Reforming Not-for-Profit Organisations in Australia: A Work in Progress. Kim Danielle Weinert LLM (Research) Faculty of Law, Bond University 2013
Certificate This thesis is submitted to Bond University in fulfilment of the requirement for the Master of Laws research degree. This thesis represents my own work and contains no material which has been previously submitted for a degree or diploma at this University or any other institution, except where due acknowledgement is made. Signature:... Date:... i
Thesis Abstract Reforming Not-for-Profit Organisations in Australia: A Work in Progress. Incorporated associations are founded by, and subsequently operate exclusively on, the collective action of individuals, which is largely voluntary and motivated by altruistic goals. This thesis will examine whether the law regulates the operation of incorporated associations in a manner that is proportionate, effective and to a standard that is acceptable. In particular, it will compare the raft of statutory duties and obligation of an incorporated association and a forprofit organisation. In examining these specific legal duties, this thesis will reveal the lack of consistency across jurisdictions, and gaps in how the law regulates the conduct of committee members within an incorporated association. Furthermore, this thesis will consider whether an officer of an incorporated and unincorporated association is a fiduciary and, if this is so, whether this status arises out of the category of principal and agent. Additionally, this thesis will identify specific regulatory and governance issues affecting Australia s not-for-profit sector. Finally, this thesis will examine how the numerous federal parliamentary inquiries and government reports intend to develop a reform policy for the not-for-profit sector and to evaluate these policy intentions against the world s best practice regulatory model. Keywords: Incorporated Associations, legal duties, power and control, agency, legal regulatory frameworks, volunteers, social inclusion, federal take-over of the not-for-profit sector. ii
Publications arising from thesis research The contractual framework governing the relationship between an incorporated association and its members, analysed in this thesis, was discussed in How Alternative Dispute Resolution has by-passed Incorporated Associations in Queensland. This paper was presented at the Non-Adversarial Justice Implications for the Legal System and Society Conference of the Australian Institute of Judicial Administration and Monash University (May 2010). Aspects of Chapter Five of this thesis, which highlight the need to reform the not-forprofit sector, were presented at the Law and Social Reality, Sydney Law School, Postgraduate Conference. This presentation was entitled Is a Small Revolution Really Too Much to Ask For? (October 2010). The need to establish statutory legal duties for not-for-profit organisations as an efficient means to address accountability within a not-for-profit was discussed in a paper presented at the 3 rd Global Inter-Disciplinary Conference for Crime, Justice and Punishment at Mansfield College, Oxford (September 2011). Inter-Disciplinary Press has published this conference paper entitled Is there a Perfect Environment for a Villain and Villainess to Survive in an ebook called The Real and the Real and the Reflected: Heroes and Villains in Existent and Imagined Worlds (ISBN: 978-1-84888-106-8). Chapter Nine of this thesis considers whether it is permissible for the federal government, using its power under section 51(xx) of the Constitution, to takeover the responsibility of not-for-profit organisations, which would have circumvented the duplication of reporting and registration for not-for-profit organisations. This discussion of section 51(xx) of the Constitution was published as an opinion piece in Viewpoint Perspectives on Public Policy entitled A Federal Takeover of the Not-for-Profit Sector was the Revolution that was Needed An examination of the Commonwealth s Corporations Power (Issue 10, October 2012). iii
