5 accounting tips for charities and NFPs

Supporting charities and not-for-profits to achieve their goals can be extremely rewarding, but unique requirements govern these types of organisations.

Brendan Lucas, Director of Next Dimension Accounting, works regularly with charities and NFPs – he’s been there to celebrate the wins and to question questionable expenses. We spoke with Lucas to find out the essential points to stay abreast of when working with charities and NFPs. 

1. Charitable status rests on reporting

All charities registered with the Australian Charities and Not-for-profits Commission are required to lodge an Annual Information Statement. This covers questions about a charity’s operations and finances over a 12-month period.

Charities may also need to lodge an annual financial report that can be audited or reviewed, depending on the size of the organisation.

Medium charities (those with annual revenue between $500,000 and $3 million) and large charities (i.e. annual revenue with $3 million or more), except for basic religious charities, must submit an annual financial report. 

“This can be really helpful information for donors – if they want to donate to a charity, this extra detail can help them assess whether they want to make a donation or give a grant.”

In Lucas’s experience, existing charities are usually aware of these requirements, but accountants might need to inform newer charities or leadership teams of their obligations.

“Newly formed charities can sometimes get caught out, or when there’s been a change in leadership and someone is coming from a commercial background, they might not know the requirements governing NFPs,” says Lucas.

“The ACNC will start chasing if the charity is late to submit their first AIS. If they’ve had two years of outstanding AIS’s then they run the risk of the ACNC cancelling their charitable status and, with that, all their relevant tax concessions, so this is a really important compliance obligation for charities.”

2. The charitable purpose must be maintained

A charity’s expenditure needs to be in pursuit of its charitable purpose – i.e. the reason a charity has been set up, and what its activities work towards achieving – which is usually included in the organisation’s constitution.

“It’s a relatively broad definition,” says Lucas. “That’s because there are many ways that charities can achieve their purpose. They might be purchasing essential items to support victims of domestic violence, running a professional development seminar for case workers or paying overheads such as the CEO’s salary or reimbursement for volunteer costs.

“This requirement exists to stop people from abusing ‘charitable status’ for their own personal benefit – for example, to pay an employee an inappropriate salary.”

Determining what constitutes ‘inappropriate’ is a matter of judgement, says Lucas.

“We’d look at various benchmarks, salary surveys specifically for not-for-profits, and award rates.”

He also suggests accountants ask their clients two key questions:

1. If you were setting a salary for an employee in another organisation, who you have no relationship with, what would you offer them? This can be a useful way of promoting clarity about whether a certain amount is reasonable, says Lucas.
2. Would you feel comfortable with this information being public? “If this information were to be featured on the front page of a newspaper, could the CEO stand behind it and say it was a commercially good decision?” asks Lucas.

“In some cases, paying a very senior employee $200,000 might make commercial sense if the charity is getting a good return on investment. The employee might be bringing in high revenue in sponsorship and fundraising. But for other charities, there’s no way they could substantiate having anyone on $200,000.

“It’s all a judgement of the facts at the time.”

3. Record everything and be curious 

Putting stringent policies and procedures in place can go a long way in preventing charities and NFPs from spending money inappropriately.

“A not-for-profit organisation with good governance will typically have a budget that’s been approved by the board,” Lucas says. 

“The organisation will have well-documented procedures in regards to the delegation of duties and who has approval to spend money as part of the plan for the year. Accountants should be involved in setting up procedures and policies to prevent irresponsible spending. That in itself usually manages the risk.”

However, it’s critical for accountants to remain vigilant about suspected inappropriate spending.

If there’s reason for concern, take the query to management, says Lucas. If the claim is substantiated, management can elevate the concern to the board.

“Management will have a more detailed picture about what’s happening in the organisation. As external providers, we’re not in the office every day so we might know what’s happening on the ground. The role of the accountant is to record everything thoroughly and approach situations with curiosity. That might mean asking why money is being spent in a certain way, and then determining whether the expense makes sense.”

4. Salary sacrificing documentation is complex 

One major financial benefit of working at a not-for-profit organisation is the ability to salary sacrifice.

Under a salary sacrifice arrangement, employees lower their taxable income by receiving $15,900 of their salary as pre-tax money which can be directed to personal expenses including cars, goods, shares and loan repayments.

“This arrangement allows not-for-profits to compete with the commercial sector. It helps to create a more level playing field,” says Lucas.

However, he notes that organisations need to abide by relatively complex rules in order to offer salary sacrifice arrangements.

“The biggest area where accountants can help here is in making sure employers have the right documentation for salary sacrificing. Everything needs to be accounted for correctly. If the organisation gets reviewed by the ATO, it needs to be able to substantiate its decisions.”

Given the complexity of the rules, Lucas advises that clients engage an external provider to manage the salary sacrificed packaging. 

“If an organisation doesn’t have a huge finance section, outsourcing is a cost-effective solution.”

5. Be a source of expertise amid regulatory change

With a number of requirements placed on charities and NFPs, accountants can support their clients by staying informed of regulatory changes and compliance regulations.

“It can be quite complicated and, at times, unnecessarily impractical for NFPs, especially the smaller organisations, ” says Lucas.

“When some organisations are audited they need to prepare pages and pages of financial statements. The end-of-year process can be complicated, so anything that simplifies that would be good.”

In this vein, the Australian Accounting Standards Board is currently considering whether to modify the NFP financial reporting framework. If adopted, the AASB would add another tier – Tier 3 – to make it easier and simpler for non-profit private sector entities (non-governmental organisations with a revenue between $500,000 and $3 million) to lodge relevant financial information.

The IPA Guide on the New Financial Reporting Framework sheds further light on these developments.

“Anything that cuts down compliance is great, so long as it goes far enough because otherwise, if it’s not going to be all that different to tier 2, then the AASB may as well increase the threshold for determining which charities are subject to these rules,” Lucas says.

“But I do think adding another tier in theory would make the process far less arduous for many not-for-profits.”

Learn more about accounting for NFPs by taking the IPA’s NFP Auditing Workshop – available on demand now until 31 July 2023.