The Federal Government (the Government) tabled the Australian Charities and Not-for-profits Commission Amendment Regulation 2013 (No 1) (the Governance Standards) in Parliament on 12 March, following a public consultation that concluded in February.
The Governance Standards, of which there are five, take effect on 1 July 2013.
From that date, ongoing compliance with the Governance Standards is one of the criteria that charities, save for "basic religious charities", must meet to be eligible to register, and continue to be registered, with the Australian Charities and Not-for-Profit Commission (ACNC) under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (the Act). Registration with the ACNC is required if charities wish to access (or continue to access) Commonwealth tax concessions.
The Governance Standards:
• establish a minimum level of outcomes for the practices and procedures expected of charities registered with the ACNC; and
• are "principles-based" in that they specify the outcome the registered charity should achieve, not the means of achieving it. Accordingly, the manner by which registered charities can comply with the Governance Standards will vary according to a charity's particular circumstances, such as its legal structure, size and the extent to which the charity receives monies from the government or the public.
In addition to the "principles-based" approach that applies to interpreting the content of the requirements, the consequences, and actions that need to be taken to comply with the Governance Standards, vary depending on the legal nature of the charity and its governing rules:
• transitional arrangements are available to charities to the extent their governing rules prevent them from complying with the Governance Standards. These charities have until 1 July 2017 to change their rules to enable compliance with the Governance Standards, provided the charity complies with the Governance Standards to the extent possible without breaching their rules;
• until 1 July 2017, charities that are incorporated associations are taken to comply with Governance Standard 5, which deals with the duties of responsible persons, where they are complying with the equivalent State or Territory law. However, this transitional relief ends if the relevant State or Territory harmonises its law to adopt Governance Standard 5 (as intended in at least the ACT and South Australia so far);
• charities that are companies limited by guarantee are likely to meet the new Governance Standards if they were already complying with the requirements relating to governance processes under the Corporations Act 2001 (Cth) (Corporations Act) but, as those governance provisions will not apply to registered charities from 1 July 2013, companies limited by guarantee will have to review their constitutions to ensure that they have arrangements in place that will meet the governance standards; and
• for charities that are trusts or take another legal form that was not already subject to a legislated governance regime, the Governance Standards represent a new obligation that prevails over anything contained in a trust deed or other governing document.
The Governance Standards
Governance Standard 1: The purposes and not-for-profit nature of a charity
The charity must have rules that demonstrate its purposes and character as a not-for-profit entity, comply with those rules and make information about its purposes publicly available.
Governance Standard 2: Accountability to members
For charities with members, such as incorporated associations and companies limited by guarantee, the charity must take reasonable steps to ensure that it is accountable to its members and the members have adequate opportunity to raise concerns about governance. The Explanatory Statement to the Governance Standards notes that if a registered charity is already meeting the requirements relating to members under the Corporations Act, State or Territory incorporated associations legislation or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), then that charity would be complying with this Standard. The Explanatory Statement also acknowledges that once the equivalent obligations under the Corporations Act are "turned off" on the commencement of the Governance Standards from 1 July, registered charities with members will have more flexibility to adopt procedures that suit that charity's particular circumstances to ensure accountability to members.
Governance Standard 3: Compliance with Australian laws
The charity must not engage in conduct that is an indictable offence (that is, an office punishable for a period exceeding 12 months) or punishable by a fine of more than 60 penalty units (currently calculated to be $10,200).
Governance Standard 4: Suitability of responsible persons
The charity must take reasonable steps to be and remain satisfied that each of its responsible persons, such as its directors, committee members or other members of the charity's controlling body, is not disqualified from managing a corporation under the Corporations Act nor, in the 12 months preceding their appointment, disqualified by the Commissioner.
This Governance Standard also amends the Act to include a provision requiring the Commissioner to maintain a publicly available online register of disqualified responsible persons.
Governance Standard 5: Duties of responsible persons
The responsible persons of the charity must:
• exercise their powers responsibly and discharge duties with the degree of care and diligence of a reasonable individual in that position in light of the particular circumstances of the charity;
• act in good faith, in the best interests of the charity and to further its purposes;
• not misuse their position or information obtained in the performance of their duties as a responsible person;
• disclose perceived or actual conflicts of interest (and the Governance Standard provides for the Commissioner to not require disclosure, for example, where the relevant conflict is low-risk and disclosure would cause unnecessary compliance costs);
• ensure the charity's financial affairs are managed responsibly; and
• not allow the charity to operate while insolvent.
The Explanatory Statement confirms that:
• the meaning of these duties is to be interpreted with reference to their established meanings at common law and under the relevant source legislation, such as the Corporations Act; and
• if a responsible person is already complying with the equivalent duties under State or Territory incorporated associations legislation, then they will be complying with this Standard.
This Governance Standard notes that the responsible person might also already be subject to duties of a higher standard than the standard required here.
Defences to breach of Governance Standard 5: duties of responsible persons
A responsible person is deemed to have taken the reasonable steps necessary to comply with the duties required by Governance Standard 5 where one or more of the following four protections apply.
Reliance on information or advice provided by an employee, professional adviser or authorised committee, where the responsible person has independently assessed the advice (derived from section 189 of the Corporations Act). This protection will apply if the information relied upon was inaccurate but it would have been unreasonable for the responsible person to have known that or had any reason to doubt the source of the information or its accuracy.
A responsible person may rely on a decision they have made in good faith and in the best interests of the registered entity (i.e. the "business judgment" rule in section 180(2) of the Corporations Act).
A responsible person will not have breached the duty in respect of insolvent trading if:
• they had reasonable grounds to expect and did expect that the charity was solvent and would remain solvent at the time that a debt was incurred; or
• they took all reasonable steps to prevent the charity from incurring the debt the defences to trading while insolvent (reflecting section 588H of the Corporations Act).
Where absence due to illness or other good reason prevents the responsible person from taking part in the management of the charity at the relevant time and they did not otherwise know they were in breach of Governance Standard 5 (in the Corporations Act, this protection takes the form of a defence to trading while insolvent: section 588H(4)).
The ACNC has said it will release guidance material shortly to assist registered charities understand and comply with the Governance Standards in a way that is relevant and proportional.