Frequently asked questions for Board nominees

Making the decision to join the board of a charity or trust or social enterprise is often a choice which is made without much information. Often this is simply because the person who may become a trustee is not sure what sort of questions it is that they might want to consider asking. Below we have set out some of the points which you may want to raise prior to agreeing to join a board.

Do you think there are too many questions? Others you think we have missed off? Email Steven at stevenmoe@parryfield.com and let us know so it can be improved for others!

This list originated from the first Legal Mashup we held in early May as it was something that people who came along were asking about. Obviously whether or not the questions are relevant or not will depend on the particular situation of the entity – so bear in mind and be aware that one that is in start-up phase will have completely different answers to one that has been going for 5 years…

While we wrote this with a social enterprise or charity in mind many of these questions would be equally applicable in other contexts such as joining a board of directors.

Before joining the Board I would like to ask for your responses to the following questions:

A copy of the Trust Deed/Constitution can be accessed _____________________________.
The purposes of the Trust/Social Enterprise are _____________________________. Any differences in actual activities (compared to the purposes) are ___________________________.
Our plans for the future include _____________________________. Major projects on at present are _______________ Any activities overseas?
There is an indemnity for board members contained in the Trust Deed/Constitution: Yes / No. We have taken out insurance for board members: Yes / No. What insurance is in place generally particularly if holding events?
Potential liability can result from the following key risk areas (eg health & safety): _______________________.
Our meetings are: monthly / quarterly / half-yearly. In addition to scheduled meetings we also expect board members to _____________________________.
What is the management structure? How does self-governance work for board members eg compulsory retirement after 3 years?
What is the legal entity of the organisation (eg Incorporated Society, Company, Charitable Trust)? Does it have charitable status?
Are the financial statements available to view? Are they audited or reviewed by an accountant?
For verbal discussion rather than in writing: Any employment disputes in last 3 years? Describe. Any third party disputes over provision of services in last few years?

We hope that this list is helpful for those who may be wondering about what topics they should be thinking through before joining a board. You could print this page and give it to your contact to run through the answers with you. Our intention is that it helps all those involved (both current trustees and the new trustee) to ensure there is clear communication from the outset regarding expectations, plans and the status of the organisation. If you are already on a trust then it might also trigger some thoughts for you about whether you need to undertake a strategic review to ensure you have clear answers to some of those questions.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions.
Copyright © Parry Field Lawyers 2017.

Reasons for a Trust Board to incorporate

It is very common for the board of a charitable trust to apply for incorporation under the Charities Act 1957. To do this certain forms must be submitted to the Registrar of Societies – information and access to those forms are here.

But why bother??

Well, incorporating a charitable board means that a group of trustees has a single identity in the eyes of the law – it then “exists” as a form of legal entity. The technical term is a ‘body corporate’ and – separately to the trustees who make up the board – it can be sued, can sign contracts (with a common seal, yes you need one) and can own property.

A board (once incorporated by the trustees of the charitable trust) will not end until certain events occur so it can then administer the trust going forward (whether or not trustees come or go).

Perhaps the biggest reason for trustees to incorporate is that the board itself will then enter into contracts and obligations – if things go wrong the incorporated board is liable for that (rather than the individual trustees). That is important safeguard for the trustees to have in place. Also, since it can hold trust property in its own name that does not need to be held in the names of the trustees themselves.

Having said all that, it is not a legal requirement to incorporate a trust board. If that is not done then the property of the trust is held in the personal names of the trustees.

If you have any questions about the process of incorporating a Trust Board or would like to discuss your situation we are happy to have a chat with you.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions. Copyright © Parry Field Lawyers 2017.

Do not pass Go: The case of CDC and whether it was a charity (or not).

