What You Need to Know About Asset Distribution When Ending a Charity in Australia

Introduction

When a charity organisation in Australia considers winding up, understanding the fate of its assets is a critical aspect of the process. The decision to cease operations, whether voluntary or compulsory, brings forth significant responsibilities for the charity’s leadership, particularly concerning the proper handling and distribution of any remaining assets after all obligations are met.

This guide provides essential information for those involved in ending a charity, outlining the key principles and procedures that govern asset distribution. Navigating these requirements correctly ensures compliance with legal and regulatory obligations, including those stipulated by the Australian Charities and Not-for-profits Commission (ACNC) and the Australian Taxation Office (ATO), especially when the charity is insolvent or holds deductible gift recipient (DGR) status.

Your Australian Charity’s Assets Key Principles During Winding Up

The Mandate to Distribute Surplus Assets When Winding Up Your Charity

When an Australian charity is winding up, a fundamental principle is the requirement to distribute any surplus assets. After all debts and liabilities of the organisation have been settled, the remaining assets cannot be retained by the charity’s members.

Instead, these surplus assets must be passed on to ensure that charitable funds continue to serve community purposes even after the original charity ceases operations. Typically, these assets are directed to another charitable organisation with similar objectives.

The process of ending your organisation involves several steps, including:

• Settling all outstanding debts and liabilities
• Identifying all remaining assets (money and property)
• Distributing these surplus assets according to proper procedures

Following Your Charity’s Governing Document for Asset Transfer

The governing document of your charity plays a critical role in determining how assets are handled during the winding up process. It is imperative that the Responsible People of the charity meticulously follow this document throughout.

Many governing documents for registered charities include a specific ‘winding up clause’ or ‘dissolution clause’ that:

• Dictates that surplus assets must be transferred to another charity with similar purposes
• Outlines the specific procedure for selecting the recipient charity
• Provides legal guidance for the proper distribution of assets

Consulting your organisation’s governing documents is a crucial first step in this process. The importance of clear winding up clauses in a charity’s constitution cannot be overstated, as they guide the entire process of asset transfer when ending your organisation.

The Process for Distributing Your Charity’s Surplus Assets When Ending Your Organisation

Identifying & Valuing Surplus Assets for Your Winding Up Organisation

When your charity is winding up, one of the critical steps involves identifying and valuing its surplus assets. This process occurs after your organisation has settled all its financial obligations. Surplus assets essentially represent what remains once all debts and liabilities have been fully paid.

The winding up process for your charity typically includes:

• Paying all outstanding debts and financial obligations
• Identifying remaining assets (money and property) as surplus assets
• Preparing these assets for distribution according to your charity’s rules and legal requirements

It is important for the organisation to accurately account for all assets and liabilities to determine the precise value of these surplus assets before proceeding with their distribution.

Transferring Assets to Eligible Recipient Organisations Including Other Charities

Once surplus assets are identified, the next step in winding up your charity involves transferring these assets to eligible recipient organisations. The governing document of your charity usually dictates where these assets must go.

Many registered charities’ governing documents include a ‘winding up clause’ or ‘dissolution clause’. This clause typically mandates that any surplus assets must be given to another charity that has similar purposes to your own organisation.

For organisations with DGR status, specific rules apply:

• The winding up clause in the constitution requires all surplus assets to be transferred to another DGR fund, authority, or institution
• The recipient DGR must have a similar primary purpose to your winding up charity
• This ensures that assets accumulated with the benefit of DGR status continue to serve a comparable public good

Ultimately, when a charity is wound up, any surplus assets can only be given to a charitable organisation with similar charitable purposes.

Member Involvement in Asset Distribution Decisions for Your Winding Up Charity

In many cases, the members of the charity play a role in deciding how surplus assets are distributed when ending your organisation. It is a common requirement for the members to formally agree on the distribution plan for the charity’s surplus assets. This ensures that the process is transparent and aligns with the collective understanding of the charity’s mission and obligations.

