Managing Charity’s Governance Practices & ACNC Compliance in Complex Corporate Structures

Introduction

For any charity operating within a complex corporate structure, maintaining diligent governance practices is essential, particularly as the Australian Charities and Not-for-profits Commission (ACNC) has made this a key area of compliance focus. Although these structures are often used for legitimate reasons, they can introduce significant governance challenges and increase the risk of non-compliance.

In response to this regulatory focus, this guide offers essential information and practical advice to help registered charities manage their governance obligations effectively. It breaks down key governance considerations and outlines the necessary practices to ensure compliance, thereby helping charities to operate successfully within a complex structure.

Interactive Tool: Check Your Charity’s Governance & ACNC Compliance Risk

Complex Charity Structures & Their Legal Foundations

What the ACNC Considers a Complex Structure

The ACNC does not have a formal definition for a "complex structure." Instead, it uses this term to describe charities that operate within a group of multiple entities, which can present unique governance challenges.

The ACNC identifies these structures based on a range of features related to their purposes, operations, and finances. A charity may be considered part of a complex corporate structure if it shares characteristics across the following areas:

• Purposes and Activities: The group may include a mix of charitable and non-charitable entities, such as for-profit businesses. The entities might have different legal forms, like companies, trusts, or incorporated associations, and may pursue different charitable purposes or deliver distinct services.
• Operations: The structure often involves entities that work across different states or overseas. There can be shared directors or board members across multiple entities, and sometimes a lack of clarity about who ultimately controls each part of the structure.
• Finances and Resources: It is common for entities to share assets, resources, staff, or volunteers. These arrangements often lead to frequent transactions between related parties and can involve organisations of vastly different sizes, each with different governance needs and compliance obligations.

Common Legal Structures for NSW Charities

When setting up a not-for-profit in New South Wales, it is crucial to choose the right legal structure, as charities are often established using specific forms governed by state legislation. Two prevalent forms are incorporated associations and charitable trusts, each with its own legal foundation and operational framework.

Understanding these structures provides context for the governance practices required.

An incorporated association is a common legal entity for not-for-profit community groups in NSW. Governed by the Associations Incorporation Act 2009 (NSW), this structure creates a legal identity separate from its members. This separation allows the association to:

• Enter into contracts in its own name.
• Hold property independently.
• Be sued in its own name.

This structure effectively protects individual members from personal liability.

Another established structure, regulated by the Charitable Trusts Act 1993 (NSW), involves establishing a charitable trust. This Act defines a charitable trust as any trust established for charitable purposes that is subject to the control of the Supreme Court of New South Wales.

This legal framework is designed to:

• Protect the property held by the trust.
• Ensure it is used to advance the trust's charitable objectives.

Key ACNC Concerns for Charities Operating Within a Complex Structure

Concealing Non-Compliance & Mismanagement

The ACNC has identified the use of complex structures as a key focus area. While recognising that they can be legitimate, the Commission notes they also present significant risks.

A primary concern is that these corporate structures can be used to obscure or hide non-compliance with ACNC governance and compliance obligations. This can happen:

• Deliberately to conceal organisational wrongdoing.
• Inadvertently due to mismanagement.

The ACNC has noted that the layers within a complex corporate structure can make it difficult to maintain clear oversight. This lack of transparency creates risks, including:

• Opportunities for mismanagement to go undetected.
• Breaches of the ACNC's Governance Standards.
• Structures that prevent the charity from meeting its compliance duties.

The Risk of Private Benefit & Conflicts of Interest

A significant issue for any charity, which is amplified within complex structures, is the risk of providing a private benefit.

Private benefit occurs when a charity's resources—such as funds, goods, or services—are used to benefit individuals or entities connected to the charity, rather than for its public charitable purpose. Consequently, an organisation cannot be a registered charity if it operates for private benefit.

Complex structures, particularly those involving common directors or shared resources between charitable and non-charitable entities, increase the likelihood of both actual and perceived conflicts of interest, making managing conflicts of interest a key governance priority. These conflicts can lead to decisions that result in the misuse of a charity's assets.

Examples of misuse include:

• Unauthorised transfers of charity funds to individuals or related entities.
• The inappropriate use of charity credit cards for personal expenses.
• Entering into transactions with related parties that are not in the charity's best interests.

Essential Governance Practices for Your Charity's Compliance

Implementing Appropriate Policies & Record-Keeping

To maintain compliance, each charity within a complex corporate structure must weigh up whether common policies and procedures are suitable or if bespoke documents are required.

Shared policies can create efficiency, but they may not be appropriate when:
• an entity delivers different services
• entities pursue different purposes
• the structure includes for-profit arms

It is vital that policies are fit for each charity’s specific circumstances, are regularly reviewed, and are followed by all staff and volunteers.

Alongside tailored policies, each registered charity must keep its own distinct financial and operational records.

These records must: • be accurate and up-to-date • clearly explain each charity’s financial position, performance and activities to meet ACNC obligations

Clarifying Roles & Responsibilities Within the Structure

A well-maintained clear organisational chart sets out roles, responsibilities and reporting lines for personnel and board members across every entity.