A fascinating case which came before the courts just a few years ago provides a great lesson and insight in to what makes a “charity”. Canterbury Development Corporation (CDC) is a great organisation doing a lot of good things in Canterbury and it challenged Charities Services over its decision not to allow CDC to be registered as a charity. CDC eventually lost the case in the High Court to be registered and have tax exempt status. This is an interesting case to understand because it is likely that other community focussed groups could also be in the same boat as the CDC.

CDC helps to promote economic development in the Canterbury region. CDC was therefore arguing that it acted for charitable purposes – specifically the relief of poverty, advancement of education and the beneficial effect to the community (due to the development of industry and commerce). The case analysed whether CDC could come within one of the four charitable heads contained in the Charities Act 2005 (the only head not argued was that of advancing religion).

The court concluded that CDC was not a charity. Looking first at education, It decided that this was provided not to a broad section of the public but to a narrow group who met strict eligibility criteria. The Judge said:

“The objects and work of the CDC are commendable. Its intention is to help fledgling businesses. By itself this does not establish CDC as having the necessary focus on charitable intent … These are essentially the provision of help to individual businesses in the hope they will grow. Not all businesses who ask for or indeed need help are offered it. Only those within a narrow band. This help may promote these individual businesses. It may make them more profitable. This promotion and profitability is not incidental to the work of CDC. It is at its core. This illustrates how the spirit and intendment of charitable purpose is not central to CDC’s function and thereby cannot be charitable.”

Regarding whether CDC promoted the relief of poverty through job creation the judge said:

“What is illustrated by this analysis is that the purpose of the CDC is not relief of poverty through providing those who are unemployed with jobs. It is to improve the general economic wellbeing of the area. In that sense, therefore, CDC’s purpose cannot be the relief of poverty. The possibility of helping someone who is unemployed is too remote for it to qualify as the charitable purpose of relief of poverty.”

Regarding public benefit, the Judge said:

“In CDC… the pursuit of the objects is focused on the development of individual businesses. The provision of support to those businesses is done in the hope and belief that their economic success would be reflected in the economic wellbeing of the Canterbury region…any public benefit therefore from CDC’s purpose and operations is in my view too remote to establish CDC as a charity. Public benefit is not the primary purpose of CDC’s objects or operation. It’s primary purpose is the assistance of individual businesses. The creation of jobs for the unemployed, as opposed to jobs for those who are employed and not in need, is the hoped for, but remote and uncertain, result of the way in which the CDC approaches its task…. The general economic lift for the Canterbury region from CDC’s work is the hoped for result of helping individual businesses. It is remote from the purpose and operation of CDC. Public benefit is not at the core of CDC’s operation.”

You can read more from the time of the decision here to see how it was portrayed at the time:

This case and the conclusions reached are important for other organisations which may have a broad purpose to assist a region by helping individual businesses in that region. Just because there is good work being done and there may be positive results it does not mean that the organisation will necessarily be able to register as a charity. It pays to think about this sooner rather than later if you are at the early stages of forming your charity and we can help work through that process with you.

When a charitable trust has been going for a long time it may be that it eventually “runs out of steam” either through the purpose having been achieved, the situation having changed or a lack of fresh volunteers to continue. What are the next steps for the board of a charitable trust in such a situation? This note sets out the key points to consider and what the steps are.

Step 1: Review what the Trust Deed says

The Trust Deed will provide guidance on what happens on the dissolution or wind up of the trust. This is a key step and is important because those rules will need to be complied with.

Usually there will be some provision that the assets of the charitable trust can only be distributed to some other trust which is also charitable.

Therefore anything left over usually needs to go towards “…carrying out charitable purposes within New Zealand similar to those set out in this deed …”

Step 2: Do what the Trust Deed provides: Likely a Deed of Distribution

We will not go into detail here apart from to say that the Trustees will need to comply with the rules and fulfil what they say – for example, they might need to identify another charity that could receive any amounts on wind up. Normally we would expect this to be done via a deed of distribution signed by the trustees. If there was a vesting date (that means the ‘end date’) then there would be a deed bringing the date of vesting forward.

