Charities often work with other organisations across both the for-profit and not-for-profit spheres in order to achieve their aims and fulfil their charitable purpose.
But in doing so, charities and their people can face situations that give rise to actual, potential or perceived conflicts of interest that they must manage appropriately. One such situation comes in the form of a related party transaction.
Related party transactions are common and are not necessarily a problem in and of themselves. In fact they can sometimes bring about benefits for charities through, for example, access to discounted goods or services.
However, related party transactions can also bring about issues with potentially damaging conflicts of interest, meaning there is a risk that a related party transaction may not be in the best interests of the charity.
Charities must carefully manage any related party transactions to ensure they are handled:
- appropriately
- transparently, and
- in the best interests of the charity.
A charity's financial decisions must be made in its own best interests, and not in the interests of related parties or key management personnel. Charities need to manage the risk that related parties or key management personnel could receive significant private benefits from charity operations.
Maintaining good records is a key way for charities to properly manage related party transactions. This means that charities must be aware of their record-keeping obligations when reporting on related party transactions.
This page details what related parties and related party transactions are, offers guidance on how charities can manage related party transactions, and provides information on how charities must report on their related party transactions.
From the 2023 Annual Information Statement onwards, all charities (except Basic Religious Charities) are required to report on their related party transactions.
What is a related party?
We define a related party differently according to charity size. We use a simplified definition for small charities, and for medium and large charities we use the definition from the Australian Accounting Standards (AASB 124).
For a small charity, a related party is a person or organisation that is connected to the charity and has significant influence over the charity.
This includes:
- a charity’s Responsible People and their close family members
- a charity’s senior management and their close family members
- other people or organisations that can influence a charity’s decision-making
- another organisation where a related party controls the organisation, a related party has significant influence over that organisation, or a related party is a member of the key management personnel of that organisation.
Importantly, simply being an employee or volunteer in a charity does not make someone a related party. To be a related party, a person or organisation must have significant influence over the charity’s strategic and financial decisions.
For medium and large charities, a related party is defined in AASB 124 Related Party Disclosures.
In summary, a related party is:
- a person that is connected to the charity, such as a Responsible Person or a close member of their family, that has control or joint control of the charity
- an organisation that is connected to the charity and has control or significant influence over the charity, such as a parent entity of the charity
- an organisation that the charity has control or significant influence over, such as a subsidiary entity
- any organisation and the charity that are members of the same group (for example, fellow subsidiaries)
- a member of the charity’s key management personnel (people with authority and responsibility for planning, directing and controlling the activities of the charity directly or indirectly) or a close member of their family
- an associate (an entity over which the charity has significant influence) or joint venturer (an entity that shares control of an arrangement with the charity and has rights to the net assets of the arrangement)
- another organisation where a related party controls the organisation, a related party has significant influence over that organisation, or a related party is a member of the key management personnel of that organisation.
What is a related party transaction?
A related party transaction is a transfer of resources, services, or obligations between related parties. It does not have to include financial payment.
A related party transaction can include:
- purchases, sales or donations
- receiving goods, services or property
- leases
- transferring property, including intellectual property
- loans
- guarantees
- providing employees or volunteers
- a Responsible Person of a charity providing professional services (for example, accounting or legal services) at a discounted rate or for free.
Charity reporting and related party transactions
Charities must report on their related party transactions through the Annual Information Statement.
This means charities will need to keep records of related party transactions from the start of their 2023 reporting period; for many charities, this period began on 1 July 2022.
Reporting requirements for related party transactions differ according to charity size.
For the 2023 Annual Information Statement onwards, small charities are only required to disclose reportable related party transactions.
Reportable related party transactions
If there are no reportable related party transactions, small charities should answer ‘No’ to the question about ‘Did your charity have any reportable related party transactions in the 2023 reporting period?’
Small charities who do have reportable related party transactions in the reporting period must select one or more applicable types of related party transaction in the 2023 Annual Information Statement:
- Fees paid to a related party for providing goods or services to the charity
- Loans from/to a related party
- Salary/wages paid to a related party’s relative(s)
- Transfer of charity property or assets to a related party
- Charity goods or services provided at a discount to a related party
- Significant use of charity property by a related party
- Investment in a related party
Some other types of transactions may also be reportable:
- because of their size,
- if the terms and conditions are different to the terms and conditions that would apply to similar transactions with other unrelated parties, or
- if information about those transactions would affect a stakeholder’s understanding of its operations or its financial performance and position.
