The Australian government changes to charity financial reporting announced during July 2021 represent some mixed messaging for NFPs of different sizes.
In good news for grassroots organisations, smaller charities will have fewer financial reporting obligations under the new reforms agreed to by the Council on Federal Financial Regulations. In turn, this reduction in red tape comes with greater accountability to donors, beneficiaries, and the public, including reporting related party transactions. The larger charities will also have to report key remuneration under the new rules.
The ACNC states that it will “work with the charity sector to develop appropriate guidance and education resources to allow the sector to easily understand and meet these new reporting requirements.”
So, how will your charity or NFP respond to these changing conditions? As always, it depends on how your organisation is classified – small, medium or large. As the classification thresholds for ACNC registered charities will take effect from the 2021-22 financial year, it is worthwhile reconfirming the status of your NFP as a start.
Go back to the thresholds
The tiered system for regulating the Australian NFP sector is based on classifying organisations as small, medium or large. It is essential be sure which tier your NFP belongs to as the new legislation is raising the ‘small, medium and large’ thresholds.
The following new thresholds will take effect from 1 July 2022 (reporting against the 2021–22 financial year):
- Small entity – less than $500,000 annual revenue.
- Medium entity – $500,000 or greater but less than $3 million annual revenue
- Large entity – $3 million or greater annual revenue.
The government estimates that some 2,500 Australian NFPs will be classified as small and around 2,700 as medium. However, given the recent financial rollercoaster years, which featured large public donation events like the bushfires, but also the disruptive pandemic impacts, many borderline medium organisations will find it hard to predict how they will fit into the new thresholds.
The benefit of professional advice
When projecting future revenue, consider both typical and atypical years. The pandemic’s impacts have been significant and in many cases have negatively affected NFP staffing numbers, assets, participation of volunteers and normal funding sources. Calculating annual revenue for thresholds and budget plans is not a straightforward task, because previous revenue can no longer be assumed.
While the ACNC 2019 report showed charities employing 1.38 million people and sector revenue growing by 6.8 per cent, in contrast, Social Ventures Australia (SVA) and the Centre for Social Impact (CSI) review, produced more than a year on from the dual crises of COVID-19 and the 2020 bushfires, reported that: “More than half of charities faced some form of temporary closure, and more than 80% made some shift towards at least partial online service delivery.
All NFPs
In line with the Review’s recommendations, the Government will also enhance charities reporting obligations to provide greater accountability to donors, beneficiaries, and the public. From 1 July 2023, all charities will be required to report related party transactions in their annual reporting to the ACNC. “This will increase transparency of transactions with related people or organisations that pose a higher risk of conflicts of interest,” says the government press release.
Large NFPs
From 1 July 2022, large charities with two or more key management personnel will be required to report remuneration paid to responsible persons (directors) and senior executives on an aggregated basis in their 2022 Annual Information Statement to the ACNC.
Medium NFPs
Medium charities registered with the Australian Charities and Not‑for‑profits Commission (ACNC) will no longer be required to produce audited financial statements to the ACNC.
Small NFPs
Small charities registered with the Australian Charities and Not‑for‑profits Commission (ACNC) will no longer be required to produce reviewed financial statements.
But even if you are freed up from one layer of reporting obligations, don’t neglect to collect the relevant figures as your organisation will still need them for internal review purposes or possible audits.
Conclusion
Red tape reduction is always welcome but responsible NFPs should stay focused on financial realities.
Public donor and volunteer expectations of NFP management and conduct are only increasing. Many small to medium organisations will go to the wall if conditions don’t improve. NFPs that lose their ACNC charity registration due to financial reporting breaches are not entitled to a range of Commonwealth charity tax concessions.
NFPs still need to focus on the numbers.
All organisations need good controls and reporting in place to raise funds and operate effectively. Any of the latest exemptions outlined above do not change this fundamental requirement. Be transparent, informed and proactive. Talk to your accountant today for more guidance.
At Next Dimension Accounting, we provide outsourced accounting services for NFPs of different sizes. Having expertise in the NFP sector makes it easier for us to streamline NFP client processes and ensure that sound reporting practices meet the requirements of the ACNC.
