COVID-19 regulatory updates for NFPs and charities

As governments respond to the evolving COVID-19 crisis, we highlight the key developments for not-for-profits (NFPs) and charities, including guidance from ASIC on COVID-19 financial reporting, clarifications on eligibility for JobKeeper, and which committee members of incorporated associations will benefit from temporary insolvent trading relief.

Charities’ access to JobKeeper

The Treasurer has announced some further changes to the rules for charities seeking to access JobKeeper.

Importantly, charities (other than schools and universities) will now be able to exclude government revenue from the JobKeeper turnover test.  This will ensure more struggling charities will have access to the support scheme.

There are also changes to the JobKeeper rules specifically for directors of:

• Religious institutions: changes will allow JobKeeper Payments to be made to religious institutions in respect of religious practitioners, recognising that many religious practitioners are not ‘employees’.
• International aid organisations: changes will allow entities that are endorsed under the Overseas Aid Gift Deductibility Scheme or for developed country relief to meet the requirement that NFPs pursue their objectives principally in Australia.  The current requirement that employees must be Australian residents to be eligible under the JobKeeper program remains in place.
• Universities: changes will clarify that the core financial assistance provided to universities by the Commonwealth Government will be included in the JobKeeper turnover tests. 

Finally, the ATO has also extended the date by which employers can make payments to employees and still be eligible for JobKeeper, from 30 April to 8 May.

Further information about how to enrol for the JobKeeper payment can be found on the ATO’s website here.

ASIC guidance on COVID-19 financial reporting

On 28 April, ASIC released guidelines on financial reporting and audits during COVID-19.These are a must-read for NFP directors. While some topics are mainly relevant to listed or for-profit entities some are relevant to both, and all of the guidance makes useful reading for good practice.

The guidance talks about the disclosures that need to be made in the financial report covering topics such as:

• what disclosures should be made in the financial report (and the directors report, if you make one);
• appropriate factors to consider for assets, liabilities and going concern assessments;
• solvency resolutions and issues of trading while insolvent;
• reporting deadlines; and
• audit matters.

Of particular interest are solvency resolutions. This is a resolution passed by the directors of a company as to whether, in their opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. All boards are required to pass a solvency resolution when filing financial statements. It has largely operated as a pro forma requirement to date, with directors satisfying it by filing a return with ASIC.

The Federal Government’s decision to temporarily suspend the duty of directors to prevent insolvent trading, has raised questions regarding compliance with this requirement. The application of the Government’s decision to incorporated associations is discussed later in this newsletter.

The ASIC guidance confirms that directors do remain subject to solvency and going concern obligations, notwithstanding the temporary safe harbor, and goes on to provide advice on how to assess solvency. Qualified declarations of solvency are also available for entities and some advice on how that might be applied is provided. ASIC notes that, because of the suspension of the duty and many businesses effectively going into “hibernation”, it may be possible for an entity to be insolvent and yet still a going concern. This is an entirely novel prospect that directors, auditors and other preparers and users of financial statements will need to come to grips with.

The AICD understands that further guidance, particularly on going concern issues during COVID-19, is coming soon from regulatory and standard setting agencies. The AICD will assess those publications once they are released to see if we need to release our own guidance to assist directors. In the interim, members are encouraged to consider the guide to going concern issues published by the AICD and the Auditing and Assurance Standards Board.

Finally, any NFP entity that is regulated by the ACNC has additional requirements. If the directors believe the entity may be insolvent, the charity must ensure that its Responsible People are aware of the issue and have an achievable aim to return to viability when the crisis has passed. The charity must also inform its members and the ACNC if it is trading while insolvent. The AICD views this as unnecessary regulation which works against the Federal Government’s intentions in creating the insolvent trading safe harbour, and has made representations to that effect.

Committee members of incorporated associations – does the COVID-19 insolvency safe harbour apply?

While directors of charities structured as companies limited by guarantee benefit from the COVID-19 insolvency safe harbour, it is not clear whether committee members of incorporated associations (which are regulated separately in each State and Territory) are afforded the same relief.

At time of writing, the state of play is as follows.

Victoria and Northern Territory

Committee members of incorporated associations in Victoria and the Northern Territory benefit from the temporary coronavirus insolvency safe harbour by virtue of the incorporation of the Corporations Act into the relevant legislation.

However, in the Northern Territory there is no protection from the separate offence under the Associations Act 2003 (NT) of incurring debts not likely to be paid. In other words, while committee members will not be personally liable for trading while insolvent, they could be found liable for incurring debts if they do not believe these are likely to be paid.

NSW, South Australia and Western Australia

At this time, committee members of incorporated associations in NSW, South Australia and Western Australia do not benefit from the temporary coronavirus insolvency safe harbour available to directors.

In response to our advocacy efforts, NSW Fair Trading has stated it:

The AICD welcomes this statement from NSW Fair Trading and is speaking with the equivalent bodies in South Australia and Western Australia to ensure committee members of associations benefit from the same relief available to NFPs and charities structured as companies limited by guarantee.

Queensland, Tasmania and ACT

There is no duty imposed on committee members of incorporated associations in Queensland, Tasmania and ACT to prevent insolvent trading. However, ACNC registered charities must of course comply with the ACNC obligations outlined above.

New reporting standards and new definition for not for profits

NFP entities that are reporting entities and which choose not to apply the full accounting standards are currently allowed to report under the Reduced Disclosure Standard (RDR). The Australian Accounting Standards Board has decided to replace that with a new standard called the Simplified Disclosure Standard (SDS). The SDS more closely resembles the international accounting standard, IFRS for SMEs. More details about what is involved in the SDS can be found here.

Not for profits that are not reporting entities are not required to use the SDS. This usually means small charities that have an annual revenue of under $250,000 and are able to use either cash or accrual accounting. The ACNC sets out details of its reporting and threshold requirements here. These matters are currently under review by the AASB.

The AICD supported the adoption of a new standard although we argued that it should not require entities to report on matters not required by the full accounting standards. The AASB largely accepted that submission.

This SDS will be mandatory for reporting entities from 1 July 2021, although early adoption is allowed. This means that entities that report in accordance with the normal Australian and ACNC financial year will still be able to prepare next year’s financial accounts under the RDR. However, entities will need to start preparing to apply the new standard, which might involve training, changes to software and similar matters.

The AASB also has announced that they will release a new definition of a not for profit entity, which seeks to ensure that an entity will be regarded as NFP for reporting purposes if the ATO regards it as NFP for taxation purposes. This addresses a fundamental concern of the AICD about a new definition. We are waiting for a formal release of the definition and will report on that in an upcoming newsletter. This will potentially require some NFPs to seek advice on their status.

AICD advocacy work

The AICD continues to advocate for a NFP government relief package, including accelerated funding support for the sector, harmonisation of fundraising laws and further concessions for charitable donations. See here for further information about our advocacy efforts.

Further information about relief measures relevant to directors of NFPs and charities can be found here.