Acknowledgements It is both an honour and a privilege to have the opportunity to undertake my master s research degree at Bond University in an area of law that I am passionate to know and learn more about. The completion of this thesis was due to the invaluable and fundamental support from my friends and family. A colossal amount of thanks must go to my husband, Chris, and longest friend Shannon Murdoch for their love and support. Added to the support network is Michael Grigg, Theodora Mweneghoa, Laura-Leigh Cameron-Dow, Charles Paul, Christopher Goff-Gray, Associate Professor Doctor Liz Spencer, Doctor Rachel Franks, Professor Michael Weir and Rosa Riedl. Furthermore, a special thank you goes to Dr Jessie Chella, Associate Professor Annette Greenhow, and Emma Petherick for your friendship and generosity. Gratitude is extended to my family: Mum, Paul, Poppy, Ben, Aunty Dor, Uncle Mal, Susan, Elva, Graham, Karl, and the Kippen family for their ongoing support. Substantial thanks must go to my supervisor, Emeritus Professor John Farrar. I am indebted to his endless patience and wisdom when listening to my many ideas. It has been an absolute privilege to be supervised by John. Thanks is also extended to Debra Morris, Director, Charity Law and Policy Unit at the University of Liverpool, for allowing me access to the university s resources, which was of great benefit to my research. Finally, a warm thank you to the University of Liverpool for the kind welcome and assistance I received as a visiting student. iv
TABLE OF CONTENTS Certificate i Thesis Abstract... ii Publications arising from Thesis Research... iii Acknowledgements... iv TABLE OF CONTENTS... v List of Tables and Figures... ix PART I Introduction... 1 CHAPTER 1: Introduction... 2 1.0 Hypotheses and Objective... 2 1.1 Research Approach and Methodology... 4 1.2 Structure... 5 1.3 Terminology... 8 1.4 Research Contribution and Outcomes... 8 1.5 Limitations... 8 PART II An Inter-disciplinary Understanding of the Not-for-Profit Sector and its Organisations... 10 CHAPTER 2: The Definition and Dynamic of the Not-for-Profit Sector... 11 2.0 Introduction... 11 2.1 Characteristics of the Non-Profit Sector... 12 2.1.1 Terminology... 12 2.2 Defining the Not-for-Profit Sector... 14 2.3 International Classification of Not-for-Profit Organisations... 19 2.4 An Economic Understanding of the Not-for-Profit Sector... 22 2.5 Not-for-Profit Organisations Through the Lens of Social-Political Theory... 31 2.6 Conclusion... 41 CHAPTER 3: History of Incorporated Associations in Australia and New Zealand... 43 3.0 Introduction... 43 3.1 History of Incorporated Associations in Australia... 43 3.2 Troubles for South Australia s Incorporated Associations Act... 46 3.3 Other Australian States... 48 3.4 History of New Zealand s Incorporation Model for Non-Profits... 49 3.5 Sir John Salmond s Model of Incorporation... 52 3.6 Conclusion... 54 CHAPTER 4: Legal Forms for Organising Not-for-Profit Organisations... 55 4.0 Introduction... 55 4.1 Associations... 55 4.1.1 Definition... 55 4.2 Unincorporated Associations... 56 4.2.1 Definition... 56 4.2.2 Membership Entry and Rights... 57 4.2.3 Legal Standing... 57 4.2.4 Liability... 58 4.2.5 Sources of Revenue and Gifts... 58 4.2.6 Rules... 58 4.2.7 Management Committee and Power... 59 4.3 Incorporated Associations... 60 4.3.1 Definition... 60 4.3.2 Legal Status... 61 4.3.3 Membership Entry and Rights... 61 4.3.4 Rules... 62 4.3.5 Source of Revenue... 63 4.3.6 Liability... 64 v
4.3.7 Management Committee... 65 4.4 Company Limited by Guarantee... 67 4.4.1 Definition... 67 4.4.2 Liability... 68 4.4.3 Legal Status... 68 4.4.4 Membership Entry and Rights... 69 4.4.5 Rules... 69 4.4.6 Source of Revenue... 70 4.4.7 Management Committee... 70 4.5 Conclusion... 70 CHAPTER 5: Legal Duties as Part of the Governance Framework... 71 5.0 Introduction... 71 5.1 The Respective Functions of a Board of Directors and a Management Committee... 72 5.2 Regulation and Accountability of Committee Members... 74 5.3 The Regulatory Framework... 74 5.3.1 Statutory Duties... 74 5.3.2 Duty of Care and Diligence... 75 5.3.3 The Duty of Skill... 76 5.3.4 Duty of Solvency... 77 5.3.5 Duty of Diligence... 77 5.3.6 Reliance and Delegation... 79 5.3.7 The Duty of Acting in Good Faith, in the Best Interest and for Proper Purpose... 81 5.3.8 The Duty not to Improperly Use a Position or Information... 84 5.3.9 Duty not to Improperly Use Information... 86 5.3.10 Duty to Disclose a Personal Interest... 87 5.4 Filling the Gaps in the Statutory Framework... 95 5.5 Fiduciary Duties and Obligations... 97 5.5.1 Is an Officer of a Management Committee a Fiduciary?... 97 5.5.2 The Fiduciary Doctrine... 97 5.5.3 What is a Fiduciary?... 98 5.5.4 Principal Agent Relationship... 102 5.5.5 An Agent s Authority... 104 5.5.6 Duties of an Agent... 105 5.6 Conclusion... 107 PART III Shaping Australia s Not-for-Profit Sector for the Future... 111 CHAPTER 6: Future Movements within Our Not-for-Profit Sector... 112 6.0 Introduction... 112 6.1 Federal Parliamentary Inquiries and Governmental Reports... 