ACNC Governance Standards

The ACNC Governance Standards set out by the Australian Charities and Not-for-Profit Commission are a set of five core minimum standards that deal with how charities are run.

Generally, the standards require charities to keep operating lawfully and with a charitable purpose and be run in an accountable and responsible way.

Charity Governance Standards

Charities must meet the ACNC Governance Standards to be registered and remain registered with the Australian Charities and Not-for-profit Commission (ACNC). These governance standards do not apply to a limited category of charities called Basic Religious Charities.

Charities do not need to submit anything to the ACNC to show they meet the standards, but must have evidence of meeting the standards that they can provide if requested.

Charities that conduct activities overseas - including sending funds overseas from Australia - must comply with the  ACNC External Conduct Standards, in addition to the ACNC's Governance Standards.

Due to COVID-19, special changes have been announced for charities (see more detail below). During the period 25 March to 25 September 2020, the ACNC will not investigate certain breaches of the Governance Standards and External Conduct Standards unless such breaches are significant and harm the public interest.

What are the Governance Standards for charities?

The Governance Standards are a set of core, minimum standards that deal with how charities are run (including their processes, activities and relationships) – in terms of their governance.

The standards require charities to remain charitable, operate lawfully and be run in an accountable and responsible way. They help charities remain trusted by the public and continue to do their charitable work. Because the standards are a set of high-level principles, not precise rules, charities must decide how they will comply with them.

Each charity must be able to demonstrate that the steps it has taken to comply are appropriate (considering factors such as its size, purpose and activities). For example, a larger charity or one with vulnerable beneficiaries may need to take extra steps to comply with the standards.

The five standards

A registered charity must comply with five Australian charity governance standards which require them to:

1. Operate as a not-for-profit and exist for charitable purposes;
   
2. Be accountable to its members;
   
3. Comply with laws;
   
4. Appoint responsible persons to its board and committee; and
   
5. Ensure responsible persons uphold their duties.
   

To operate as a not-for-profit and exist for charitable purposes

The first standard is that the charity must be not-for-profit and exist for a charitable purpose. This must remain the case for as long as it is registered as a charity. Importantly, the charity’s activities must be dedicated to achieving its charitable purposes. The charity can meet this standard in several ways:

• Only undertaking activities in line with its charitable purposes;

• Ensuring there are processes in place to allow funds to be distributed in a not-for-profit manner and towards its charitable purposes;

• Publicising the activities it undertakes; and

• Having governance documents that set out the charitable purposes and how it will manage and distribute funds.

To show accountability

The second charity governance standard is that the charity must be accountable to its members (who are effectively the “owners” of the charity). This means providing its members with:

1. The results of its activities; and

1. An opportunity to discuss and question the operation of the charity.

The charity can meet this standard by holding annual meetings for members and providing members with information about the charity’s activities and finances.

Complying with laws

The third standard is that the charity must comply with all applicable laws. Therefore, the charity must first determine which laws will apply to their activities. Some of these laws will include:

• The charitable fundraising legislation of the states and territories in which it operates;

• ACNC financial reporting obligations and auditing requirements; and

• industry-specific laws, such as food safety laws for a charity that gives food.

Appointing responsible persons

The fourth charity governance standard is that it must only appoint ‘responsible persons’ to its board and committee. Responsible persons play an important role in directing the activities of the charity and ensuring regulatory compliance with the governance standards.

The charity’s governing documents should set out how it appoints a responsible person. The ACNC also requires that a responsible person is:

• Not disqualified from managing a corporation; and

• Not disqualified from being a responsible person within the previous 12 months.

The charity can comply with this governance standard by thoroughly investigating the suitability of a nominated responsible person before appointing them.

Upholding duties of responsible persons

The final charity governance standard is that the responsible persons (including directors) must comply with duties, including:

• Acting with reasonable care and diligence;

• Acting honestly and fairly for the charitable purpose and in the best interests of the charity;

• Disclosing conflicts of interest;

• Not misusing their position or information obtained as a responsible person;

• Ensuring responsible management of finances; and

• Not allowing the charity to operate while it is insolvent.

The charity should write these duties into their governing documents. This will give procedures for the responsible persons to follow.

Directors' duties

Companies registered with the ACNC have obligations under the ACNC Act and the ACNC Regulations that replace the standard obligations on companies under the Corporations Act 2001 (Cth). Obligations for a company registered with ACNC are found in ACNC Governance Standard 5, which set out the duties of responsible persons, such as directors and the Chief Executive Officers, including to:

• Act with reasonable care and diligence;

• Act honestly in the best interests of the charity and for its purposes;

• Not misuse the position of responsible person;

• Not to misuse information obtained in performing duties;

• Disclose any actual or perceived conflict of interest;

• Ensure that the charity’s financial affairs are managed responsibly; and

• Not allow a charity to operate whilst insolvent.

The following requirements of the Corporations Act also still apply to directors of a company that are registered charities (some are currently subject to temporary changes under COVID-19 – see below):

• Criminal offences relating to breaches of duties of good faith and acting for a proper purpose and misuse of position or information (under section 184 of the Corporations Act); and

• The duty to prevent insolvent trading (under section 588G of the Corporations Act); this duty is also included under Governance Standard 5.

