Introduction
Charities often work with a wide range of individuals and organisations to fulfil their charitable purposes. These dealings, known as related party transactions, are a common and often necessary part of operations. However, such transactions require careful management as they can give rise to a conflict of interest, potentially affecting decisions and creating risks for the charity.
Given the Australian Charities and Not-for-profits Commission (ACNC) provide for requirements for disclosure, it is crucial for charities to handle these arrangements transparently. Properly managing related party transactions is not only a matter of compliance but is also fundamental to maintaining public trust and safeguarding the charity’s reputation. This guide offers essential information to help your charity understand its obligations and manage these transactions.
Understanding Related Parties & Transactions for Your Charity
Defining a Related Party for Your Charity
The ACNC defines a related party differently depending on the size of your charity. This distinction is important for understanding your specific reporting obligations.
For a small charity, a related party is generally a person or organisation with a connection to the charity that allows them to have significant influence over its strategic and financial decisions. It is important to note that simply being an employee or volunteer does not automatically make someone a related party. To be considered a related party, they must hold significant influence.
This category includes:
- Responsible People and their close family members: This covers individuals on the board or committee.
- Senior management and their close family members: Key personnel who guide the charity’s operations.
- Other influential entities: This can include other people or organisations that have the capacity to sway the charity’s decision-making processes.
For medium and large charities, the definition aligns with the Australian Accounting Standards, specifically AASB 124. A related party in this context is more broadly defined and includes:
- A person connected to the charity, such as a Responsible Person or their close family member, who has control or joint control.
- An organisation that controls or has significant influence over the charity, such as a parent entity.
- An organisation that the charity controls or has significant influence over, like a subsidiary.
- A member of the charity’s key management personnel or a close member of their family.
Identifying 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. Crucially, a transaction does not need to involve a financial payment to be considered a related party transaction. These arrangements can sometimes create a conflict of interest, which is why proper disclosure and management are essential.
Charities must be able to identify these transactions to ensure they are managed transparently and in the charity’s best interests.
Common examples of a related party transaction include:
| Transaction Type | Description |
|---|---|
| Purchases, sales, or leases | Buying goods from, selling goods to, or leasing property from or to a related party. |
| Loans and guarantees | Providing a loan to a related party or receiving one from them, as well as any associated guarantees. |
| Transfer of assets | Moving property, including intellectual property, between the charity and a related party. |
| Provision of services | A Responsible Person offering professional services (e.g., legal, accounting) to the charity, even if for free or at a discount. |
| Use of resources | Providing the charity’s employees or volunteers to a related party or the significant use of charity property by a related party. |
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Why Disclosure of Related Party Transactions Matters
Upholding Your Charity’s Duties & ACNC Governance Standards
Disclosing related party transactions is a fundamental aspect of good governance and is essential for meeting your legal obligations. Under the ACNC Governance Standard 5, your charity’s Responsible People have specific duties they must uphold. Properly managing and reporting these transactions is a direct reflection of your commitment to these duties.
Responsible People are required to comply with several key duties, including:
- Acting honestly and fairly in the best interests of the charity and for its charitable purposes
- Ensuring that the financial affairs of the charity are managed in a responsible manner
- Not misusing their position or information they gain in their role
- Disclosing any actual or perceived conflict of interest
These duties are directly linked to the handling of related party transactions. Because these transactions involve individuals or organisations with close ties to the charity, they require careful oversight. In doing so, you ensure that all decisions are made in the charity’s best interests and that financial resources are used wisely.
Maintaining Public Trust & Your Charity’s Reputation
The transparent management of related party transactions is crucial for maintaining public trust and protecting your charity’s reputation. A charity’s reputation is one of its most valuable assets, as public confidence is essential for attracting the donations and volunteers needed to achieve its mission. When you disclose and properly manage these dealings, you demonstrate a commitment to integrity and accountability.
Conversely, the improper handling of a related party transaction can cause significant reputational damage. If a transaction is perceived as benefiting an individual rather than the charity, it can lead to:
- A loss of public trust
- Reduced ability to attract donations and volunteers
- Damage to the strong reputation you have built within the community
Having an actual, potential, or perceived conflict of interest that is not managed correctly may undermine your charity’s ability to operate effectively and tarnish its standing.