This chart ensures that everyone understands the overall governance framework and each entity’s place within it.

When entities share staff, volunteers or board members, it must be evident:
• which entity the individual is employed by
• who they report to
• which charity they are representing when making a decision

Managing Common Boards & Board Meetings

The use of common boards or directorships across multiple entities can present governance challenges. Board members must comply with their duties to the specific entity they are acting for at any time.

Conflicts can arise where there is a conflict of duties between entities, particularly during inter-entity transactions.

To manage these challenges, charities should:
• Ensure board members fully understand their distinct obligations to each entity.
• Clearly document all board decisions and the reasons behind them.
• Consider appointing independent directors to help manage potential conflicts of duty.

Holding separate board meetings for each entity is considered good practice because it keeps the focus on that entity’s best interests.

For convenience, meetings can be consecutive, but the agendas and minutes must show clearly that separate meetings took place.

Handling Conflicts of Interest & Related Party Transactions

Complex structures increase the likelihood of actual or perceived conflicts of interest. Such conflicts can stem from personal relationships or common directorships and must be managed through clear governance processes.

To manage conflicts effectively, charities should:
• implement a tailored conflict-of-interest policy
• maintain a register of interests
• encourage a culture of disclosure

Related party transactions occur more frequently in complex structures and must always be in the charity’s best interests and further its charitable purposes.

To ensure each transaction meets these requirements, charities should:
• follow a transparent approval process
• ensure the transaction is on arm’s length terms or more favourable to the charity
• keep accurate records of decision-making
• maintain a related party transaction policy and register for ongoing oversight and compliance

Proving the Legitimacy of Charity's Complex Structure

Demonstrating Structure Furthers Charitable Purpose

To justify the use of a complex corporate structure, a charity must have a clear charitable purpose and be able to demonstrate how the arrangement helps achieve it. The ACNC acknowledges that there are many legitimate reasons for charities to operate within these structures.

According to ACNC reviews, compliant charities purposefully adopt complex structures to meet operational needs or strategic goals. The benefits of such a corporate structure can include:

• Operational and strategic flexibility: Different legal entities may be better suited for specific activities, such as service delivery, advocacy, or operating social enterprises. This also allows for operations across various jurisdictions and access to different funding sources.
• Risk management and asset protection: High-risk activities can be isolated within separate entities, which helps to protect the assets of the broader group by limiting exposure.
• Tailored governance and expertise: A charity may appoint board members with specialist skills to oversee specific activities, providing more targeted guidance without altering the composition of the main charity's board.
• Shared services and resource efficiency: A group structure can enable centralised services like finance, HR, and IT across multiple entities, which reduces duplication and improves consistency.

Tailoring Governance & Periodically Reviewing Arrangements

Charities operating within a complex structure should tailor their governance practices to their specific circumstances. This often involves seeking specialist advice to ensure the framework is appropriate for the unique challenges presented by the arrangement.

Furthermore, it is essential to conduct periodic reviews of the entire corporate structure. ACNC reviews have found that charities with satisfactory governance regularly assess their arrangements to ensure they:

• Remain fit for purpose.
• Continue to meet all compliance obligations.

This proactive approach helps manage the increased complexity and ensures the structure remains suitable for the charity’s ongoing needs.

Case Study on ACNC Enforcement Actions

The Returned and Services League of Australia (NSW) Case Involving Misuse of Funds & Governance Failures

A prominent example of ACNC intervention involved the Returned and Services League of Australia (New South Wales Branch) (RSL NSW). An ACNC charity dispute investigation identified the misuse of charity funds by the former State President, which highlighted significant governance failures within the organisation.

The investigation found that the charity's governing body, the former State Council:

• Had failed to properly investigate the misuse of funds.
• Did not report the allegations to the police.

RSL NSW acknowledged that its State Councillors, who are the charity's responsible persons, had been unaware of their duties as directors.

In response to these findings, RSL NSW requested the resignation of the State Councillors who had served during the period when the misconduct was considered.

Subsequently, the ACNC accepted an Enforceable Undertaking from the charity, which outlined 15 specific actions to be implemented over three years. This measure was designed to ensure RSL NSW would comply with:

• Governance Standard 1.
• Governance Standard 5.
• Its operational record-keeping obligations under the Australian Charities and Not-for-profits Commission Act 2012 (Cth).

Conclusion

For any charity operating within a complex corporate structure, maintaining diligent governance practices is critical to manage ACNC compliance and uphold its mission. This involves understanding the unique risks these structures present, such as conflicts of interest and private benefit, and implementing tailored policies and clear roles to meet all governance obligations.

If your charity is part of a complex structure and requires guidance on its governance practices, contact LawBridge’s specialist not-for-profit lawyers today. Our team provides specialised legal advice to help registered charities ensure compliance with their ACNC obligations, allowing you to focus on effectively pursuing your mission.

Frequently Asked Questions