The ACNC Review

In December 2017, the ACNC completed its fifth year of operation, bringing a close to its ‘establishment’ phase as a regulator. This milestone triggered a statutory review, which was conducted between December 2017 and May 2018.

The government appointed an independent panel to undertake the Review chaired by Patrick McClure AO and including Su McCluskey MACID, Greg Hammond OAM MAICD and Dr Matthew Turnour FAICD.

The final report of the statutory review of the Australian Charities and Not-for-profits Commission was made public on 22 August 2018. The report was titled Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislative Review 2018.

Key recommendations of the charities review included:

• Significantly raising reporting thresholds to less than $1 million for small charities, from $1 million to less than $5 million for a medium charities and $5 million or more for a large charities;

• Reviewing the ACNC’s secrecy provisions to enable the ACNC Commissioner to disclose greater information about their regulatory activity and even investigations;

• Bringing certain tax exempt not-for-profits that are not registered charities under the ACNC regulatory framework; and

• Removing, subject to certain preconditions, the exemptions granted to ‘basic religious charities’.

The federal government responded to the review in March 2020 and agreed with 18 recommendations. The ACNC review government response changes, which include enabling swifter decisionmaking, reducing red tape and enhancing ACNC powers to detect breaches of governance standards and deal with misconduct, will not be immediate as some responses require legislative amendments, or significant changes to ACNC processes.

COVID-19 – Safe Harbour Measures For Charities

In 2020, several measures were announced to assist registered charities with their ACNC compliance obligations while dealing with COVID-19.

During the period 25 March to 25 September 2020 (Applicable Period), the ACNC will not investigate certain breaches of the Governance Standards and External Conduct Standards unless such breaches are significant and harm the public interest. The ACNC has identified the following three standards in relation to which a safe harbour measure will now apply.

Charitable purposes

Under Governance Standard 1 and External Conduct Standard 1, charities’ activities must align with the charitable purposes set out in their governing document. Where a charity undertakes activities in response to COVID-19, the ACNC has indicated it will accept a charity applying a broad interpretation to its purposes and will take no action in relation to activities that do not clearly align with a charity’s purposes, if the charity:

1. Reasonably shows that its members would approve of the activity; and

1. Documents how it believes the new activities align with its charitable purposes or are incidental or ancillary to its charitable purposes.

The ACNC has recommended that before a charity decides to undertake a new activity that assists in the response to COVID-19, it should review its purposes set out in its governing document and, if the proposed activities do not align with its charitable purposes, seek to amend its governing document.

Solvency requirement

Governance Standard 5 requires Responsible Persons for charities to take reasonable steps to make sure that the charity does not operate whilst insolvent. With respect to the application of this Governance Standard, the ACNC has indicated that it will follow the amendments to the Corporations Act 2001 (Cth) by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth).

This Act provides relief for directors from their personal liability to prevent insolvent trading if the debt is incurred in the ordinary course of business during the Applicable Period before any appointment of an administrator or liquidator. The ACNC has indicated that it will apply the approach to all charities and not just those charities that are companies limited by guarantee to which the Act applies.

In applying this approach, the ACNC requires the charity to:

1. Ensure that its Responsible Persons are aware of the issue and have a plan for the charity to return to viability when the COVID-19 crisis has passed which is achievable; and

1. Inform its members and the ACNC if the charity is operating whilst insolvent.

Records of overseas activities

External Conduct Standard 2 requires a charity to obtain and keep sufficient records of its operations outside Australia to enable it to prepare a summary of its activities and related expenditure outside Australia on a country-by-country basis.

The ACNC has advised that it will not investigate breaches of this External Conduct Standard where a charity cannot obtain records during the Applicable Period due to the effects of COVID-19. This safe harbour for compliance with the standard is conditional on the charity:

1. Recording the reasons it cannot obtain the records; and
   
2. Obtaining any outstanding records from its overseas operations and partners as soon as practicable.

What does good governance look like on NFP boards?

Good governance is just as critical for performance and compliance in not-for-profits and charities as in other entities. An effective framework of governance can vary across different organisations, but a number of elements that contribute to this in not-for-profits and charities include:

• A clearly defined purpose and strategic direction for the organisation with goals and objectives and these are communicated to all relevant stakeholders;

• The board's role is similarly well defined;

• The board is aware of its duties and responsibilities, the legislation under which it operates, and has appropriate documentation of policies and procedures;

• Board composition reflects the skills, knowledge and experience needed to achieve the organisation's purpose;

• Managed financial responsibilities – through measures such as established policies and delegations, set criteria/indicators of good financial health and ensure management reports on this to each board meeting, determine financial priorities;

• Adequate Directors and Officers’ (D&O) insurance.

In order to remain registered under the ACNC, a charity has an obligation to:

• Keep a charitable status;

• Notify the ACNC of any changes to the charity’s legal name, address for service, responsible persons and governing documents;

• Keep required records;

• Report information regarding the charity’s charitably status to the ACNC annually; and

• Meet the ACNC Governance Standards.