Are You Reporting Related Party Transactions Correctly? A Guide for Charities

Introduction

Engaging in a related party transaction is a common and often beneficial practice for a charity. However, these arrangements can introduce significant governance risks, such as real or perceived conflicts of interest, which must be managed transparently to ensure decisions are always made in the charity’s best interests.

As a result of new rules from the Australian Charities and Not-for-profits Commission (ACNC), the reporting requirements for these transactions have become stricter. Most charities must now report related party transactions in their Annual Information Statement (AIS), and this guide provides essential information to navigate these obligations, including specific considerations for charities that prepare special purpose financial statements (SPFS).

What is a Related Party & a Related Party Transaction

Identifying a Related Party Based on Your Charity’s Size

The ACNC defines a ‘related party’ differently depending on the size of a charity. This distinction is crucial for understanding your organisation’s specific reporting requirements.

For small charities, with an annual revenue under $500,000, the ACNC uses a simplified definition. A related party is any person or organisation connected to the charity that has significant influence over its strategic and financial decisions. This includes:

• A charity’s Responsible People
• Its senior management
• Their close family members

For medium and large charities, the definition aligns with the Australian Accounting Standard AASB 124. Under this standard, a related party is more broadly defined and can include:

Related Party Category	Description
Individuals with control	A person, such as a Responsible Person or their close family member, who has control or joint control over the charity.
Influential organisations	An organisation that has control or significant influence over the charity (e.g., a parent entity) or one that the charity has control or significant influence over (e.g., a subsidiary).
Group members	Any organisation that is part of the same group as the charity, such as a fellow subsidiary.
Key Management Personnel (KMP)	Members of the charity’s KMP who have authority for planning, directing, and controlling the charity’s activities, as well as their close family members.
Associates & joint ventures	An entity over which the charity has significant influence (an associate) or an entity where control is shared (a joint venturer).

Understanding What Qualifies as a Related Party Transaction

A related party transaction is a transfer of resources, services, or obligations between a charity and one of its related parties. A key aspect of this definition is that the transaction does not need to involve a financial payment to be reportable.

Charities must report these transactions to meet ACNC reporting requirements. Common examples of what constitutes a related party transaction include:

Transaction Type	Description & Examples
Financial exchanges	Covers loans made to or from a related party, as well as investments made by the charity in an entity connected to a related party.
Purchases & sales	Buying goods or services from, or selling them to, a related party, even if at a discount or free. This also includes donations of goods.
Use of assets	A related party making significant use of the charity’s property, or the charity leasing property from a related party. Also includes the transfer of charity assets.
Provision of services	A Responsible Person providing professional services (e.g., legal, accounting) at a discounted rate or for free. Also covers the provision of employees or volunteers between entities.
Employment of relatives	Paying a salary or wages to a close family member of a related party, such as a board member’s relative.

Your Charity’s Australian Charities and Not-for-profits Commission Reporting Requirements

Reporting Obligations for Small Charities

For small charities, the ACNC has specific reporting requirements for related party transactions. These charities must disclose any ‘reportable’ related party transactions in their AIS for the 2023 reporting period onwards. If no such transactions occurred, the charity can simply answer ‘No’ to the relevant question in the AIS.

When a small charity does have a reportable related party transaction, it must identify the type of transaction from a specific list provided in the AIS. These reportable transactions include:

Transaction Type	Reportable Status
Fees for goods or services	Reportable
Loans (to or from the charity)	Reportable
Salaries for relatives of related parties	Reportable
Asset transfers to a related party	Reportable
Discounted goods/services to a related party	Reportable
Significant use of charity property by a related party	Reportable
Investments in a related party entity	Reportable
Donations received from a related party	Generally Not Reportable
Reimbursement for reasonable out-of-pocket expenses	Generally Not Reportable
Services received by a related party on same terms as other beneficiaries	Generally Not Reportable

Reporting Obligations for Medium & Large Charities

The reporting requirements for medium and large charities are more detailed, as they must disclose ‘material’ related party transactions. Unlike the specific list for small charities, a transaction is considered material if its omission or misstatement could reasonably influence the decisions of someone reading the charity’s financial reports.

Materiality is not based on a specific dollar amount but on the size, nature, and context of the transaction. These charities must report material transactions in both their AIS and their annual financial reports, including SPFS.

To determine how to disclose these transactions, charities should refer to the Australian Accounting Standards, specifically AASB 124 Related Party Disclosures or AASB 1060.

Examples of transactions that are often considered material for a charity include:

Example Transaction	General Materiality Assessment
A loan provided to a related party, regardless of interest.	Often Considered Material
The sale of charity assets to an organisation controlled by a board member.	Often Considered Material
Paying fees for professional services provided by a board member.	Often Considered Material
Employing a close relative of a board member.	Often Considered Material
Significant use of the charity’s property by a related party, even without payment.	Often Considered Material
Small gifts to board members.	Generally Not Material
Donations received from a related party.	Generally Not Material
A related party purchasing goods from the charity on the same terms as the public.	Generally Not Material

Disclosures in Special Purpose Financial Statements

Disclosing Related Party Transactions in Your Special Purpose Financial Statements

Medium and large charities that prepare SPFS now have specific reporting requirements for related party transactions. These requirements ensure greater transparency, allowing the ACNC, members, and the public to better scrutinise these arrangements.