Your charity’s governing document may outline the specific procedure for how members are involved in this decision-making process, including how the recipient charity is chosen. This step underscores the importance of member engagement in the final stages of winding up a charity.

How Deductible Gift Recipient Status Affects Your Charity’s Asset Distribution

Specific Rules for Distributing Assets of a Deductible Gift Recipient Charity

When a charity with DGR status is winding up, specific rules govern the distribution of its assets. The ATO mandates strict guidelines to ensure charitable assets continue to serve their intended purpose.

Upon winding up or revocation of DGR endorsement, the organisation must transfer remaining assets to another DGR. These assets include:

• Gifts
• Deductible contributions
• Any money received from these sources

This transfer requirement ensures that assets accumulated due to DGR status continue to serve a similar charitable purpose.

The receiving organisation must be a gift deductible fund, authority, or institution. Additionally, the exact requirements for this transfer can vary depending on the type of DGR endorsement the charity holds. For instance, DGRs endorsed as a whole are required to pass on surplus assets to another DGR with a comparable primary purpose when ending your organisation.

Constitutional Requirements for Deductible Gift Recipients Regarding Winding Up & Assets

Organisations endorsed as DGR by the ATO are obligated to include specific clauses in their constitution or governing rules regarding the winding up process. A critical requirement is a winding-up clause that dictates the distribution of surplus assets.

This clause must ensure that upon winding up your charity, or if its DGR endorsement is revoked, all surplus assets are transferred to another DGR fund, authority, or institution with a similar primary purpose.

Furthermore, the governing documents of a DGR must stipulate that its profits and assets are used solely for its principal purpose. These rules generally prohibit any distribution of profits or assets to members, both during the charity’s operation and at the point of winding up a charity.

For example, a typical constitutional clause will state that if the organisation is wound up or its DGR endorsement is revoked, any surplus of the following must be transferred to another DGR:

• Gifts of money or property received for the organisation’s principal purpose
• Contributions made in relation to eligible fundraising events held for the principal purpose
• Money received by the organisation as a result of such gifts and contributions

Legal & Regulatory Obligations for Your Australian Charity’s Assets During Winding Up

Australian Charities and Not-for-profits Commission Rules for Asset Distribution Before You Cancel Your Charity Registration

When your charity is preparing for winding up, the ACNC has specific expectations regarding the handling of its assets. Before cancelling your registration, you must ensure that:

• Any remaining assets will be distributed in a manner consistent with your charity’s charitable purposes
• The distribution aligns with your governing document
• Surplus assets are typically transferred to another registered charity with similar objectives

The ACNC Commissioner will evaluate several factors before approving a request for voluntary revocation of your charity’s registration. A key consideration is confirmation that all assets have been, or will be, properly managed according to your charity’s rules and legal obligations.

Therefore, meticulous adherence to your charity’s governing document concerning asset distribution is crucial during the process of ending your organisation.

Australian Taxation Office Considerations Including Capital Gains Tax for Your Not-for-Profit Organisation

When winding up a not-for-profit organisation, there are important ATO considerations to address. One significant aspect is the potential for Capital Gains Tax (CGT) if your organisation disposes of assets during this period.

CGT generally applies to not-for-profit clubs, societies, and associations that:

• Are not otherwise exempt from income tax, or
• Are treated as companies for income tax purposes

However, organisations that are exempt from income tax are typically also exempt from CGT.

Beyond CGT, the winding up process for your charity involves finalising all tax obligations with the ATO. This includes:

• Submitting any outstanding activity statements
• Settling tax debts
• Cancelling your organisation’s Australian Business Number (ABN)
• Terminating other relevant tax registrations

Adhering to Your Incorporating Regulator’s Rules for Winding Up & Assets for Your Organisation

In addition to ACNC and ATO requirements, your organisation must also comply with the rules set by its incorporating regulator when winding up and distributing assets. The specific obligations depend on the legal structure of your charity and its jurisdiction of incorporation.

