ACNC cracks down on NFP reporting requirements

Good intentions aren’t enough for those in the not-for-profit sector, as the regulator gets tough on charities that fail to file essential reporting documents.

Not-for-profits and charities are frequently set up in the first flush of purposeful passion. But those who work with these entities behind the scenes say the determination to do good must be balanced by a commitment to meeting financial and administrative requirements — which may continue long after a founder’s energy and enthusiasm wanes.

“If you’re not doing that base-level compliance, you’re not looking at really achieving your purpose,” says Justin Hogg MAICD, founder and managing director of Right Source, which provides governance and strategic support to businesses that have a social purpose.

Registration revoked Reality recently hit home for more than 700 charities, which repeatedly failed to submit their annual income statements (AIS) and, accordingly, had their registration revoked by the Australian Charities and Not-for-profits Commission (ACNC).

The ACNC was established in 2012 to register and regulate Australian charities. In a statement, released in April, ACNC assistant commissioner general counsel Anna Longley said that because all charities are required to submit an AIS, those that repeatedly failed to do so risked losing their registration.

“Most charities meet their obligations. However, we notified more than 1000 charities last month that they were at risk of having their registration revoked because they had failed to submit two or more annual information statements despite several reminders to do so.”

Longley added that many of these organisations may have ceased operating. The move follows similar action in 2022, when 396 charities lost their registration after failing to submit two or more statements.

Dr Danny Davis, managing director of LINK Community & Transport, notes that while there may have been some bona fide and well-meaning charities that failed to identify their obligations, the deregistration exercise was more likely related to “putting out the trash”.

“They’re mostly ones that just ran out of money, ran out of steam, ran out of care and have just been sitting there,” he says. “It’s not so much a failure of governance as a failure of action of any kind.”

Davis says the ACNC requirements are “not very rigorous” because they were designed to be low-impact, with very little in the way of filing directives. However, he adds, “It’s important that any regulator, even a low threshold one, has some teeth and is active in keeping the sector clean. If they can remove the worst performers — not in any egregious way, but just the ones who simply can’t act — then that’s probably going to be in society’s best interest at the end of the day.”

Due process

The ACNC sends reminders to charities when their AIS is due, a spokesperson says. If an organisation has a legitimate reason why it cannot lodge its statement on time, it can contact the ACNC and request a deferment. If a charity twice fails to submit its AIS, it is sent overdue reminders and warnings, with revocation of registration only occurring as a last resort.

The recent ACNC action highlights the importance of ensuring a charity’s address for service details are up to date, so it receives reminders, can keep track of its reporting obligations and has the necessary procedures in place to collect the data required.

Much of the data that is provided in an AIS appears on the ACNC Charity Register, which attracted more than 5.6 million searches in 2021–22.

Opportunity knocks

Hogg encourages organisations to regard compliance as an opportunity rather than as an obligation. “The [Charity Register] is a publicly accessible site, so anyone can look at it,” he says. “So why not put that information about your charity on record? Talk about how many meals you’ve served, or how much progress you’ve made towards research or whatever your organisation’s purpose is. It’s often a question people have about charities, as in, ‘Oh, I don’t want to give,’ or ‘I’m not sure because I’m not sure where the money goes’,” he adds. “This allows you to explain how you’re spending money in a very structured, authentic and regulated way.”

Charities can also provide information about the key people involved in their operations, as well as more granular income and expenditure details. Regardless of how deep a donor’s pockets are, many use the Charity Register to assess how an organisation is travelling.

“If your search for a charity tells you their report is overdue, it’s a red flag that they’re not on top of what they’re doing,” says Hogg. “If a charity isn’t well governed in that respect, is it an evidence point for other things not being in place? Does that mean they’re not maintaining their WorkCover requirements, employee safety or client safety — particularly for those doing clinical work?”

Challenging environment

The ACNC’s regulatory action takes place against a backdrop of an increasingly tough environment for NFPs and charities. According to HLB Mann Judd’s Not for Profit Leader’s Report released in May, two-thirds of organisations have seen an increase in the need for their services in the past 12 months, and 84 per cent predict an increase in demand over the next 12 months. According to the 100-plus individuals surveyed, the two biggest barriers to achieving their organisation’s strategic goals were staffing issues and the economic environment. The two greatest risks were seen to be loss of reputation and employee resourcing.

Aidan Smith, HLB Mann Judd partner and head of its Australasian Not for Profit Industry Group, says such pressures make it all the more crucial to ensure the board’s roles and responsibilities (including compliance with laws and regulations) are clearly defined and understood by all members. “You’ve got to make sure the board has the right skill set, including those who are aware of the legislative and regulatory requirements.”

In an increasingly competitive funding environment, he adds that it is important to guard against any reputational damage that may arise from failing to meet these requirements.

What happens next?

Once charity registration is revoked, the ACNC notifies the Australian Taxation Office to remove the organisation’s entitlement for charity tax concessions. Additionally, if a charity’s revocation is backdated, it may be considered liable for income tax on previously tax-exempt income. However, the ACNC says charities can re-register if they are still operating, meet the eligibility requirements and submit all overdue AIS documents.

“Charities must do this within six months of their revocation date to have their registration backdated and ensure they do not experience a period of loss of any tax concessions they were previously entitled to,” says an ACNC spokesperson

Yet as Smith points out, it can be hard for a charity to come back from this, given the impact on its ability to raise revenue and assist its beneficiaries, and the significant reputational damage that has occurred — both to the charitable entity and to the individual directors. “In terms of charities, people will be thinking, ‘You’ve had your charitable status revoked by the ACNC. How can we trust you going forward?’ That can be difficult to get past,” says Smith.

For directors, the stain lingers. “People can still look up the Charity Register and see who the responsible directors were,” says Smith. “Whether it’s for boards of other charities or even their day-to-day job, it’s not a great look.”

Trust and confidence

“Accountability and transparency are critical to maintaining public trust and confidence in the sector,” notes Longley. “For example. people check the Charity Register to verify key details about organisations before they make a donation.”

Ensuring details are correct and up to date allows donors to make informed choices about who to support and helps beneficiaries know where they might seek assistance. It also gives the broader community the confidence that tax concessions and donated funds are being used for their intended purposes.

This article first appeared under the headline 'Handle with Care’ in the August 2023 issue of Company Director magazine.