One point to note is that accounting advice should be taken about whether there will be any tax consequences of deregistration to ensure that there is no later liability that results after deregistration that was not anticipated. While we cannot give tax advice, we note that this is unlikely where the charity is distributing any assets it held within twelve months of being deregistered as a charity.

Step 3: Wind up Trust by Trustees Resolution

Once the assets had been distributed we would expect the Trustees to sign a short resolution to wind up the Trust.

Step 4: Notify Government departments

In the same way that a new charity needs to register with certain government departments the same process needs to be undertaken in reverse.

Charities Services require that an officer complete a deregistration form which can be accessed on the online account of that charity.

IRD requires a written request to cease a trust. This takes place once all taxes have been paid and all tax returns have been filed. IRD has more information available here.

The Companies Office provides that a board can apply to be dissolved by the Registrar by confirming:

The board is no longer carrying on its operations.
All liabilities (debts) of the board have been discharged/paid off.
All surplus assets (after payment of liabilities) have been distributed.
The board is not a party to any legal proceedings or disputes.

This can be done by applying online to dissolve the trust board. Companies Office sets out how to do this here. It provides that you need a RealMe® login, an online services account with the Companies Office, and authority to act on behalf of the charitable trust board. Companies Office provides that the steps to follow are:

On the dashboard, from ‘My Businesses’, select the charitable trust board you wish to dissolve.
On the ‘View Details’ page, from the ‘Maintain Charitable Trust Board’ menu select ‘Request to Dissolve a Charitable Trust Board’.
Confirm the required conditions for dissolving the board (as stated above), and that a resolution has been passed to apply for dissolution.
Once you have confirmed the above, complete the ‘Signatory Details’ section and click the ‘Submit’ button.

This can also be done manually by downloading Form CT5 here and sending the completed form by post to Companies Office or by their email at compliance@companiesoffice.govt.nz.

The applicant will be notified regarding the outcome of their application. If the application is accepted, the trust board will be taken off the register and a public notice of this will be on the New Zealand Gazette and Companies Office website.

Further information from each Government department:

—

Every situation is unique. If you would like to discuss further, please contact one of our team on stevenmoe@parryfield.com, michaelbelay@parryfield.com, sophietremewan@parryfield.com, or yangsu@parryfield.com at Parry Field Lawyers

Navigating the rocky shores of “control” where a Church may exercise some power over other organisations and the implications that may result in the need for consolidation of accounts and a change in the reporting tier used by that Church.

Introduction

Many of the most famous charities today have a history that trace back to the Christian Church in some way or other. Think of the Salvation Army, World Vision and the YMCA. But there are plenty of other less famous examples of trusts scattered throughout the cities, towns and communities of New Zealand which originated because someone who attended a Church had an idea and it was then taken on board and supported by the Church.

Those charitable trusts are often doing truly amazing front line work with people out in the community who really need different types of support. They are incredibly wide ranging from helping children, women, the poor, mentally challenged and those with drug or other addictions (to name just a few). Sometimes those trusts are completely independent and separate to the originating Church. Others advance similar purposes to the Church itself or work in the same geographic area. Sometimes they may even generate income which goes back to the Church (through day care centres or cafes). They may also provide in the governing documents that the Church itself (usually through its elders) has the ability to appoint or remove trustees of the charitable trust.

But what does all this mean when you look at the (relatively) new rules that can require financial consolidation of different entities together? Often it can be difficult to navigate the tricky waters that govern this area. Could the Church actually “control” the charitable trust through trustee appointment rights and are they related parties? Most importantly, if there is a situation of control then it may be that financial accounts consolidation is required by the two related entities and that this will then trigger their qualifying for a different set of reporting requirements if they cross over into a higher threshold of income. In this article we will look at what the rules are, what the guidelines tell us and then offer some practical examples of a few different scenarios and how they might be treated.

