Following our recent submissions on the Government’s consultation paper regarding a statutory definition of charity (click here to read), the Federal Government’s reform agenda continues at a rapid pace with the release on 9 December 2011 of 2 more major elements of the reform being:

• Exposure draft legislation to establish the Australian Charities and Not-for-profits Commission (ACNC) as announced in the 2011 budget; and
• A consultation paper on current governance arrangements for the not for profit sector.

Submissions on both of these significant releases are due by 20 January 2012.  Given the stated commitment of the Government to consultation with the sector as these reforms are implemented it is clear that the timeframe for these submissions allows little time for true consultation on these important proposals. 

In addition to these papers, an additional consultation paper was released on 9 December which focuses on the implementation design aspects of the Commission including education and support activities; portal design and the reporting framework. This paper introduces the concept of a Charity Passport for dealing with Federal Government departments and provides mock ups of the proposed forms including the Annual Information Statements. Submissions on this paper are due by 27 February 2012. We will provide you with our commentary on this paper later this month.

The exposure draft legislation proposes major changes for the sector which will have significant implications for all NFPs.  The impacts of these proposals include:

• Registration with the ACNC of all charities currently with income tax exempt status (ITEC);
• Access to the public for all financial and other information required to be lodged with the ACNC;
• Implementation of a concept of “responsible individuals” for all charities with somewhat similar responsibilities to the directors  of a company;
• The requirement for all charities with Deductible Gift Recipient status (DGR) to prepare and lodge with the ACNC annually a general purpose financial report;
• The requirement for such a general purpose financial report to also be prepared and lodged with the ACNC for all charities with revenue greater than $250,000 per annum;
• The requirement of all charities with annual revenue over $1m to be audited and for those with revenue between $250,000 and $1m to have their financial statements reviewed by an auditor;
• The likely requirement for charities to maintain records that demonstrate compliance with their objects and for the auditor of the charity to form an opinion concerning the maintenance of these records; and
• Transfer of the regulatory responsibility from ASIC to the ACNC for charities who currently operate within a company limited by guarantee structure.

It is clear that these requirements if enacted will change the landscape for many charities.  Accordingly, from our initial review a number of significant concerns arise.  These include:

• The cost to charities of both transition and ongoing compliance with the requirements.
• The blunt use of revenue as the sole basis for determining size and thus a charity’s reporting obligations.
• The haste with which the financial reporting and audit obligations are being implemented.
• The lack of alignment between the implementation timeframe for the proposals and the current NFP projects of the Australian Accounting Standards Board (AASB).
• The likely duplication of requirements for many charities during the initial transition period.
• The unnecessary inclusion in the public domain of the annual financial statements of certain charities.
• The need to align these proposals with any legislative changes that result from the Government’s recent consultation paper on introducing a statutory definition of a charity for which public submissions have already been made.

Cost Impact

For charities who currently operate within a company limited by guarantee structure the implications of these changes may not be so significant.  For all others these changes would have profound implications in terms of both transition and ongoing compliance as well as in respect to governance arrangements.  In many instances we estimate that the added reporting and audit cost burden could be as much as 50% for many charities compared to what is currently expended in these areas.  In addition, given the legal significance of introducing within the legislation “responsible individuals” for charities  (which has many similarities to the Corporations Act in respect to the directors of companies) this is also likely to have further major cost implications and could result in a diminished willingness for people to act in such roles in an honorary capacity. We also note the onerous deadlines being proposed of reporting to the ACNC by 31 October in respect to a 30 June financial year end. This reporting deadline will place major pressure on the limited resources of many charities and will also have implication for audit costs. We also note that this is out of line with the requirement of the UK Charity Commission which has a reporting deadline of 10 months following the financial year end.

