Key Takeaways:
- The Australian Charities and Not-for-profits Commission (ACNC) has increased enforcement and compliance investigations targeting charities that operate a complex structure.
- A ‘complex structure’ may have the following features:
- uses a mix of not-for-profit, charitable and non-charitable, for-profit entities;
- uses different entity types including trusts, companies limited by guarantee, incorporated associations and private companies;
- uses entities with different charitable purposes; and
- operates across multiple jurisdictions, using common boards, shared staff, and pooled assets.
- Complex structures require careful management and good governance due to their associated and heightened risks.
- With good governance, policies and appropriate oversight, complex structures can operate legitimately and effectively.
Background
The ACNC's Compliance and Enforcement Focus for 2024-25 recognised complex structures as an emerging area of concern due to their increasing role in concealing or attempting to conceal non-compliance with the ACNC Governance Standards. Governance Practices for Complex Structures has been released by the ACNC to assist charities manage common governance issues that may arise within complex structures.
What is a complex structure?
A ‘complex structure’ will have one or more of the following features:
- uses a mix of not-for-profit, charitable and non-charitable, for-profit entities;
- uses different entity types including trusts, companies limited by guarantee, incorporated associations and private companies;
- uses entities with different charitable purposes; and
- operates across multiple jurisdictions, internationally or throughout different States, uses common boards, shared staff, and pooled assets.
Complex structures, with common Boards/directors, can lead to uncertainty around who controls a particular entity within the structure, how each entity is working towards its charitable purpose, inadequate reporting and record keeping, heightened risks of related party transactions and not appropriately managing conflicts of interest.
What are the risks?
Complex structures present heightened governance risks due to the increased oversight required for their effective operation. Complex structures often lack transparency, stemming from undefined roles and responsibilities and diverse entity types within a single structure. Charities operating within a complex structure may pursue different charitable purposes and deliver varied services, adding to further governance complexities. Cross-jurisdictional operations within a structure can result in inconsistent regulatory compliance, with some entities subject to stricter regulatory requirements than others.
In some cases, complex structures can be used deliberately by charities in an attempt to conceal non-compliance. The ACNC has increased enforcement and compliance efforts to target charities that operate a complex structure for intentional non-compliance reasons.
Of particular concern to the ACNC is a heightened risk of inadvertent non-compliance. This is a result of charities failing to understand the regulatory obligations associated with complex structures due to their inherently complicated governance and oversight requirements.
Despite these heightened risks, operating an effective complex structure is possible. The ACNC has recognised legitimate and practical reasons for charities to operate within complex structures, including mitigating risk, asset protection, accessing debt or equity financing, operating programs in different jurisdictions and the need to use different structures to access and maintain eligibility for tax concessions, including endorsement of separate deductible gift recipient funds.
Things to consider in operating a complex structure
The ACNC has outlined the following governance considerations for charities operating under a complex structure:
- Tailored policies and procedures for each entity.
- Accurate record-keeping, in relation to financial and operational records, across and as related to each entity.
- Common boards must understand their responsibilities to each entity, ensure their decisions align with each charity’s purpose and manage conflicts accordingly, with separate governance policies.
- Separate board meetings, with separate minutes of meetings, this helps to enable directors on multiple boards to fulfil their obligations to act in the best interests of each charity independently within the broader structure.
- Organisational charts should be used to clarify individual roles and responsibilities. Information on delegations, reporting lines and decision-making authorities should be clearly outlined.
- Conflicts of interest should be appropriately managed with adequate disclosure mechanisms including maintaining and regularly reviewing a conflicts of interest register.
- Management of related party transactions, including transparent processes in selecting partners, maintaining accurate records and having appropriate related party transaction policies and procedures. Transactions must be on commercial/market and ‘at arm’s length’ terms.
How we can help?
If you’d like tailored advice around the regulatory compliance and risks of your charity within a complex structure, or if you’re seeking assistance with drafting ‘best practice’ governance policies to enable compliance with the ACNC Governance Standards please contact Dan Saunders, Senior Associate or Jonathan Teh, Principal directly.
We can advise on your record keeping obligations, board composition and responsibilities and general risk management and prepare appropriate policies. We would be happy to provide more detailed advice tailored to your circumstances and objectives or to assist with the governance of your charity.
This Alert was written by Dan Saunders with assistance from Sophie Harrington.
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