Examples of transactions that need to be reported in the Annual Information Statement
- A charity’s Responsible Person is also a director of a web development company, ABC Web Pty Ltd. The charity paid ABC Web Pty Ltd to update the charity’s website. ABC Web Pty Ltd provided the service under normal commercial terms and conditions. The charity must select the transaction type – ‘Fees paid to a related party for providing goods or services to the charity’ in the 2023 Annual Information Statement.
- The daughter of a charity’s president was employed by the charity as a paid part-time finance officer. The charity must select the transaction type – ‘Salary/wages paid to a related party’s relative(s)’ in the 2023 Annual Information Statement.
- A charity paid a rent or lease payment for the office space owned by one of the members of its management committee to deliver their charitable work. The charity must select the transaction type – ‘Fees paid to a related party for providing goods or services to the charity’ in the 2023 Annual Information Statement. The charity could also include additional information, for example that the rent charged was below the market rates for this type of office space in the area.
Types of related party transactions generally not reportable
- a gift of a box of chocolates to charity board members to say thank you for their pro-bono service
- donations received by the charity from a related party
- reimbursement of reasonable out-of-pocket expenses incurred by a related party in their duties for the charity
- volunteer services provided by a related party that are the same as (or similar to) services provided by the charity’s other volunteers
- professional services provided free of charge by charity board members
- a related party receiving goods or services from the charity as a beneficiary on the same terms as other beneficiaries
- a related party buying goods from the charity on the same terms offered to the public.
Where small charities have other types of related party transactions that are also reportable, the ‘Other’ option should also be selected. Small charities can describe the related party transaction, if ‘Other’ is selected.
Small charities can provide additional information about their charity’s related party transactions in an optional question: ‘Include any other relevant details’.
For example, small charities can include a dollar value of the transaction, how they manage such transactions or list the page number of their voluntary financial report containing the related party transaction disclosure.
Small charities are not required to report remuneration paid to Key Management Personnel. For more information, see our Key Management Personnel remuneration guidance.
Medium and large charities are required to disclose ‘material’ related party transactions in the Annual Information Statement and financial reports.
They do not have to report ‘immaterial’ related party transactions.
Material related party transactions
Information in a financial report is considered ‘material’ if omitting, misstating or obscuring it could reasonably be expected to influence someone using that information to make a decision.
It depends on the size, nature and circumstances of the transaction.
The materiality of a related party transaction is determined in the context of a charity’s specific circumstances and does not have a dollar value.
When reporting, a charity should consider whether excluding information about a related party transaction would affect a stakeholder’s understanding of its operations or its financial performance and position.
To determine when and how to disclose related party transactions, medium and large charities should refer to AASB 124 Related Party Disclosures or AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (paragraphs 189-203 and Appendix A).
Examples of related party transactions that are generally material
- a loan to a related party by the charity (whether or not interest is charged)
- the sale of charity assets to another organisation controlled by a committee member of the charity
- fees paid for professional services provided by a board member of the charity
- salary or wages for a close relative of a charity board member
- sales of goods or services to the charity by another organisation controlled by a close relative of one of the charity’s board members
- significant use of a charity’s property by a related party (even if there are no fees involved)
- transactions that have a material effect on the charity’s financial statement
- lease agreements between related parties.
Related party transactions that are not material
A related party transaction is not considered material if it:
- does not substantially influence a charity’s decisions or activities
- does not affect someone’s understanding of the charity or its finances.
A charity does not need to report a related party transaction that is not material.
Examples of related party transactions that are generally not material
- a gift of a box of chocolates to charity board members to say thank you for their pro-bono service
- donations received by the charity from a related party
- reimbursement of reasonable out-of-pocket expenses incurred by a related party in their duties for the charity
- volunteer services provided by a related party that are the same as (or similar to) services provided by the charity’s other volunteers
- a related party receiving goods or services from the charity as a beneficiary on the same terms as other beneficiaries
- a related party buying goods from the charity on the same terms offered to the public.
