By Clement Ngai, Paralegal
There is little doubt that in many charities and not-for-profit organisations, volunteers play an integral role in day to day operations. Paid employees often go above and beyond what is required of them, making sacrifices with both their time and money in order to further the cause of the organisation. Naturally, a not-for-profit will often wish, or even feel an obligation, to provide a gift or honorarium (also referred to as ex-gratia payments or allowances) to certain volunteers, employees or other individuals for their service to the organisation. This includes common gestures such as providing a box of chocolates, or a bottle of wine to volunteers or committee members at the end of a year.
However, failing to consider the legal implications of providing gifts and honorariums to individuals may result in consequences for the organisation and its directors or committee members. This is particularly so in situations where the contemplated gifts and honorariums are of large, or extraordinary value.
The Australian Charities and Not-for-profits Commission (ACNC) has recently released new guidance targeted at assisting charities wishing to provide gifts or honorariums to people in their organisations. In addition to the ACNC advice, charities should also consider any additional legal requirements imposed through taxation law, employment law, and rules relating to charitable trusts.
What’s the big deal?
For charities registered with the ACNC, the obligation to continue to meet all the criteria for ongoing registration creates restrictions on the nature of gifts and honorariums that may be given to individuals within their organisations. Neglecting to consider the relevant restrictions when providing a gift or honorarium to an individual may place the charity at risk of breaching its obligations to the ACNC, which may subsequently lead to enforcement action being taken against the charity by the ACNC. The responsibility to consider what restrictions apply falls on the Responsible Persons of the charity, who may themselves be suspended or removed from the board or committee of the charity for breaching their obligations, and in serious cases, disqualified from being a responsible person of any charity.
Remaining a not-for-profit entity
In order to remain registered as a charity, ACNC Governance Standard 1 requires that charities must remain not-for-profit entities, and must not operate for the profit, personal gain or other benefit of particular people. Charities must also operate for their charitable purposes. The ACNC guidance describes how a gift or honorarium of significant value may result in a private benefit to someone, breaching the requirements to remain not-for-profit and creating inconsistency with the charity’s charitable purposes.
Accountability to members
ACNC Governance Standard 2 requires registered charities to take reasonable steps to ensure that the registered entity is accountable to its members. The ACNC guidance states that ‘a lack of transparency about gifts and honorariums – especially if they are of significant value’, may mean that a charity is not being accountable to its members.
Acting in good faith in the charity’s best interests
Under ACNC Governance Standard 5, registered charities have an obligation to act in good faith in the entity’s best interest. The ACNC guidance states that ‘failing to properly consider all factors before providing a gift or honorarium’ could indicate a failure to satisfy the requirements of this obligation.
Responsible financial management
ACNC Governance Standard 5 requires the Responsible Persons of registered charities to ensure that the financial affairs of the charity are managed responsibly. The ACNC guidance states that ‘excessive gifts or honorariums’ could be an indicator of irresponsible management of financial affairs, particularly if the payments impair the charity’s ability to carry out its charitable purpose.
If your charity prepares financial statements, you may also need to disclose gifts or honorariums to certain individuals (such as Responsible Persons) in accordance with the Australian Accounting Standards Board Related Party Disclosures standard (AASB 124). For medium and large sized charities, charities are required to report whether they have made any related party transactions, and whether they have documented policies or processes about related party transactions. Gifts or honorariums to Responsible Persons of charities, or even close family members of a Responsible Person, could be regarded as related party transactions.
What if my organisation is not a registered charity?
Although not-for-profit organisations such as community service associations, sporting clubs, trade unions and schools run by churches or religious bodies may not be registered charities, many of these organisations are income tax-exempt organisations. In order to retain their tax exemptions, these organisations are required to apply their income and assets solely for the purpose for which the organisation was established.
Operating similarly to the rules regulating registered charities, organisations with eligibility for certain categories of income tax exemptions under taxation law, are required to be established for purposes that are ‘not carried on for the profit or gain of their individual members’. However, even where organisations are not prohibited under taxation law from operating for the profit or gain of their individual members, not-for-profit organisations usually have clauses within their constitutions or governing documents that require the assets and income of the organisation to be solely applied to further its objects, and prohibit any distribution of assets and income of the organisation to individual members.
