Not-for-Profit organisations registered with ACNC need to be aware of potential tax and other implications where providing gifts and honorariums to volunteers, staff, responsible persons, etc.
It is not uncommon for not-for-profit (NFP) organisations registered with the ACNC to provide gifts or honorariums to volunteers or their staff as a token of appreciation. However, it is important that they understand the implications when deciding to provide a gift or a honorarium, as it may result in adverse consequences to the organisation and their responsible persons.
The Australian Charities and Not-for-Profits Commission’s (ACNC) Gifts and Honorariums Guide provides some useful guidance to assist responsible persons in understanding the implications of their decision in the context of their own organisation.
Gifts vs Honorariums
Gifts and honorariums are fairly similar – they are both ex-gratia payments. The ACNC draws a slight distinction between the two:
- ‘A gift is something given to someone without obligation and may be in the form of money, goods or other property … and typically given in recognition and appreciation of an individual’s charitable service.’
- ‘An honorarium is an honorary payment made to someone without obligation in recognition of their professional service … and is typically a payment made to honour an individual for their charitable service’.’
The key distinction is the nature of service. An honorarium is an honorary payment in respect of ‘professional service’, as distinct from the broader ‘charitable service’ which is a catalyst for a gift. Nonetheless, the ACNC expects that any gift or honorarium should be made voluntarily, without obligation and have a token nature.
What are the risks?
In order to remain registered with the ACNC, charities must meet the ACNC’s Governance Standards. A gift or honorarium of a significant value may cause the charity to fail to comply with the Standards. Compliance with the Governance Standards is a condition of registration with the ACNC. Loss of ACNC registration as a charity impacts on the charity’s access to tax concessions such as income tax exemption and, in the case of some organisations (e.g. PBI’s, certain public funds, etc.), deductible gift recipient status.
NFP organisations usually have clauses within their governing documents that prohibit distribution of assets or income to their members and require these to be applied solely for the furtherance of the organisation’s objects. A gift or honorarium of a significant value may constitute a breach of the governing document and loss of the organisation’s character as a charity. For organisations that qualify for certain categories of taxation concessions, this could put at risk their on-going tax concession status with the ATO.
It is important to note that honorariums and gifts are generally once-off and have a token nature. If a gift or honorarium is made on a regular basis to recognise a person’s services, or alternatively as a form of reimbursement or allowance to cover a person’s out-of-pocket or estimated expenses, the payment may not be in the true nature a gift or honorarium. In that situation, there may be employment and tax law implications for both charity and the recipient of gift/honorarium. It is worth considering how the provision of such gifts or honorarium be reported and whether there are any PAYG withholding obligations for the charities/NFPs. The ATO Honorariums Factsheet provides a useful guide as to the tax treatment from a donor and recipient perspective.
What are the rules?
The responsible person(s) are the ones who must determine the amount of the acceptable value of any gift or honorarium. The responsible persons should have regard to their organisation’s financial position and whether the provision of the gift or honorarium will cause their organisation to breach its obligations to remain registered with the ACNC and, in consequence, jeopardize access to tax concessions.
Charity to be not-for profit and to comply with charitable purposes
In order to remain registered with the ACNC, charities must meet the ACNC’s Governance Standards.
ACNC Governance Standard 1 requires registered charities to be not-for-profit and work towards achieving their charitable purposes. A gift or honorarium of significant value could create a situation where it may result in conferring a private benefit on someone – thereby breaching the requirement that the charity be not-for-profit and also engaging in conduct which is inconsistent with pursuing its charitable purposes. The responsible persons should also consider if the charity’s governing rules allow it to provide gifts or honorariums.
Charity to be accountable to is members
ACNC Governance Standard 2 requires registered charities to take reasonable steps to be accountable to their members.
The ACNC Gifts and Honorariums Guide states ‘a lack of transparency about gifts and honorariums – especially if they are of significant value – may mean a charity is not being accountable to its members’.
Documentation of the decision process is the key to transparency. Some of the questions that the charity’s responsible persons should consider include: how does the charity determine the value of any gift or honorarium it provides; is there a need to consult with other similar charities; how is the discussion leading to the making of that decision going to be documented; is the decision consistent with the charity’s charitable purposes; etc.
Charity to act in good faith in the charity’s best interest
Under ACNC Governance Standard 5, registered charities must take reasonable steps to ensure that their responsible persons meet certain duties. Broadly, the responsible persons must comply with their duties to act in good faith in the charity’s best interest and for its charitable purposes; to disclose perceived or actual conflicts of interest; and to properly manage the charity’s financial affairs.
For instance, the charity’s responsible persons should consider whether providing a gift or honorarium will put the charity’s finances at risk or pose a risk to the charity’s reputation.
A conflict of interest may be actual, potential or perceived and, especially, can occur in the situation where the gift or honorarium is provided to a responsible person or their relatives. It is important that there are processes in place to ensure that a potential conflict of interest is managed appropriately. For example if the gift or honorarium is to a responsible person, or a person that they know (whether by way of familial or business relationship), consideration should be given as to whether that responsible person should participate in any decision about the relevant gift or honorarium (the ACNC notes that a responsible person should not participate in the decision to provide a gift/honorarium to themselves); should the decision be referred to its members, etc.
The ACNC Gifts and Honorariums Guide states in relation to providing gifts/honorariums to responsible persons or their associates that ‘while this doesn’t necessarily mean the gift or honorarium isn’t allowed, failing to disclose the conflict of interest is likely to be a breach’ of the governance standard.
Financial reporting disclosure
A registered charity that is required to prepare financial statements may need to disclose gifts or honorariums to certain individuals (such as Responsible Persons) in accordance with the Australian Accounting Standards. Medium and large size charities that are not required to prepare financial statements may also be required to disclose gifts or honorariums to related parties in their Annual Information Statement.
Given the tax risk of non-compliance, where charities choose to allow gifts and honorariums to be made, it may be prudent to have a clear and formal policy which sets out the steps that must be taken before one is granted.
A charity and, in particular, its responsible persons should, prior to making a gift or honorarium, consider the capacity to provide, and the consequences of providing, these. Considerations include obligations under its governing document and ACNC governance standards – with non-compliance having potential adverse taxation implications.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.