Key aspects of these requirements include:

• Charities must include disclosures about related party transactions and balances in their financial reports
• These disclosures must follow rules set out in Australian Accounting Standards
• The changes primarily affect medium and large registered charities
• The requirements apply to financial years from 2022/23 onwards

For the 2023 reporting period, the ACNC Commissioner exercised discretion, allowing charities preparing SPFS to submit their reports without providing comparative figures for related party transactions from the 2022 period.

Reporting Key Management Personnel Compensation

Large charities preparing SPFS face an additional requirement to report on the compensation of KMP. If a large charity has two or more individuals in KMP roles during a reporting period, it must disclose the total compensation amount on an aggregated basis.

KMP are defined as individuals who have the authority and responsibility for planning, directing, and controlling the charity’s activities. This group typically includes:

• Responsible People such as board directors, committee members, and trustees
• Senior executive staff, including the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Operating Officer

Compensation is broadly defined and includes all forms of payment or benefits provided in exchange for services. The aggregate figure to be disclosed should cover:

• Short-term benefits like wages and salaries
• Superannuation contributions
• Paid leave
• Bonuses
• Post-employment and termination benefits

Although AASB 124 requires a detailed breakdown, the ACNC Commissioner has permitted these charities to disclose only the aggregate compensation figure, simplifying the process.

How to Manage Related Party Transactions & Conflicts of Interest

Maintaining a Register of Related Parties & Transactions

A key step for any charity in managing a related party transaction is to maintain comprehensive records. Charities must keep a register that tracks all relevant information about both the related party and the transaction itself. This practice is crucial for ensuring accurate compliance with ACNC reporting requirements, whether for the AIS or for disclosure notes in a financial statement.

The ACNC has developed a template register that charities can use to streamline this process. For each related party transaction, the register should capture enough detail to support your reporting obligations. This includes information that will help:

• Identify related parties and transactions
• Approve related party arrangements
• Properly disclose related party arrangements

This is particularly important for charities preparing SPFS that may not have collated this information previously.

Implementing a Clear Policy & Procedure

Beyond simply recording transactions, it is highly recommended that every charity implements a formal policy and procedure for handling related party transactions. A dedicated policy ensures that all decisions involving a related party are made transparently and in the best interests of the charity.

This framework helps clarify:

• Who is responsible for approving these transactions
• What criteria must be met before entering into any such arrangement

An effective policy should contain clear directives to ensure decisions are made at arm’s length. This can be achieved through processes such as:

• Conducting open and competitive procurement processes that consider multiple, unrelated parties
• Performing due diligence on any potential related party before an agreement is made
• Ensuring that any individual with a conflict of interest is not involved in the decision-making process

Documenting these procedures helps a charity demonstrate that its governance is sound and that it complies with the ACNC Governance Standards.

Identifying & Managing Conflicts of Interest

A related party transaction can often create a potential, perceived, or actual conflict of interest. This poses a significant governance risk, as it may become difficult to demonstrate that decisions are being made solely for the charity’s benefit. ACNC Governance Standard 5 requires a charity’s Responsible People to act honestly, fairly, and in the best interests of the charity and its purposes.

To comply with this standard, charities must take reasonable steps to manage these conflicts. This involves:

Process Step	Required Action
Disclosure	Responsible People must declare any potential, perceived, or actual conflicts of interest as soon as they arise.
Recording	The charity must record these declared conflicts in a formal register of interests.
Exclusion	Any individual with a declared conflict of interest must not be involved in the decision-making process related to that conflict.

Caption: Core steps for managing conflicts of interest arising from related party transactions.

For example, consider a case where a charity needs a new website and a company managed by a director’s daughter is a candidate. To manage this situation:

• The director must disclose the conflict, which is then recorded.
• The director would not participate in the decision.
• The board would assess multiple quotes to ensure the final choice represents fair market value and is in the charity’s best interests.

Special Considerations for Certain Australian Charities

Exemptions for Basic Religious Charities

The ACNC does not apply reporting requirements for related party transactions uniformly across all organisations. Basic Religious Charities enjoy certain exemptions, specifically:

• They are generally not required to answer financial questions in the AIS
• This exemption means they don’t have to report related party transactions

However, this exemption comes with a condition. If a medium or large Basic Religious Charity voluntarily submits a financial report to the ACNC, it must then comply with the same reporting requirements as other charities of its size, including the disclosure of any material related party transaction.

Additional Rules for Ancillary Funds & Companies

Certain types of charities face obligations beyond the standard ACNC framework. These additional requirements include:

• Ancillary Funds must follow specific guidelines that outright prohibit certain kinds of related party transactions
• Trustees of these funds must strictly adhere to these rules

Furthermore, a charity that is also a public company registered with the Australian Securities and Investments Commission (ASIC) must comply with requirements under the Corporations Act 2001 (Cth). These rules may impose additional obligations regarding related party transactions, particularly those involving a ‘financial benefit’ to a related party.

Conclusion

Understanding the ACNC’s reporting requirements for a related party transaction is crucial for every charity to maintain good governance and transparency. Charities must now navigate specific obligations based on their size, manage potential conflicts of interest, and adhere to disclosure rules, especially when preparing SPFS.

To ensure your charity meets these complex reporting requirements and correctly manages every related party transaction, contact the expert team at LawBridge today. Our not-for-profit services law firm provides trusted expertise to help you navigate ACNC rules and achieve peace of mind.

Frequently Asked Questions