Charities Act Changes – helpful or hurtful?

Charities are an important part of our social fabric as a country, the glue that holds many things together.

The response to proposed changes to the Charities Act has been mixed. Comments I’ve heard range from, “that all seems like common sense,” to “the proposed charity reforms are an utter insult to the charitable sector”. Like most things in life, the answer probably lies somewhere in the middle.

I must nail my colours to the mast and declare that my sympathies are nearer the commonsense view, rather than that it's an insult.

Let's put it in context with some history. When the government’s review of the Charities Act 2005 was first announced back in 2018, its scope was reasonably narrow. Essentially, it was to focus on possible practical improvements to modernise the act.

This disappointed many in the sector who'd been calling for a first-principles review of charities law in New Zealand, including asking, what is the fundamental definition of a "charity" and of a "charitable purpose".

That would be challenging because that definition dates back to the 1501 Statute of Elizabeth and has been enshrined in case law ever since.  

Note the date there, folks – that’s not our current Queen Elizabeth who's just celebrated 70 years on the throne but one of her distant predecessors of the same name.

It’s disappointing not to have a thorough first principles review of any existing law, but the practical enormity of the task shouldn't be underestimated. To avoid unintended consequences, it needs to be done right.

This usually means it will need significant resources and significant time. There's also the question of who's best placed to carry out such a thorough review?

Most people agree that any first principles review should ideally be carried out by an objective, independent body such as the Law Commission, rather than by the government of the day via giving the task to a government department.

As a recent example, we got a new Incorporated Societies Act 2022 in NZ to replace our 1908 Act.

This is a good example of a thorough and well-thought-out first principles legislative update.

It stemmed from a very thoughtful and consultative Law Commission review and report process. However, that review process kicked off back in 2011, which goes to show that good things take time.

And, for added context, this was a review of an area of law far less contentious and potentially emotive than charities law would be.

Peeni Henare, the minister of the community and voluntary sector when the review was announced, acknowledged the calls for a first-principles review and said in a charities conference I was MCing that he was keen for a practical review to be completed and changes implemented within his government’s term of office.   

Legislation has still to be drafted, appropriately debated and passed into law, but it seems that this will be achievable before next year’s election.

Compliance costs vs transparency

The minutes of the decision from the cabinet social wellbeing committee show it agreed that policy proposals for legislative change should encourage and support charities to thrive while ensuring public transparency.  

That, to me, sums up a large part of the apparent intention here. That is, walking the delicate tightrope between unrestricted freedom of a legal entity to operate, and the counterbalanced need for transparency and being accountable to the general public who donates.

The government in NZ supports charities on the general public’s behalf. A large part of how it does this is by granting registered charity status.  

This gives the charity credibility, thanks in part to the government’s regulatory role.   

The government also grants income tax exemptions to registered charities, and the ability for donors to receive a tax rebate on donations to registered charities.

As someone who has spent more than 25 years as an audit partner across a very broad client base of commercial, government, and not-for-profit charitable sector entities, I’ve always subscribed to the concept that “sunlight is the best disinfectant”.  

If information is appropriately disclosed and transparent, then users of that information can form their own opinions on whether or not to support the entity.  

If charities want ongoing public support for their cause, it’s up to them to be open and clear about how they're delivering on their charitable purpose. And this includes the financial implications.   

But we have a very wide range of charities in NZ, in size and complexity. That's why it's challenging to strike a balance between compliance costs and transparency.  

To try to address this, we already have a tiered system of financial reporting requirements, a “horses for courses” approach. This is where the larger, more complex, charities have to adopt financial reporting standards appropriate to their size and complexity.   

At the other end of the scale, small, simple charities can adopt very simple financial reporting, really just cash recording.  

When you're drawing lines in the sand between the different tiers, the results will never meet everyone’s approval. 

But my personal view is that we've actually done a pretty good job in Aotearoa so far.   

Small charities

However, the review of the act has thrown up that at the small end, compliance may be too burdensome for some small charities.   

So, the minister has announced a power of exemption to be granted to the regulator, Charities Services.

It will give Charities Services the power to exempt very small charities from the standards set by the External Reporting Board (XRB). The XRB sets NZ’s financial reporting standards.

Interestingly, media reporting so far appears to show this is a done deal, applying to all. That is, an automatic blanket exemption to be applied to all small charities.  

As a former auditor, I can personally attest that the devil is often in the detail, and my detailed read of the policy papers clearly shows there's an XRB review under way of the tier 4 standards applying to the smallest charities, specifically looking to reduce the reporting burden. That's the same aim as the minister’s.  

And only if that XRB review doesn’t achieve the outcomes of the minister will the charities regulator be granted the power to exempt small charities.   

That means, from my reading, the power would not be automatically used. But only time will tell.  

Whether you agree that the level of reporting compliance is too much or too little, any simplification or partial exemption from the standards needed for small charities is likely to be a very popular result for them.

If anyone wants to take part in the democratic process, the XRB is now consulting on proposed changes to the standards for smaller charities. You can find information on their website, www.xrb.govt.nz.

Large charities

At the big end of the charities' size range is the opposite compliance issue – that some charities may not be reporting enough, especially when it comes to their accumulation of assets. The concern here is that some charities may be using their charitable status to accumulate significant assets and not appropriately applying these to their charitable purpose.  

The consultation originally floated concepts such as forcing all charities to distribute a certain percentage of their assets every year. However, applying a blunt measure like that across the huge variety of charities would likely do much greater harm than good. 

Sometimes there are very good operational and strategic reasons for charities to accumulate assets, such as intending to build a major health facility in the future or investing in a building to house the charity.      

Thankfully, common sense and pragmatism seem to have prevailed.  

Instead of trying to create a one-size-fits-all solution or complex extra requirements, the pragmatic suggestion is to require large charities with significant asset accumulations to explain the purpose of having them.

This seems very sensible to me because it should address the issue of transparency, allowing flexibility across charities but without creating unnecessary compliance.    

I'm aware that this requirement to disclose accumulations is already worrying some large charities and is seen as some sort of threat.  

However, if a charity can't explain how it's meeting its charitable purpose, including why it might be accumulating assets and its longer-term strategy, that's precisely the sort of information I want to know as a member of the donating public.  

I'm then better placed to decide if I should support them and how they've chosen to deliver on their charitable purpose. Interestingly, this disclosure requirement may be an “emperor’s new clothes” issue for a small number of large charities, who may in fact not be delivering well on their charitable purpose.

In short, this announced transparency versus compliance cost measures gets a pass mark from me.

Craig Fisher FCA is a former audit partner and Chairman and now consultant at RSM. He holds a number of governance roles including amongst others independent Councillor at ADLS, Chairman of the External Reporting Board’s Advisory Panel, Chairman of the Fred Hollows Foundation and is a specialist regarding not-for-profit and charitable entity issues. The views expressed here are entirely his own.