Related party transactions that may not be reportable but could be material
There may be situations where a medium or large charity has a related party transaction that is not 'reportable' to the ACNC through its Annual Information Statement, but could be seen by the charity to be 'material'.
An example of this could be where professional services are provided free of charge by charity board members to the charity.
Generally, this type of transaction is not reportable to the ACNC in the Annual Information Statement. However some charities may decide this transaction is ‘material’ – and therefore report it separately in their financial reports – because the information is important for those charities' stakeholders:
- to make it clear to charity stakeholders that board members who provided professional services were not paid fees to do so
- to acknowledge the extra work done by these board members for no payment
- where the charity is dependent on those services and it could not operate without them being provide free of charge.
It would be for the charity and its professional advisors to determine whether there is sufficient interest in these transactions from the charity’s stakeholders to make them ‘material’ and so require disclosure in the charity’s financial report.
Reporting in the Annual Information Statement
If a medium or large charity has no related party transactions during the reporting period, it should answer ‘No’ to the question in the 2023 Annual Information Statement which asks: ‘Did your charity have any reportable related party transactions in the 2023 reporting period’.
Alternatively, medium and large charities who did have material related party transactions must select one or more applicable types of related party transaction in the 2023 Annual Information Statement according to the related party transaction disclosure note in the financial report.
For example:
- Fees paid to a related party for providing goods or services to the charity
- Loans from/to a related party
- Salary/wages paid to a related party’s relative(s)
- Transfer of charity property or assets to a related party
- Charity goods or services provided at a discount to a related party
- Significant use of charity property by a related party
- Investment in a related party
- Other.
Medium and large charities can describe the related party transaction, if ‘Other’ is selected.
Medium and large charities can provide additional information about their charity’s related party transactions in an optional question - ‘Include any other relevant details’.
For example, list the page number of the financial report containing the related party transaction disclosure.
Financial statement inclusions
Medium and large charities must provide details of related party transactions in their financial statements in accordance with the requirements of AASB 124 or AASB 1060.
This applies whether the charity prepares Special Purpose Financial Statements (SPFS) or General Purpose Financial Statements (GPFS).
The ACNC Commissioner has exercised discretion allowing charities that prepare SPFS for the 2023 reporting period not to have to provide a comparative figure of related party transactions from the 2022 reporting period.
See more information about AASB 1060 for Special Purpose Financial Statements.
AASB 124 and AASB 1060 require, at a minimum, disclosure of the following details of related party transactions in the financial report:
- the nature of the relationships with related parties
- the amount of the related party transactions
- the amount of outstanding balances, including commitments, and:
- their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement and
- details of any guarantees given or received.
- provisions for doubtful debts related to the amount of outstanding balances
- the expense recognised during the period in respect of bad or doubtful debts due from related parties.
Medium charities preparing General Purpose Financial Statements, as well as all large charities, must separately report on remuneration paid to Key Management Personnel (unless an exemption applies).
For more information, see our Key Management Personnel remuneration guidance.
Managing related party transactions
Problems can arise when charities fail to adequately manage the potential risks caused by related party transactions, especially where relationships between Responsible People and a related party can bring about a conflict of interest.
When entering an arrangement that could result in the potential for related party transactions and conflicts of interest, having a clear series of steps to manage the issue is vital.
The ACNC has investigated charities that have not adequately managed their related party transactions. This has given rise to conflicts of interest and situations where charity Responsible People have obtained private benefits from the decisions they have made.
While these actions have not risen to the level of a fraud investigated by law enforcement agencies, it has indicated that the governance of the charity in question has been deficient, which in some instances has seen their charity status revoked.
There are a number of steps charities should take to properly manage their related party transactions. These actions are based around record-keeping, proper disclosure and effective policies and procedures.
Maintain a register
For each related party transaction, the register should keep enough information about the related party and the transaction. The information will help charities to meet the reporting requirements in the Annual Information Statement or for the relevant disclosure note in the financial statement.
