Last Updated 26 July 2022

Under the Charities Act 2013 (Cth), an organisation must satisfy the following in order to be recognised as a charity:

  1. be not-for-profit
  2. have only charitable purposes that are for the public benefit (more information on these purposes can be found here)
  3. not have a disqualifying purpose
  4. not be an individual, a political party or a government entity

In this Insight, we explore the first requirement; that is, the definition and legal requirements of a not-for-profit.

Not-for-profit organisations provide services to the community, and do not operate to make a profit and is not for the benefit of particular people, such as the organisation’s members, directors or staff.

This principle does not prevent:

  • a member from receiving services from the organisation as a member – provided those services are consistent with the organisation’s objects.
  • staff and even directors being paid for their work, so long as the amount payable is reasonable, having regard to the association’s objects. You can read more on this issue here.

So, for example, a religious organisation is not prevented from providing religious services for the benefit of its members. However, the directors of the organisation (who may themselves be members) would not be entitled to share in its revenue from ticket sales to members and the general public at its festivals.

To qualify as a not-for-profit organisation, the income, assets and surplus funds of the organisation must be used to achieve its objectives and cannot be distributed to members.

This does not mean a charity cannot make a profit or operate with an annual modest surplus per se – merely that the profit or surplus cannot be distributed to members. It would also raise questions if the charity accumulated surpluses generated from its activities over many years without applying the surplus or income to its charitable objects.

Indeed, one would expect a financially well run charity to have in place a policy of budgeting to achieve a small surplus annually, reserving those funds to:

  • generate additional income for its activities; and/or 
  • for future capital expenditure to improve its capacity to deliver on its objects in the medium to longer term.

Reinvesting surpluses to aid the organisation in carrying out its mission is likely to be appropriate. For instance, this can be by saving up for new projects, building and infrastructure, or technology. Running the organisation for the financial benefit of a handful of closely associated directors, or their associates, is not.

In practical terms, these questions of whether an organisation is a ‘not-for-profit’ entity will turn on whether:

  • appropriate limiting clauses are included in the organisation’s constitution; and 
  • whether there are adequate arrangements operating to prevent directors, members and staff or their close associates from deriving any inappropriate personal benefit from the charity.

Does your organisation meet its Not-for-Profit objects? 

We can help you review or draft suitable ‘not-for-profit’ provisions in your organisation’s governing documents, including provisions for:

  • not-for-profit status
  • dissolution without distribution to members
  • DGR revocation to enable the transfer of any surplus to an organisation with similar objects, in the event the organisation is wound up

We can also help you design governance arrangements and build compliance systems to help monitor and ensure that your organisation effectively implements its not-for-profit objectives. This includes managing potential conflicts of interest for directors, key staff and volunteers. This can be achieved by:

  • adopting an appropriate conflicts of interest policy;
  • implementing a declarations of interests register;
  • minuting conflicts and treatments through your governing body; and
  • ensuring contractual arrangements with directors, staff, volunteers and third-parties, financial delegations and procedures are truly reflective of a ‘not-for-profit’ culture.

Birchgrove Legal is a boutique Sydney law firm that specialises in the not-for-practice sector. Its market-leading practice is at the cutting edge of innovative approaches to serving NFP sector organisations across the spectrum of entity types. Get in touch with one of our authors to discuss your needs further.

Our Not-for-profit Sector Experts