Managing Potential Conflicts of Interest
Related party transactions are closely connected to conflicts of interest, which arise when a person’s personal interests—or their duties to another organisation—clash with their responsibility to act in the best interests of your charity. These transactions can create situations where such a conflict may occur, whether it is:
| Conflict Type | Definition |
|---|---|
| Actual | The person is directly influenced by a competing interest. |
| Potential | The person could be influenced by a competing interest in the future. |
| Perceived | A reasonable person might believe that the individual could be improperly influenced. |
The disclosure of related party transactions is a critical tool for managing these conflicts. By making all decisions transparent, you help ensure they are taken solely for the benefit of the charity.
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ACNC Reporting Requirements for Your Charity
Disclosure Obligations for Small Charities
Small charities must disclose “reportable” related-party transactions in their Annual Information Statement (AIS). If such transactions occurred during the reporting period, the charity needs to specify which types took place.
According to ACNC guidance, reportable related-party transactions for small charities include:
| Reportable Transaction | Description |
|---|---|
| Fees for goods or services | Payments made to a related party for providing goods or services. |
| Loans | Financial loans provided to or received from a related party. |
| Salaries and wages | Remuneration paid to a close relative of one of the charity’s related parties. |
| Asset transfers | Transfers of any charity property or assets to a related party. |
| Discounted goods or services | Instances where the charity provides goods or services to a related party at a reduced rate. |
| Use of property | Significant use of the charity’s property by a related party. |
| Investments | Any investment the charity makes in an entity that is a related party. |
Conversely, certain transactions are generally not considered reportable. These often include:
- Minor gifts
- Reasonable reimbursements for out-of-pocket expenses
- Donations received by the charity from a related party
Disclosure Obligations for Medium & Large Charities
Medium and large charities must disclose “material” related-party transactions in both their AIS and financial reports. The concept of materiality is crucial: a transaction is material if its omission or misstatement could reasonably influence the decisions of someone reading the charity’s financial statements.
Materiality does not hinge on a specific dollar value but instead depends on the size, nature and circumstances of each transaction. To determine how and when to report, these charities should refer to the Australian Accounting Standards:
- AASB 124 Related Party Disclosures
- AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities
Examples of transactions that are typically material include:
| Example of Material Transaction | Description / Context |
|---|---|
| Sale of charity assets | The sale of assets to an organisation controlled by a committee member. |
| Lease agreements | Lease agreements established between the charity and a related party. |
| Fees for professional services | Payments for professional services provided by a board member. |
| Loan to a related party | A loan made by the charity to a related party, regardless of whether interest is charged. |
Similar to small charities, transactions such as donations received from a related party or the reimbursement of reasonable expenses are generally not considered material. Disclosure for medium and large charities must be detailed, covering the nature of the relationship, the transaction amount and any outstanding balances or obligations.
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Best Practices for Managing Related Party Transactions
Developing an Appropriate Policy & Procedure
To effectively manage related party transactions, it is highly recommended that every charity develops and implements a formal policy and procedure. A well-defined policy provides clear guidance, helps ensure compliance with ACNC Governance Standards, and reduces the risk of mishandling situations that could lead to a conflict of interest.
This document is a cornerstone of good governance and demonstrates a commitment to transparency. An appropriate policy for managing related party transactions should clearly outline the charity’s approach. It helps to ensure that any decisions involving a related party are made at arm’s length by individuals who do not have a conflict of interest.
The policy should specify:
- The process for identifying and approving any related party transaction before it is entered into
- The criteria that must be satisfied for a transaction to be approved
- Who is authorised to make decisions regarding these transactions
- A protocol for ensuring that all transactions are fair, reasonable, and in the best interests of the charity
Maintaining a Register of Interests & Transactions
A crucial step in managing related party transactions and any associated conflicts of interest is to maintain accurate records. Charities should keep two separate registers:
- A register of interests for its Responsible People
- A register for all related party transactions
These registers are vital tools for ensuring proper disclosure and transparent management. The register of interests helps to identify potential conflicts before they become an issue, while the related party transaction register provides a clear record of all such dealings.
For each transaction, the register should capture enough detail to meet ACNC reporting requirements. To assist with this, the ACNC provides a downloadable template that charities can adapt for their own use, which does not need to be submitted to the commission.
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Conclusion
Effectively managing related party transactions is crucial for every charity to uphold its governance duties, maintain public trust, and comply with ACNC disclosure requirements. By understanding who constitutes a related party and implementing clear policies and registers, your organisation can ensure all dealings are transparent and serve its charitable purpose.
If your charity requires assistance with developing an appropriate policy or needs guidance on managing conflicts of interest and related party transactions, contact our experts at LawBridge today. Our not-for-profit & charity law firm provides specialised advice to help you navigate your obligations with confidence and integrity.
