Charities Discussion Document - top four risks for established charities
Charities need to ensure they keep their eye on the ball and avoid getting distracted by the debate surrounding the Department of Internal Affairs’ Modernising the Charities Act 2005 Discussion Document, which was released in February 2019.
Since its release, the Discussion Document has faced its fair share of criticism. Critics have been calling for an overhaul of the Act for quite some time and there is a valid argument that the issues identified in the Discussion Document are too narrow and do not permit a broader discussion.
While there may be some basis to this criticism, it doesn’t change that fact that any reforms to the issues that are addressed in the Discussion Document could have a major impact on the charitable sector - especially established charities. If charities don’t engage on the issues that are included in the review, there is a real risk that the resulting law reform could catch them out. Charities should therefore ensure they make submissions on the Discussion Document by 31 May 2019.
The Discussion Document covers a range of issues. These include the obligations of charities, the role of the regulator, the appeal of decisions, Te Ao Maori, charities and businesses and advocacy as a charitable purpose. For established charities, changes to procedural and fringe matters of the Act are unlikely to be of immediate concern, however, legal reform to issues that could impact on their sustainability and in particular their day to day activities could be a cause for concern.
For most established charities, the risk focus should be on:
- Potential obligations to be actively managing financial reserves;
- Business activities of charities;
- Advocacy as a charitable purpose; and
- Disclosure of third party fundraisers and the impact that could have
1. Obligation to manage reserves
Many established charities are in the enviable position of having significant reserves and, through bequests and other revenue generating activities, are able to add to these reserves on an annual basis.
The Discussion Document queries whether accumulated funds not applied to charitable purposes should be entitled to receive the benefit of the charities regime (in particular their tax status). In some countries, charities must report on their reserves policy. In others, there is a statutory requirement for some charitable organisations to spend a certain percentage of their assets on charitable programmes each calendar year.
The Discussion Document asks whether reserves strategies should be transparent and published as part of the reporting and whether certain charities should be required to distribute a certain portion of their reserves annually.
A charity may of course have legitimate reasons for building reserves. Our view is that governance standards, particularly after the upcoming trusts and incorporated societies law reform are passed, should contain sufficient obligations on charities to manage reserves activity without additional reporting legislative change.
2. Business activities of charities
Charities that operate businesses, from which income is used for charitable purposes, have long been a policy discussion point in the charities sector.
In New Zealand, charities’ business operations and subsidiary businesses make up a significant amount of the annual $2.9 billion of trading income that is applied to charitable purposes.
The position in New Zealand is that irrespective of the type or structure of the business activities, they are permitted to operate within the charitable status of the charity (and enjoy the associated tax status) as long as the income from the activity is applied to the charitable purposes of the organisation.
Notably however, some other countries do not allow unrelated businesses to register as charities and obtain the benefits that charitable status confers. This is partly due to a general concern that business risk generally threatens other assets that have been accumulated for charitable purposes.
The Discussion Document asks what New Zealand’s registration requirements should be for unrelated businesses and how should they report.
We are of the view that it is not the Charities Office’s role to manage the business risk of charities. Governance standards in subsidiary companies and the new officer duties soon to be introduced under the Trusts Bill and the Incorporated Societies law reform provide the framework, obligations and remedies to deal with the management and accountability of risk.
Given the political nature of this topic, we consider there is risk that the law as it related to businesses within charitable organisations could be amended given some of the trends overseas. It is therefore important for charities who operate businesses to make submissions on this point.
The Discussion Document also considers whether advocacy is a charitable purpose. A number of recent decisions (including the Greenpeace decisions) have essentially distinguished between advocacy that is not considered charitable in today’s environment (which have been deemed not charitable) and advocacy for charitable purposes (which have been deemed charitable).
There has been a lot of discussion about advocacy being an activity rather than a purpose. However, it is clear that some organisations are established to advocate for a certain right, thought or position.
There is a concern that the recent case law is discouraging advocacy. We hold a different view. If the purposes of an organisation are truly charitable, then advocacy is incidental and can be as small or as large part of the organisation's activities as it wishes to be.
4. Disclosure of third party funders
Whether third party fundraiser costs should be disclosed is also discussed in the Discussion Document. Some charities outsource fundraising to third parties, some resource fundraising ‘in-house’ and some do both.
There has been the odd story about the number of cents in the dollar that are spent to raise the balance, and it can make a good headline. The danger is that disclosure of the outsourcing of the fundraising could lower the confidence in a charity or the sector. Disclosure could also drive fundraising in-house, which may not be as efficient.
Again, we consider charities and their boards should be left to regulate and monitor their own costs of fundraising. Good governance should result in the most efficient processes being sought. Without this self-regulation we risk an environment where competing charities use the cost of each other’s fundraising as a marketing tool in the same way politicians point to each other’s travel expenses.
These issues will not be relevant for all charities. However we expect these will be live and relevant considerations for most established charities.
Related law reform
Over 95% of charities are trusts or societies. This means that in addition to charities reform, charities are likely to face further changes in the near future as the Trusts Bill works its way through Parliament and the Incorporated Societies Bill prepares to be introduced later this year. Charities should continue to keep an eye on these developments and in particular the introduction of governance obligations that are more aligned with those in the Companies Act.
So what’s next?
Submissions on the Discussion Document are due on 31 May 2019. Whether it be with the help of advisers or not, we strongly encourage all charities to make a submission. All submissions will be reviewed and used to inform policy development and government decisions, including any potential Charities Bill. If Cabinet agrees, a Charities Bill will be introduced to Parliament towards the end of 2019. If this occurs, reforms to charities legislation in New Zealand will no longer be “if” but “when.” If charities do not sufficiently advocate for their positions at this stage, they risk being subject to the risks of law reform discussed above.
If you have any questions, please contact Scott Moran. Scott acts for some of New Zealand’s most iconic charities in the disability, youth and vulnerable support sectors. He assists the charities he works with in a wide range matters including constitutional, compliance, contractual, property and IP matters.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.