Part A: What are the accounting standards that apply?

Before looking at the applicable standards that apply let’s first take a look at the different reporting tiers. There are 4 of them ranging from Tier 1 which require full disclosure for larger charities whereas Tier 4 has minimal disclosure. Put very broadly the categories have the following key elements and monetary thresholds:

Tier 1: Full disclosure standards, over $30 million annual expenses;

Tier 2: Reduced disclosure, under $30 million annual expenses;

Tier 3: Simpler reporting but on accrual basis, under $2 million annual expenses; and

Tier 4: Simple format reporting on cash basis, under $125,000 annual operating payments.

The point at which the differences in the tiers become really critical is the distinction between tier 2 and 3 – that is, if an organisation has annual expenses of under $2 million but then is required report on other entities that it controls that could lift its totals to above $2 million. That would result in higher compliance cost and reporting being required and it is that situation and what constitutes control that is the subject of the rest of this article.

When it comes to Charities, it is also important to look at what Charities Services have said about this issue. In their guidance accessible here they state:

“If a Tier 1, Tier 2 or Tier 3 registered charity has control relationships with other organisations, these organisations are considered part of the charity’s reporting entity. Charities in this situation will need to include information about these organisations in their performance reports by providing consolidated financial statements and submitting these consolidated financial statements to Charities Services together with their annual returns.”

The standards are issued by the New Zealand Accounting Standards Board (NZASB) under section 24(1)(a) of the Financial Reporting Act 1993. The particularly relevant standard which we will look at here is IPSAS 6 – Consolidated and Separate Financial Statements.

While we have not gone into them in detail below (because they echo much of what follows in this part) the other two documents that should be on your radar when researching the regime that applies in this area are EG A8 – The Reporting Entity, and EG A9 – Identifying Relationships for Financial Reporting Purposes. We have also written a separate article about Accounting Standard (IPSAS) 20 – Related Party Disclosures regarding what it provides about disclosure of related parties so contact us if that is of interest.

IPSAS 6 – Consolidated and Separate Financial Statements

This standard notes in paragraph 1 the following about the reason it exists: “An entity that prepares and presents financial statements shall apply this Standard in the preparation and presentation of consolidated financial statements for an economic entity.”

Paragraph 39 states: “The definition of control under this Standard requires, subject to two limited exceptions, that there be both a power element and a benefit element…” . The paragraph goes on to note that there is a rebuttable presumption of control where there is the following power: “A unilateral power to appoint or remove a majority of the members of the governing body of an entity.” Based purely on this if a Church has the power to appoint the trustees it looks like there could be a strong argument that there was control (of course it depends on the facts – for example, perhaps the Church can only appoint 1 of 5 trustees).

Whether or not there is a benefit to the Church is also a criteria that needs to be met to show control. Even if there is a power element that is proven can it be said that the Trust provides a benefit to the Church? This will likely come back to the purposes of the Trust and how it fits within the scheme of the ministries of the Church. Paragraph A31 of the guidance notes: “it is common for special entities such as trusts to be established to provide certain services to support the operating objectives of another entity. In such circumstances, a controlling entity may benefit from complementary activities”. Is the Trust considered another arm of the Church itself that is used to reach out to the community or is it considered to be distinct and separate? This will need to be analysed in each situation to determine if there is some benefit to the Church or not.

Paragraph A6 of the guidance in the appendix to this standard draws out another dimension as it specifically talks about trusts and raises the idea of a fiduciary relationship. It states: “In the case of trusts, careful consideration is required to determine whether the relationship between an entity and a trust is such that the entity has control over the trust. If the entity’s only relationship with the trust is as a trustee of the trust, the entity is unlikely to have control over the trust because its relationship with the trust is likely to represent a fiduciary relationship rather than an ownership relationship (refer to paragraph A11).”