Therefore, if a not-for-profit organisation is to provide a gift or honorarium of significant value to an individual in the organisation, this may result in a private benefit to someone that subsequently results in a breach of the organisation’s governing documents, and in some cases, a breach of the conditions under which the organisation has been granted tax exemptions.
Organisations may also wish to consider whether gifts and honorariums provided voluntarily to individuals in the organisation, would be considered assessable income to that individual. This is particularly so in cases where the gift or honorarium is provided to the individual in recognition of, or incidental to, services performed by the person. Furthermore, there may be situations under employment law where providing honorariums to volunteers for their service, creates an employment relationship with the organisation, as opposed to a strict volunteer relationship.
Trustees of charitable trusts have strict obligations to ensure that charitable funds are not directed to an object not contemplated by the donor. In many cases, providing a gift or honorarium out of charitable trust funds may constitute acting in breach of trust. Although there are situations under which a court may authorise for gifts and honorariums to be made from funds held on charitable trust, any such payments require prior authorisation from the court, and this authority is not granted lightly.
Although the risk of legal implications from providing gifts or honorariums increases as the value of the gifts and honorariums increase, there are no numeric figures provided by either the ACNC, or in legislation, that determine the maximum acceptable value of any gift or honorarium. For all not-for-profit organisations, the board, committee, or Responsible Persons are responsible for determining what the acceptable value of any gift or honorarium is, with consideration of the organisation’s financial position and its ability to carry out its charitable or constitutional purposes.
The ACNC has developed a list of 10 questions for charities to consider before providing a gift or honorarium. Consideration of these questions would be of assistance to any not-for-profit organisation in minimising risk when considering the legal implications of gifts and honorariums.
The ACNC further advises charities to consider developing a formal policy on gifts and honorariums, with guidelines that set out the circumstances in which they can be provided, and the approval process required for doing so.
10 Questions to consider before providing a gift or honorarium
The ACNC has provided a list of questions that Responsible Persons of a charity should consider before providing a gift or honorarium to an individual:
- Do the charity’s governing rules allow it to provide gifts or honorariums?
- Who receives a gift or honorarium and why?
- How should the charity determine the value of the gift or honorarium?
- It may be through a discussion among the Responsible Persons or at the management level.
- It may be by consulting with other similar charities.
- Will the payment of a gift or honorarium affect any current funding arrangements?
- Are there conditions on funding that specify funds must be used in a particular way?
- What will supporters or the public think of the charity providing a gift or honorarium?
- For example, it could pose a risk to the charity’s reputation and its donations especially if the gift or honorarium is of significant value.
- Is the gift or honorarium going to be a once-off occurrence?
- If not, it might not be a true gift or honorarium, especially if recipients are expected to do something in return, or if it is made in exchange for services. There may be implications for this under employment and tax law.
- Is the charity considering the gift or honorarium because its rules prevent it from offering remuneration?
- If so, the charity may not be taking reasonable steps to ensure that its Responsible Persons are acting in good faith and in the charity’s best interests, particularly if the person receiving the gift or honorarium is likely to be regarded as an employee or contractor.
- Is the charity considering making a gift or honorarium to cover the out-of-pocket expenses incurred by individuals – for example, travel costs to attend a board meeting?
- Consider reimbursing those individuals for the actual costs incurred instead, if allowed by the charity’s governing rules.
- Is the charity providing a gift or honorarium on a regular basis to recognise an individual for their services?
- Consider if it is more appropriate to recognise them as an employee or contractor instead.
- Is the charity providing a gift or honorarium to a Responsible Person?
- If so, make sure there is a proper process for making a decision and determining a reasonable value.
- How will the charity’s Responsible Persons be accountable for and transparent about the gift or honorarium?
- Will the charity consult with its members or put the decision to its members?
- NOTE: A Responsible Person should not participate in any decision about a gift or honorarium to themselves.
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