The process for winding up and managing assets will differ accordingly:

• If your organisation is a company limited by guarantee, it must follow the procedures outlined in the Corporations Act 2001 (Cth), with the Australian Securities and Investments Commission (ASIC) as the regulator
• If your organisation is an incorporated association, it must adhere to the specific legislation of the state or territory in which it was incorporated

Each incorporating regulator has its own distinct processes, forms, and legal requirements that govern how an organisation is wound up and how its assets must be handled. It is essential to consult these specific rules when ending your organisation to ensure full compliance.

Learning from the Maitland Benevolent Society Case About Charity Asset Distribution

How the Court Interpreted the Charity’s Winding Up Clause for Asset Distribution

The New South Wales Supreme Court case, In the matter of Maitland Benevolent Society Limited (In liquidation) [2020] NSWSC 1284, provides a significant example of how a charity’s winding up clause is interpreted when determining the distribution of surplus assets. Maitland Benevolent Society Ltd (Maitland), a not-for-profit organisation operating an aged care facility, was wound up, and its liquidator sought court directions on distributing the surplus funds.

The core issue revolved around Maitland’s constitution, specifically clause 105, which outlined the criteria for recipient organisations. The court meticulously examined this clause, which required that surplus assets be transferred to an organisation with:

• Similar charitable objects to Maitland
• Prohibitions on distributions to its members
• If a company, prohibitions on paying director fees and requiring director approval for other payments to directors
• Status as a public benevolent institution
• DGR accreditation with the ATO

Two entities competed for the surplus funds: Royal Freemasons’ Benevolent Institution (Royal Freemasons) and the United Protestant Association. The court carefully compared their constitutions and intended use of funds against Maitland’s constitutional requirements.

A key factor in the decision was Maitland’s intention when selling its facility to Royal Freemasons—specifically, that the surplus funds would be used for improvements at that specific facility. Additionally, the court found that the United Protestant Association’s constitution allowed for director fees in some circumstances, which conflicted with Maitland’s stricter clause.

Consequently, the court determined that only Royal Freemasons’ constitution strictly met all criteria outlined in Maitland’s winding up clause. Therefore, the entire surplus was directed to be distributed to the Royal Freemasons’ Benevolent Institution, underscoring the critical importance of precise wording within a charity’s governing document when winding up.

Lessons for Your Charity from the Maitland Case Regarding Asset Clauses in Winding Up

The Maitland Benevolent Society case offers crucial lessons for every charity and not-for-profit organisation concerning the drafting and review of winding up clauses in their constitutions. A primary takeaway is the necessity for absolute clarity in your governing documents regarding the intended destination of surplus assets should the organisation cease operations.

If the specific future use or recipient of these assets is important to your charity, this must be unambiguously reflected in the winding up provisions. This case demonstrates that courts will undertake a strict interpretation of these clauses. Any ambiguity or failure to precisely define the criteria for recipient organisations can lead to:

• Disputes between potential recipient organizations
• Outcomes that may not align with the original intentions of the charity
• Complications during the winding-up process

For instance, Maitland’s clear intention for the funds to benefit the aged care facility they previously operated played a significant role in the court’s considerations. Therefore, when ending your organisation, it is vital to ensure your charity’s constitution accurately and clearly articulates how surplus assets should be handled.

Regularly reviewing and, if necessary, updating these clauses can prevent complications and ensure that the charity’s legacy is preserved according to its wishes, particularly when winding up a charity.

Conclusion

Winding up a charity in Australia necessitates a meticulous approach to managing the organisation’s assets, ensuring their distribution aligns with legal mandates, the charity’s governing document, and specific conditions such as DGR status or insolvency. This process underscores the importance of transferring surplus assets to a similar charitable entity and adhering to all regulatory obligations, with the Maitland Benevolent Society case highlighting the critical need for clear constitutional provisions when ending your organisation.

Understanding the complexities of winding up your charity and ensuring proper asset distribution requires careful planning and expert guidance. For trusted expertise in not-for-profit legal services to help with ending your organisation smoothly and compliantly, contact LawBridge today to secure peace of mind.

Frequently Asked Questions About Your Charity’s Assets When Winding Up