This goes on to note a different point which is worth also considering: “Where the entity is a beneficiary of the trust and has the ability to direct/determine the operating and financing policies of the trust (or those policies have been irreversibly predetermined), for the benefit of the entity, as a trustee of the trust or by way of an autopilot mechanism.” It is easy to imagine the scenario where a Trust does benefit the Church along the lines of that description with policies irreversibly predetermined and so there could be control.

Returning to the mention of fiduciary relationships in paragraph A6 above, could this also be used as an argument that any trustees appointed to the trust are in fact acting for the best interest of the Trust they have been appointed to? Paragraph A11 of the same guidance seems to allow for this possibility as it states: “The decision-making power of a trustee does not meet the power element of the definition of control. While a trustee may have the ability to make decisions concerning the financing and operating activities of the trust, this ability is governed by the trustee’s fiduciary responsibility at law to act in the best interests of the beneficiaries of the trust.“

It is likely that the circumstances of appointment and overall context will need to be examined to determine whether there is actually control or not. For example, one aspect we have not gone into here is what happens on a winding up of the Trust – do the assets go back to the Church (or could they)? That could impact the analysis as well. But the main point to make is that if there is control and a benefit to the Church then this could mean that consolidated reporting in accounts will be required. Knowingly failing to report according to the financial standards can also result in a maximum $40,000 fine.

Part B: What does Charities Services have to say?

In the guidance issued by Charities Services there is some commentary on the issue of what they consider control to be. Let’s take a look at that before we turn to an analysis of some hypothetical scenarios which could face Churches.

Regarding control Charities Services summarise the key elements already mentioned and analysed above in the following short form:

“Control for financial reporting purposes is the power to govern the financial and operating policies of another organisation in order to benefit from its activities. There must generally be both power AND benefit for a control relationship to exist. The benefits can be both financial and non-financial in nature.”

They go on to specify the following as indicators of power and benefits:

Indicators of Power:

Ability to veto, overrule or modify decisions of organisation’s governing group.

Appoint or remove members from the organisation’s governing group.

Set or modify policy about how revenue is raised or how money is spent by the organisation;

Close or wind up the organisation.

Indicators of Benefit:

Receiving all or a portion of the organisation’s profits/surplus, or even being responsible for the organisation’s losses (negative benefit),

The organisation provides goods or services which contribute to the charity’s objectives.

As you can expect their conclusion is tied in with how difficult a judgement call often can be:

“Determining whether charities have this control relationship can be complex. It involves an exercise of judgement, after considering the definition of control and the nature of the relationships between the organisations concerned. Control of an organisation can be attained in a variety of ways, and the underlying circumstances will vary.”

It is perhaps also worth noting the following comment about the interaction between the Charities Act 2005 and the accounting requirements being discussed here. The document EG A 8 – The Reporting Entity, states this at paragraph 14 and 15:

“The Charities Act 2005 permits entities that are affiliated or closely related to register as a ‘single entity’ and Charities Services decides how those entities are to report. For the purposes of the Charities Act 2005, the entity that requests the registration and treatment of several entities as a single entity is described as the ‘parent’ entity. This is the entity that Charities Services deals with for the purposes of the Charities Act 2005.

The term ‘parent’ entity in the Charities Act 2005 is not necessarily the same as a ‘parent’ entity (or ‘controlling entity’ as it is referred to in PBE Accounting Standards) for the purpose of preparing financial statements in accordance with GAAP. A ‘parent’ or ‘controlling entity’ for financial reporting purposes is an entity which has one or more controlled entities.”

Part C: Analysis of different hypothetical situations

In what follows we have tried to think of three different hypothetical scenarios in order to illustrate how some of the concepts already discussed could play out in reality. Of course these are made up situations to emphasise certain points. Every situation will be unique and so you need to look at all the circumstances to perform a proper analysis and determine the likely outcome. But it is hoped that this will give a feel for the different permutations which can exist in this area. As well as this you can start to see that there are different models which can be adopted which will be more or less likely to raise issues when considering if there is really control.