112 6.2 Disclosure Regime for Charities and Not-for-Profit Inquiry... 113 6.2.1 Background to the Disclosure Inquiry... 113 6.2.2 Terms of Reference... 115 6.2.3 Report s Findings... 115 6.2.4 Regulation... 115 6.2.5 Financial Reporting... 118 6.3 The Productivity Commission s Report... 119 6.3.1 Background to the Productivity Commission s Report... 119 6.3.2 Terms of Reference... 120 6.3.3 The Productivity Commission s Findings... 121 6.3.4 Regulation... 121 6.3.5 A National Regulator... 122 6.3.6 Corporate and Financial Reporting Requirements... 123 6.4 Conclusion... 124 CHAPTER 7: The United Kingdom s Attempt to Develop World s Best Practice for Not-for-Profits... 127 7.0 Introduction... 127 7.1 A Brief History of the United Kingdom s Charity Legislation... 127 7.2 Overview of Legal Entities in England and Wales... 129 vi
7.2.1 Charity... 130 7.2.2 Composition of a Charity... 132 7.2.3 A Trustee s Duties and Responsibilities... 133 7.2.4 Charitable Incorporated Organisations... 135 7.2.5 Composition of a Charitable Incorporated Organisation... 136 7.2.6 CIO Trustees Duties and Members Duties... 137 7.2.7 Charitable Unincorporated Associations/Charities... 138 7.2.8 Community Interest Companies... 139 7.2.9 Regulator for CICs... 143 7.2.10 Forward Thinking... 145 7.3 The Regulator for Charities and Other Not-for-Profit Organisations... 146 7.3.1 The Charity Commission... 146 7.3.2 Status of the Commission... 146 7.3.3 The Commission s Objectives... 147 7.3.4 The Commission s General Functions... 148 7.3.5 The Commission as a Registry... 148 7.3.6 Excepted Charity... 149 7.3.7 Exempted Charity... 149 7.3.8 Removal of a Charity from the Registry... 150 7.3.9 The Commission as an Investigator... 150 7.3.10 The Commission as a Regulator... 151 7.3.11 Regulation of Exempt Charities... 155 7.3.12 The Commission s Proportionality Framework... 156 7.3.13 The Commission as an Educator and Advisor... 157 7.3.14 Appeal Mechanisms... 158 7.4 Conclusion... 159 CHAPTER 8: The Reform Picture so far... 161 8.0 Introduction... 161 8.1 The Reform Picture so far... 161 8.2 The Australian Charities and Not-for-Profit Commission... 161 8.3 The Structure and Functions of the ACNC... 162 8.3.1 ACNC s Structure... 162 8.3.2 ACNC s Functions... 162 8.3.3 Registering Not-for-Profit Entities... 162 8.3.4 What is a not-for-profit entity for the purpose of registration?... 163 8.3.5 The Monitoring Function of the ACNC... 165 8.3.6 Governance and External Conduct Standards... 166 8.4 Enforcement Powers of the ACNC... 168 8.5 Reviewing the Commissioner s Decisions... 170 8.6 Conclusion... 170 CHAPTER 9: Conclusion Evaluation of Australia s Recent Reforms Regarding Charities... 172 9.0 Introduction... 172 9.1 Are These Reforms Measuring Up?... 172 9.2 A Federal Takeover of the Not-for-Profit Sector... 181 9.3 Social Inclusion Policy... 188 9.4 Troubles with the Social Inclusion Agenda... 188 9.5 Is Australia going down the correct track?... 195 9.6 Conclusion... 197 CONCLUDING REMARKS... 197 APPENDIX 1: Tiered Financial Reporting Obligations for Incorporated Associations... 200 APPENDIX 2: An Overview of Reason/s for Disqualification from Office... 205 APPENDIX 3: The Principles of Public Benefit (United Kingdom)... 206 APPENDIX 4: Recommendations and Government Response to the Report into Disclosure Regimes for Charities and Not-for-Profit Organisations... 208 APPENDIX 5: Summary of the Productivity Commission s Recommendations... 214 BIBLIOGRAPHY... 223 vii
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List of Tables and Figures Table 1 Distinctive features of not-for-profit institutions... 17 Table 2 The five characteristics of the structural-operation definition... 18 Table 3 International classification of not-for-profit organisations... 19 Table 4 The lifecycle of South Australia s Incorporated Association Legislation... 47 Table 5 Chronology of incorporated association statutes... 48 Table 6 Statutory duties of an incorporated association compared to a company... 94 Table 7 Chronology of recent federal parliamentary inquiries, reports, studies and reviews...113 Table 8 Description of an entity and a subtype of entity...164 Table 9 Description of a small, medium and large entity...166 Table 10 Base penalty amount...169 Table 11 An overview of obligations for companies limited by guarantee...176 Figure 1 The space where the third or the not-for-profit sector exists... 15 Figure 2 Australia s classification model for not-for-profit organisations... 21 Figure 3 Composition of a management committee... 67 ix