When people donate to charities, they want to know their money will be used effectively and will have a positive impact on the cause they want to support.
One of the ways that people will try to assess the effectiveness of their donation is by examining the charity's administration costs.
While it is reasonable to want to ensure that each dollar you give will be used well, assessing and comparing charity administration costs is difficult and it can be misleading.
Overview
The effectiveness and impact of charities is important. However, it can be misleading to use administrative costs as a measure.
A key reason for this is that the charity sector is very diverse, and includes many different types of organisations, such as universities, hospitals, non-government schools, social welfare organisations, and environmental or animal protection groups.
Because charities are so varied, there is not a one-size-fits-all standard ratio or percentage to measure what might be deemed as ‘reasonable’ spending on administration.
There is also no mandatory standard accounting practice for reporting on charity spending – using the ACNC’s National Standard Chart of Accounts is optional.
And there is no overarching standard or consistent definition of what administration costs are, or what components of charity spending can necessarily be grouped as administration costs – what some charities may classify as ‘administration costs’, others may classify differently.
It can also be challenging to separate administrative costs from other charity expenses. For example, about half of all charities have paid staff, and while salaries may be considered administrative costs, the work they do contributes to the charity achieving its purpose.
It costs money to run a charity, and large charities with complex structures and extensive programs will have higher operating or administrative costs than smaller, volunteer-run charities. This is not necessarily a reflection on their effectiveness or impact.
Registered charities must be not-for-profit and use their funds to further their charitable purposes. Most charities spend some of their money on administration - without it, then wouldn't be able to operate and pursue their charitable purposes.
It can be misleading to consider administration costs as separate from a charity's cause, because doing so fails to recognise the parts of a charity's operations that enable it to deliver services.
When managing their finances, charities should exercise proper care and diligence and not be wasteful. This includes being mindful when spending on costs that could be considered as administration or overheads, such as staff, rent, transport and power.
Wherever possible, a charity should use its funds in a way that maximises its positive impact on the people or causes it was established to benefit.
Because charities operate in different ways, and have different purposes, it can be inaccurate to use administrative costs as a way to compare the impact or effectiveness of a charity.
For example, a charity that provides health services in the inner city may have higher administration costs (rent, staff costs, equipment) than a charity that runs a temporary meal service for the homeless in regional communities (using food donations and not having to pay rent).
However, the higher administration costs don't mean that the first charity is providing its services less effectively or making less of an impact than the second. Despite their different levels of administration costs, both charities may be as effective and impactful as each other.
Many costs can't be easily separated into costs for a charity's direct service and costs for administration.
For some charities, delivering a service consists of a wide range of connected activities that incur a range of costs - each are crucial to the overall service delivery.
For example, a rural health service provider may spend a significant amount on petrol and travel, but these costs are vital to the charity's service delivery. For other charities, these costs may be considered administrative.
It is important to recognise that when looking at the financial reports of two different charities, you may see similar costs treated in different ways.
In Australia, there is no mandatory common accounting standard or set of definitions. This means that charities (and other organisations) may report expenses differently.
These differences in reporting can be a major barrier to understanding and comparing charity administration costs.
The ACNC manages the National Standard Chart of Accounts (NSCOA), This is a free data entry tool and data dictionary for charities and other not-for-profit organisations.
All Australian governments have agreed to accept the NSCOA when requesting information from not-for-profits. The use of the NSCOA is encouraged, but not compulsory.
Setting ratios or percentages as standard benchmarks for administration costs often ignores that the charity sector is made up of many sub-sectors that vary greatly.
For example, the Australian charity sector includes various sub-sectors:
- universities
- private hospitals
- non-government schools
- social services and welfare organisations
- housing providers
- environmental and animal protection groups.
Even within each sub-sector, individual charities may have a different set of circumstances and activities, based on its services, size and physical location.
Applying a standard ratio or percentage as a benchmark can lead to unfair and inaccurate assumptions about a charity's management and overall performance.
Operating as a not-for-profit does not mean that a charity cannot employ people.
The work of charities often requires qualified staff. Many charities would not be able to attract the quality staff they need to carry out their work if they were not allowed to pay people fair wages for their skills, knowledge and experience.
Spending on employee salaries
The amount that a charity spends on staff salaries is decided by the charity's Responsible People (its board or committee members, or trustees).
Staff members' salaries should be appropriate for the work they are employed to do, and should be considered in the context of the charity's activities and purposes.
Remunerating board members
Most charity board members (Responsible People) are unpaid. However, some charities may decide to remunerate board members, as well as operational staff.
If a charity decides to remunerate its board members, this should be done with due consideration of its reputation, as well as public opinion on the use of donations. Any such remuneration should be reasonable, justifiable and properly approved within the organisation.
Regardless of whether Responsible People are remunerated, the ACNC expects that the governing body of every registered charities is accountable and acting in the best interests of the charity.
See our guidance about key management personnel remuneration for more information.
Charities are independent organisations, and each charity's governing body is responsible for its administration.
If there is evidence that administration costs or salaries are unreasonably high, the ACNC may look into the charity's operations to establish that it continues to be run in accordance with the ACNC Governance Standards.
The ACNC considers all the factors that may affect the perception of high administration costs or salaries in assessing such situations.
See our guidance about what the ACNC can investigate for more information.