19 Jul 2012

The Australian Charities and Not-for-Profits Commission: A step closer to reality

by Simon Bowden

The draft Bill presents some important risks to the not-for-profit sector by providing the Australian Charities and Not-for-profits Commissioner with broad powers and limiting the ability of registered entities to dispute them.

There is a swift round of consultation occurring on a new exposure draft of legislation to establish the proposed Australian Charities and Not-for-profits Commission (ACNC) now before a House of Representatives Standing Committee.

The House Standing Committee on Economics is conducting an inquiry into a new exposure draft of the Australian Charities and Not-for-profits Commission Bill. The Inquiry was announced and the new Bill released on 13 July 2012 and is available on the Treasury website, together with explanatory material and another Bill incorporating transitional measures.

Submissions are due to the Inquiry by Friday 20 July, only two weeks after release of the material. It is understood that the inquiry is to be finalised and its report handed down before Parliament resumes on 14 August. This is expected to allow for the passage of the legislation and the establishment of the ACNC by the announced date of 1 October 2012 (deferred from 1 July 2012).

What does the Australian Charities and Not-for-profits Commission Bill do?

The Bill provides a framework for charities to register with the ACNC Commissioner in order to gain access to Commonwealth tax concessions and other government benefits. Once registered, charities will be required to comply with a number of obligations contained in the legislation, including reporting and record-keeping, and the ACNC is to be provided with a range of regulatory powers.

As previously announced by the Government, the commencement of reporting requirements has been deferred. Registered entities will not be required to provide information statements until the 2012-13 financial year and will not be required to provide financial reports until the 2013-14 financial year. At this stage, the ACNC will not regulate not-for-profit (NFP) bodies that are not charities, such as sporting clubs.

The latest Bill contains some important developments in the tone of the legislation which was a significant concern in relation to the previous exposure draft released for consultation by Treasury in December 2011. For instance, a new preamble and objects clause have been introduced emphasising the distinctive role the NFP sector plays in Australia and the role of the legislation to support and sustain a robust, vibrant, independent and innovative sector.

Governance and external conduct standards

Governance standards with which registered entities will be required to comply are to be set out in regulations to allow for further consultation between the Government and the NFP sector. Regulations will also provide for "external conduct standards", expected to regulate funds and activities of registered entities outside Australia.

However, although it appears these regulations will not have been made by the time the ACNC is expected to commence, compliance with the standards will be an element of an entity's entitlement to registration. Presumably, if these standards do not exist or have not commenced at a particular time, an entity will be taken to have complied, but the legislation does not state this.

Registration and revocation

The circumstances in which the Commissioner can revoke an entity's registration have been clarified in some respects. However, it remains a broad power which is capable of being invoked if an entity loses its entitlement to registration, fails to comply with a governance standard or contravenes a provision of the Act, even for minor or inadvertent breaches.

In the interests of ensuring this power is used only in appropriate circumstances, the Commissioner is now required to consider a number of matters in deciding whether to revoke registration, including the significance and persistence of the contravention or non-compliance and the action the Commissioner or the registered entity could have taken to address it.

The Commissioner can revoke an entity's registration without prior notice if the Commissioner considers it is reasonable to do so and revocation can be retrospective in certain circumstances. The revocation can take effect even if the entity is disputes the Commissioner's decision.

Disputing the ACNC's actions

As foreshadowed in the previous exposure draft, provisions for disputing many actions of the ACNC are based on that contained in the tax legislation. For instance, if an entity is dissatisfied with the Commissioner's decision to revoke its registration, it must first lodge an objection with the Commissioner before it can take the dispute to the Administrative Appeals Tribunal or the Federal Court.

This approach is likely to result in delays to an entity's ability to bring disputes before an independent forum. Where a charity's funding is dependent on their registration with the ACNC, this could have serious consequences.

ACN Register

The contents of the proposed publicly accessible Australian Charities and Not-for-profits Register have been clarified and the Commissioner given a power to withhold information from the register, including certain information that is commercially sensitive, or information that is inaccurate, likely to cause confusion or mislead the public and information that could endanger public safety.

Reporting requirements

Provision has been made for the Commissioner to approve substituted accounting periods in place of a 30 June financial year end. The Commissioner will be taken to have approved a substituted accounting period for existing charities that are automatically registered with the ACNC on its commencement under transitional arrangements, provided the charity gives the Commissioner notice within six months of commencement.

Provision has been made for the Commissioner to approve collective or joint reporting by groups of related entities.

Enforcement powers

As with the previous exposure draft, the Commissioner is to be given a broad range of regulatory powers, including extensive information gathering and compliance monitoring powers and powers to give directions to registered entities, accept enforceable undertakings, obtain injunctions and suspend or remove directors and trustees. Under the new Bill, it is now clearer that those powers must be exercised for a purpose connected with the legislation, such as ensuring compliance with the Act, a governance standard or an external conduct standard.

However, under the new Bill, many of the Commissioner's enforcement powers may only be used against "federally regulated entities". Essentially, federally regulated entities are entities over which the Commonwealth has power to legislate under the Australian Constitution, including trading and financial corporations and corporations established in a Territory (and any trusts of which the trustees are such corporations).

The scope of the Commonwealth's corporations power is still not clear from the existing case law which looks to determine whether trading or financial activities is a sufficiently significant part of a corporation's activities.

Charities which are not involved in trading activities or where trading is a minor part of their activities compared to their charitable work may not be subject to these enforcement provisions. For the NFP sector as a whole, the risk with this is that it continues or even exacerbates the patchwork approach to regulation of the sector.

Liabilities of directors, trustees and other responsible individuals

The new Bill imposes significant obligations on "responsible individuals" of registered entities, including directors of companies, committee members of incorporated and unincorporated associations and trustees of trusts. In particular, a broad statement is made to the effect that any obligation imposed on a registered entity is also imposed on those individuals.

In the case of directors of companies and incorporated associations, however, personal liability for amounts payable under the Bill is limited to amounts payable because of a director's dishonesty, gross negligence or recklessness or a deliberate act or omission of the director. Responsible individuals may also be personally liable for offences committed by a registered entity.

These provisions raise a number of questions and may well pose real risks for directors and other individuals involved in the management of charities.

What should the not-for-profit sector do now?

The new exposure draft Bill contains some significant steps forward from the previous draft and both the Government and the ACNC Taskforce have indicated that the ACNC is expected to take a "light-touch" and proportionate approach to regulation. Nonetheless, the proposed ACNC legislation continues to present some important risks to the NFP sector by providing the ACNC with broad powers and limiting the ability of registered entities to dispute them.

As we get closer to final legislation on this important reform, charities will need to familiarise themselves with the proposed regulatory framework and how it will affect them once the ACNC is established. Clayton Utz would be pleased to assist with these considerations.

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