For-purpose organisations operate under laws that are unique to their sector, while also facing many of the same challenges as for-profit businesses.
We spoke with Sarah Johnson of Macpherson Kelley Lawyers, a trusted partner of Strategic Grants, who has over fifteen years’ experience working with for-purpose organisations, about some of the questions a board or committee of a for-purpose organisation should ask when reviewing their governing rules and other common governance questions. Here are those questions, as well as the answers!
How often should a for-purpose organisation review its constitution?
Generally, for-purpose organisations should review their constitution at least every five years. If you are a charity registered with the Australian Charities and Not-for-profits Commission (ACNC) and you haven’t reviewed your constitution since its establishment in 2013, then it is likely that your constitution will need updating to refer to current legislative requirements.
What should the governing body of a for-purpose organisation look for when reviewing its objects?
It is critical that all of the organisation’s activities align with its purpose as expressed in the constitution as well as its charity subtype (if the organisation is a charity registered with the ACNC) or the applicable criteria if the organisation is an income tax exempt organisation under the Income Tax Assessment Act 1997 (Cth) (ITAA).
If the organisation’s current activities do not align with its purpose, the organisation should review and amend the objects and/or consider whether the organisation should apply for registration under an additional charity subtype (if the organisation is a charity registered with the ACNC) or if it falls within the criteria for another category of income tax exempt organisation under the ITAA.
What else should the governing body focus on when reviewing its constitution?
Other key areas that may need updating or further consideration are:
- the membership categories – are there members in all of the membership categories? If not, should some of the categories be removed?
- Membership rights – do all members have the right to attend meetings, nominate directors and vote at general meetings and if not, is there a justifiable reason for members in a particular category not having the same rights as other members?
- What is the quorum for a members’ meeting? Does the organisation ever have difficulty reaching a quorum?
- How are directors elected and/or appointed? Are there any issues in applying the processes for appointment and election in the constitution?
- Should the Board have more input into the composition of the directors, for example, by nominating additional directors for election or appointing additional directors to the board on an ongoing basis?
- Do the directors come from diverse backgrounds and have a range of expertise? If not, why not? Should the constitution be amended to support the recruitment of a more diverse range of directors?
- How often are directors required to retire by rotation? Should there be a cap on the tenure of directors?
- Do the not-for-profit and winding up clauses comply with applicable legal requirements?
Does what we say on our website, financial statements and other publications need to align with our charity subtype and constitution?
Absolutely! The constitution of a for-purpose organisation should be a core consideration in every decision of the organisation’s governing body and should also be predominantly referred to in the organisation’s publications, including on its website, in printed materials and in its financial statements.
It is also important for the organisation to reference its charity subtype (if it is a charity registered with the ACNC) or category of income tax exempt organisation (if it is self-assessing for income tax exemption under the ITAA) in its public facing documents. For example, if the organisation is a public benevolent institution (PBI), the core elements of a PBI and in particular, the focus on benevolence, should appear in all key publications.
We also commonly see financial statements that refer to members’ funds or shares, both of which concepts are not applicable to for-purpose organisations. Care should be taken to make sure the organisation’s financial statements are consistent with its other charity requirements.
Is it true to say that if you are an incorporated association you can only operate in the State in which you are registered?
That is correct. Unlike a company limited by guarantee, which is permitted to operate in every State and Territory in Australia, if you are registered as an incorporated association you may only operate in the State or Territory in which you are incorporated.
Whilst an incorporated association may carry out occasional or one-off activities in another State such as its employees attending a conference or holding a fundraising event, if the association is regularly undertaking activities outside of its State of incorporation or plans to do so, it should take immediate action to either:
- register the organisation as a Registrable Australian Body under the Corporations Act 2001 (Cth); or
- convert the organisation from an incorporated association to a company limited by guarantee (CLG).
Given that the compliance obligations for a Registrable Australian Body are fairly onerous and that the constitution for a CLG is substantially more flexible than the rules for an incorporated association, many for-purpose clients I work with have opted to convert to a CLG.
Although the process for conversion differs in each State and Territory, as a general principle, the conversion does not affect the core structure of the organisation, nor does it impact on the organisation’s employee and other contractual arrangements and therefore, is often a good option for an organisation that is in breach of this critical requirement and/or is planning to expand its activities interstate.
This blog touches on just a few of the commonly asked legal questions by for-purpose organisations. If you have any further queries in relation to the content of this blog or any other legal issues, you can reach out to Sarah at Sarah Johnson – Principal Lawyer – Macpherson Kelley (mk.com.au). To find out more about Macpherson Kelley’s NFP expertise go to Not for Profit – Macpherson Kelley (mk.com.au).