Using revenue as a Basis of Determining Size

Given the size criteria set out for financial reporting and auditing purposes, the level of compliance in this respect will clearly add a significant cost burden for most charities.  It is imperative if this cost burden is not to be onerous, that this size criteria is set at a much higher level than is proposed.  In addition, in our view, using revenue as the sole determinant for financial reporting and audit requirements is a very blunt instrument.  As is presently the situation in other similar regulatory regimes, it is important that other criteria are also considered and included in the legislation as an input to the determination of size in order that a reasonable and consistent approach is taken.

Implementation Timeframe

Our review of the proposals indicates that the financial reporting and audit regime will effectively be in place for the year ending 30 June 2013, thus meaning that the requirements will be relevant from the commencement of that financial year being 1 July 2012.  These timeframes provide little opportunity for charities to be in readiness for the reporting and other requirements of this legislation.  Thus it will also likely result in a greater cost than is necessary.  In addition, how comparative amounts in a financial report will be addressed in this context will need further consideration.  The proposed timelines also allow charities little time to restructure their affairs to enable them to meet the requirements in the most efficient and effective manner and thus limiting their ability to allocate their scarce resources wisely.

Current AASB Projects

The Australian Accounting Standards Board currently has an unprecedented focus on NFP specific sector matters with a number of key projects in progress.  These include income recognition, control issues, disclosure requirements and service performance reporting. As the outcomes of these projects go to the heart of financial reporting for NFPs and as the issuing of new or revised standards for these projects is still likely to be some time away it would be highly inappropriate for the proposed ACNC financial reporting regime to commence prior to their completion.

Transition Issues

The proposals recognise the constitutional transition issues still to be dealt with in order to achieve a one-stop shop for all charities.  Given the matters remaining to be resolved between the Federal and State Governments and the proposed timeframe of implementation it is impossible to see duplication of requirements not occurring for many charities in the initial period, thus defeating the purpose of a more streamlined and cost effective regulatory regime for all Australian charities. Adding to these concerns is the fact that the Explanatory Memorandum merely notes that transitional provisions are to be drafted giving no guidance or indication as to the nature of these provisions. We would anticipate that as a practical matter, many Charities will need to place significant reliance on transitional provisions to meet their obligations.

Availability of Information to the Public

Many charities are in receipt of Government funding while others also have DGR status, or in some cases both.  Many other charities have neither and thus the appropriateness of the need for their annual financial statements to be available to the public is questioned.  Clearly it is important for such charities to continue to comply with their objects which provide them with charity status.  In our view the primary focus of regulation concerning such charities should be in respect to compliance with their objects.  Accordingly it would appear inappropriate and unnecessary for public access to the annual financial statements of such charities.

Alignment with Statutory Definition of Charity legislation

The Government is also currently reviewing the statutory definition of charity and under the proposed reforms is seeking to adopt this definition by 1 July 2013. The exposure draft legislation is silent on how this adoption may impact on those currently regarded as Charities but will no longer be considered a charity once the definition has been introduced and the ACNC conduct their proposed review of status for all existing charities. This highlights the need for a clear approach by the ACNC with respect to dealing with the interaction between the various proposed reforms.

Submissions

The above observations are a brief snapshot of a number of the issues we see from our initial review of the proposals.  We would appreciate your feedback on any of the above aspects or other particular concerns that you have noted and the impact on your charity as we prepare our submission to Treasury with further comment.

The closing date for submissions on these proposals is Friday 20 January 2012.  The exposure draft legislation and governance consultation paper are available on the Treasury website, click here to access.

For further information please contact one of our not for profit specialists – Joe Shannon (Sydney), Kate Daly (Sydney West), Stephen O’Flynn (Melbourne) or William Laird (Brisbane) – or your Moore Stephens relationship partner.

Author: Joe Shannon, Director, Moore Stephens Sydney
Chair, Moore Stephens Australia, Not For Profit Group

Contact

Joe Shannon
T +61 (0)2 8236 7700
jshannon@moorestephens.com.au

www.moorestephens.com.au