Charity money myths: the facts about operating as a not-for-profit

Fact: A charity can spend money on administration

Charities are justified in incurring administration costs. Running a professional, sustainable and effective charity costs money, and this includes spending money on administration.

Points to consider

• Generally, a charity's administration are those incurred to allow the charity to operate. The cost of renting an office, supplying it with electricity, purchasing and maintaining an IT system, and the salaries of the CEO and office staff who do not provide services directly to clients, are all administration costs.
• It is up to the charity’s Responsible People to decide how much money should be spent on administration, as long as they ensure the charity is complying with the ACNC Governance Standards, and the charity’s financial affairs are managed in a responsible manner.
• High administration costs alone do not indicate that a charity is poorly run.
• The Australian Charities Report provides evidence of the diversity, variability, geographic spread, and complexity in the sector. All these differences affect how much money a charity spends on administration. For example, a health charity operating in a remote area, employing a range of medical professionals and offering services such as dialysis, will have administration costs far greater than a charity based in the centre of Perth that raises funds for a local childcare centre.
• Administration costs can be a mark of effectiveness – for example, a charity that incurs administration costs when training its staff and evaluating its programs may be more efficient and effective than a charity that does not. Sometimes there is a perception that it is better if a charity gives all, or most, of its revenue to its beneficiaries. For most charities, this isn’t possible.
• When trying to understand a charity’s effectiveness, it is better to pay attention to other factors of not-for-profit performance: transparency, governance, leadership, and impact.
• In Australia, there are no standards or clear definitions to guide which of a charity’s costs should be classified as ‘service related’ and which should be classified as ‘administration’. In the absence of any such standards or guidelines, information about administration costs is not comparable and can sometimes be misleading.

See our guidance about charities and administration costs.

Fact: A charity can make a surplus (profit)

A charity can make a surplus, providing it is used to further its charitable purposes. Generating a surplus is generally considered good practice for charities.

Points to consider

• A surplus is important for a charity's financial viability, and can help account for future expenses - both expected and unexpected.
• Based on data on Australian charities, charities are more likely to have a surplus than a deficit.
• There may also be times when a charity experiences a deficit. A planned deficit, as part of responsible financial management and a charity's overall operations, may in fact be a positive. For example, a charity may experience a deficit in order to deliver immediate relief during a disaster.
• There are several ways a surplus can be used depending on the charity’s purposes and any relevant requirements in its governing document or the law. A charity could use a surplus by:
  • implementing a new project or service
  • keeping some money in reserve
  • making loan repayments
  • acquiring investments
  • donating funds to another charity with a similar charitable purpose.

Fact: A charity can keep money in reserve

It is good practice for a charity to have a reasonable amount of funds in reserve.

Points to consider

• Having a reasonable amount of funds in reserve can protect a charity in the event of unfavourable or unexpected circumstances. These contingency or ‘rainy day’ funds may be needed in cases such as a sudden loss of funding or a humanitarian disaster that requires a quick response.
• A charity may put aside a reserve to pay for planned future capital expenditures (such as a non-government school planning to build a new campus, or a disability service planning to purchase a mini bus to transport beneficiaries).
• There is no set limit on how much money a charity can keep in reserve. A charity’s Responsible People must decide on what is appropriate, keeping in mind the charity’s overall objectives, as well as the size of the profit and potential future expenses.
• A charity should only accumulate a reserve to further its charitable purposes.
• There is no rule setting out how long a charity can keep money in reserve - again it is up to a charity’s Responsible People to decide how retaining money furthers its charitable purposes. However, a charity cannot accumulate funds indefinitely, as doing so would not be seen as furthering its charitable purposes.

Fact: A charity can invest its funds

Prudent investments can diversify a charity’s income stream and form part of good financial management practice.

Points to consider

• It is common for charities to make investments.
• When a charity is planning to invest money, it needs to think about how the funds will ultimately further its charitable purposes.
• It is good practice for charities to seek appropriate financial advice about investments.
• A charity should invest its funds as a part of a financial management plan that includes risk management policies and procedures.
• A charity can invest its funds in a variety of ways. However some investments - for example, some stock markets investments or crypto-currency - may be inherently high-risk and therefore generally not appropriate for charities.
• Many charities that choose to make investments aim to do so in an ethical way that is aligned with their charitable purposes.
• Any investment decisions made by a charity must comply with the requirements set out in the ACNC Governance Standards. This will help it ensure that the decisions are made within an appropriate governance framework and in a way that furthers its charitable purposes.

Fact: A charity can undertake commercial activities

A charity can undertake commercial activities but must do so with the aim of advancing its charitable purposes.

Points to consider

• ‘Commercial activities’ involve transactions (sales and purchases) that aim to provide goods and services to businesses and individuals for the purpose of making money.
• There are three scenarios where a charity can undertake commercial activities in a way that is consistent with the requirements of being a charity:
  1. A charity can undertake commercial activity with the purpose of generating profit to fund its work towards its charitable purpose. For example, a charity that provides free health checks and information sessions for people experiencing homelessness and disadvantage has a meeting room in its building which it rarely uses. It decides to start hiring out the room to local businesses or organisations to use. All the profits generated by the hiring of the room are used to fund the charity's free health checks and information sessions.
  2. A charity can undertake commercial activity where the activity directly contributes towards its charitable purpose. For example, a charity might have the purpose of providing employment to people living with disability. To achieve this purpose, the charity could operate a retail store and provide employment and training to people living with disabilities. In this way, the charity is undertaking commercial activity while also working towards its charitable purpose.
  3. A charity can undertake commercial activity where the activity is only incidental to the purpose of the charity. For example, a charity with the purpose of rescuing and rehabilitating native animals that are injured or have lost their habitat finds that it has a stock of organic fertilizer as a result. The charity decides to sell the fertilizer as a way of raising its profile and generating a very small amount of income. The sale of the fertilizer is a commercial activity that is incidental to the charity’s charitable purpose.