The ACNC has developed a template register of related party transactions for small charities to use. Any register of related party transactions should be retained by charities for their own use; it does not need to be forwarded or submitted to the ACNC.
Have an appropriate policy and procedure
We recommend that each charity has a policy and procedure for dealing with related party transactions. A policy and procedure will help ensure that the charity records and discloses related party transactions appropriately.
A policy and procedure will also clarify who should be involved in making decisions about related party transactions and what criteria should be met before for entering into a related party transaction.
The ACNC recommends any policy and procedure contain a clear direction that any decisions about engaging a related party must be made by those without any conflict of interest.
This helps ensure:
- decisions are made at arms’ length,
- the charity can demonstrate decisions have been made in its best interests, and
- that the charity is complying with the ACNC's Governance Standards.
Prior to entering into a related party transaction, a charity's board or committee should consider the decision, as well as ensure it can demonstrate that the transaction was appropriate and necessary to meet the the charity's purposes.
Decisions that may involve a charity entering into a relationship with a related party should be conducted transparently, for example, through an open procurement process that considers multiple, unrelated parties.
This would also see due diligence undertaken on related parties as part of the selection process, and anyone with a conflict of interest not involved in the process.
Formal documentation of any related party relationship would include:
- objectives of the arrangement
- financial details
- roles and responsibilities within the arrangement
- performance and reporting expectations
- how the relationship will be regularly monitored, reviewed and evaluated
- how the charity's board or committee will monitors the relationship to ensure it remains in the charity’s best interest.
Appropriate policy and procedure will reduce the risk that the charity’s decisions are influenced by the interests of others.
Manage conflicts of interest
Related party transactions can give rise to a perceived, potential, or actual conflict of interest.
Governance Standard 5 requires a charity to take reasonable steps to make sure its Responsible People meet certain duties, including:
- to act honestly and fairly in the best interests of the charity and for its charitable purposes
- to not misuse their position
- to disclose any actual or perceived conflict of interest
- to ensure that the charity’s financial affairs are managed responsibly.
Conflicts of interest (whether actual or perceived) may arise when a related party has an interest that may conflict with the best interests of the charity. If a Responsible Person has an interest with a related party, it may be difficult to demonstrate that they are acting in the best interests of the charity.
Charity Responsible People should declare any potential conflicts of interest and the charity should record these in a register. When it is time for the charity to make a decision, anyone with a conflict (whether actual or perceived) should not be involved in the decision-making process. See more about managing conflicts of interest.
Case study
A charity is planning to launch a new website. One of the companies being considered to create the website is managed by the daughter of a director of the charity.
The charity identified this as both a potential related party transaction, and a conflict of interest. To manage it, the charity will follow its policies and procedures for conflicts of interest and related party transactions. Doing so means that:
- the director in question identifies their conflict of interest and notifies the other board members as soon as possible. That way, all directors will be aware of the relationship between the web design company and the director whose daughter manages the company
- the conflict of interest will be recorded in the charity's register of interests
- usually the director with the potential conflict would not be involved in the charity’s decision to award the contract for the work
- the board will get quotes from a few companies before making its decision as a way of assessing that the cost is of fair market value or is on terms beneficial to the charity
- the related party transaction will be recorded in the charity’s register of related party transactions if the company managed by the daughter of the director is selected to do the work.
Related party transactions for certain charities
Some charities will have different guidelines, obligations or reporting requirements when it comes to related party transactions.
Basic Religious Charities are not required to answer financial information questions in the Annual Information Statement or submit financial reports.
This means that Basic Religious Charities are not required to report related party transactions.
However, if a medium or large Basic Religious Charity chooses to submit a financial report, it must comply with the same requirements as other medium or large charities, including requirements to report related party transactions.
The Ancillary Fund Guidelines specifically prohibit certain related party transactions.
In addition to this guidance, trustees of Ancillary Funds must also follow the Ancillary Fund Guidelines for Private Ancillary Funds or Public Ancillary Funds when contemplating transactions.
If a charity is a ‘public company’ registered with the Australian Securities and Investments Commission (ASIC), there may be additional related party transaction requirements that apply under the Corporations Act 2001.
Find out more about related party transaction requirements for public companies.