party transaction requirements, and a conclusion.

CCA looks forward to ongoing discussions about how these measures can be introduced without negatively impacting the charities sector.

The Community Council for Australia

The Community Council for Australia is an independent non-political member-based organisation dedicated to building flourishing communities by enhancing the extraordinary work undertaken by the charities and not-for-profit sector in Australia. CCA seeks to change the way governments, communities and not-for-profits relate to one another. It does so by providing a national voice and facilitation for sector leaders to act on common and shared issues affecting the contribution, performance, and viability of NFPs in Australia.  This includes:

• promoting the values of the sector and the need for reform
• influencing and shaping relevant policy agendas
• improving the way people invest in the sector
• measuring and reporting success in a way that clearly articulates value
• building collaboration and sector efficiency
• informing, educating, and assisting organisations to build sustainable futures
• providing a catalyst and mechanism for the sector to work in partnership with government, business and the broader Australian community to achieve positive change.

Our success will drive a more sustainable and effective charities and not-for-profit sector in Australia making an increased contribution to the well-being and resilience of all our communities.

CCA response to the proposed requirement for disclosure of related party transactions as outlined in Recommendation 14 of the 2018 ACNC Legislation Review requiring: all registered charities to disclose related party transactions, with small registered charities to make a simplified disclosure involving a brief description of related party transactions.

It is important to note that: medium and large entities preparing general purpose annual financial reports are already making the necessary disclosures of related party transactions. 

CCA understands that the Commissioner of the Australian Charities and Not-for-profits Commission is now proposing that all registered entities disclose up to four related party transactions as part of their annual information statements.

CCA is supportive of the requirement to provide information about related party transactions in the Annual Information Statement, but with the proviso that a level of materiality be established to trigger such disclosure.

Accounting for charitable expenditure should always be transparent.  Members of the charity and the communities served should know how the resources of the charity are being applied.  It is clearly in the interests of all involved that where a significant related party transaction occurs within a charity, the transaction should be transparent and accountable. 

It would be difficult to argue that a charity making a significant payment to a related party – board member, family member of an executive, company of an executive – should be able to do so without any public disclosure of both the payment and the relationship.

In practice, the vast majority of cases where there is a related party transaction within a charity are likely to be legitimate expenditure for services provided, often below market rates, by someone who is supportive of the charity.  This might be someone who offers their skills at a lower than commercial rate to fix a computer system, repair a building, provide catering, undertake gardening, or service a car.  These typical ‘at cost’ type arrangements that involve a level of ‘in-kind’ donation are to be encouraged.  Providing cooking ingredients to voluntary bakers supporting a cake stall should not trigger a compliance activity or additional paperwork beyond the normal record keeping.  These types of smaller related party transactions can be critical to charities in managing tight budgets.  

Generally, even smaller charities declare their related party transactions as part of their financial reporting, but CCA understands that there may be concerns when significant payments to related parties are made above market rates, or are made for services that are not specified. 

CCA is uncertain why the ACNC is proposing that charities only disclose up to four separate related party transactions.  Doesn’t this allow for a lower level of accountability if a charity is actively engaged in multiple significant related party transactions?  If there are a number of smaller related party transactions and one very large related party transaction, does the charity have to report the larger transaction or will four small transactions suffice?  The rationale for this approach is unclear.

CCA’s main concern – the question of materiality

If a small sporting charity has their lawns and playing fields mowed by a local farmer who is the spouse of a volunteer Board Director and who uses his own equipment but charges the charity the equivalent of petrol money, should the charity have to declare a related party transaction?

CCA is concerned that if small charities are to be required to declare related party transactions, the trigger for such reporting needs to be set at a level that does not discourage ‘in-kind’ and ‘at cost’ type contributions to the work of smaller charities.

To this end, CCA would propose that the ACNC Commissioner introduce a threshold for related party transactions that is above $10,000 total payments or their equivalent in benefit to a related party in a given financial year.  Below this threshold, smaller charities should not have to separately report these transactions to the ACNC.

CCA supports Annual Information Statement reporting option 1

Of the options outlined in the ACNC consultation, CCA supports option one.  Options 2 and 3 both try to prelist and categorise related party transactions in a way that may or may not fit the type of activity or relationship that applies in a particular instance.  Allowing each charity to stipulate the nature of the relationship, the payment and the amount makes more sense.

Conclusion

CCA has always supported the ACNC and its role promoting transparency and accountability for Australian charities.

The ACNC review panel found in 2018 that the requirements of disclosure for related party transactions needs to be clearer than just relying on accountancy standards and governance principles.  CCA has been supportive of the 2018 ACNC review panel Recommendation 14, but always with a view to streamline and clarify reporting requirements rather than make them more onerous and difficult to comply with.

CCA is therefore supportive of the disclosure changes to reporting of related party transactions, but would like to see a clear definition of materiality to avoid smaller charities feeling as though they need to closely monitor and report all ‘in-kind’ or ‘at cost’ donations involving any level of payment or benefit provided from the charity to a related party. CCA has proposed the test for materiality be set at a minimum of $10,000 in any financial year.

The goal of streamlining charitable reporting while increasing transparency is to be commended and CCA looks forward to further engagement in this area.  Charities are still having to deal with many areas of duplicated reporting and onerous requirements created by a lack of consistency across regulatory bodies and the misguided notion that increasing reporting requirements for charities is an acceptable or cost-free way to lower the levels of risk. 

CCA hopes the related party transaction changes are just the start of a long overdue compliance reform process.

CCA Submission to the ACNC – related party transactions disclosure (pdf)