Scenario 1: Full control

Church elders appoint or remove all trustees of the charitable trust. This ensures that the Trust continues in the direction that the Church intends. The Trust performs a role which aligns very closely with the mission of the Church (advancing religion) and operates out of the Church facilities. The Senior Minister of the Church is also the Chair of the Trust and most of the trustees are elders of the Church or at least attend the Church.

Analysis: In this situation there are clear indications that the Church is in control of the Trust. While the use of the same facilities is probably not so important it is a symptom of the other clues here – the ability to appoint and remove trustees, the blurring of the leadership of the Trust and the Church, the purposes basically being the same. It seems very likely that this would result in a need for consolidation of the accounts (but it depends on all the circumstances).

Scenario 2: Some control

Church elders appoint 2 of the 5 trustee positions of the charitable trust. While it operates in the same geographic area and the Church refers people in need to the trust they are focussing on different purposes to the Church. The Chair of the Trust is appointed by the other trustees and currently that person attends a different Church.

Analysis: This is likely the scenario which is most closely aligned with reality – it is more of a ‘grey’ area which is where reality often sits in between the two extremes above and below. In this situation there is still some involvement by the Church in the Trust and yet it also has moved to be more independent. To provide a conclusion we probably need additional information (for example whether the Church receives any benefit from the Trust) but based on this factual situation presented it looks like the Church probably does not control the trust so there will not be a need to consolidate the accounts.

Scenario 3: Little control

The Church has no control over appointment or removal of trustees. The Trust purposes (advancing education for disadvantaged children) do not align with those of the Church. The Trust has spread beyond the original boundaries of the geographic area of the Church and now works throughout New Zealand. All the Trustees involved come from different areas and none attend the Church.

Analysis: In this situation there is clearly no control by the Church over the Trust. While it may have its origins in that one place it has moved on from those origins and now operates independently so there is no real question of needing to consolidate accounts in this situation.

Conclusion

We hope that this overview of the key issues to think about when looking at the issue of control has been helpful. Every situation is unique and cannot be looked at in isolation. While some elements may be present that indicate control others may not be present. It pays to discuss the situation with your advisers in order to be able to come to the right conclusion and ensure that your organisation is reporting under the correct tier.

And a final word…

We often find that clients who are looking into this area realise two things. Firstly, that records for the Trust are poor and need to be improved going forward and secondly that the original documents which they have were often written decades ago and can be outdated in terms of their terminology and language. Often they are difficult to understand. Sometimes processes that were meant to be followed have never been looked at – eg how to appoint trustees. Such documents can very often use a refresh in terms of presentation and ensuring they are easier to understand. Very often the purposes themselves (which are the core of what the entity stands for) will still be applicable and need little amendment but it may be appropriate to look at updating the rest of the document.

Steven Moe
stevenmoe@parryfield.com

We attended a webinar by Charities Services on the new reporting standards. There were 1,700 participants in the webinar so there was a lot of demand from people to learn more about the statement of service performance.

The main points which were covered included:

An overview of the new reporting standards;
The purpose of the statement of service performance; and
How the service performance standards might benefit charities.

The new changes came in relatively recently and introduced new standards for the not-for-profit sector. This seminar focused on the following two tiers which have different requirements:

Tier 3: Under $2 million (accrual based accounting required); and
Tier 4: Under $125,000 (cash based accounting).

In the past there were no requirements regarding financial information submitted – the new standards require that Charities provide a “Performance Report”. This includes both financial and non-financial reporting.

Non-financial information includes describing the entity and what it does. The second part involves a statement of service performance. The purpose of that is to “tell your story” – the both “outputs” and “outcomes” can be reported on. They distinguished those as follows:

Outputs – what was done eg goods or services provided (likely statistics will show this eg number of people helped); and

Outcomes – why it seeks to do or achieve that – this will be linked to the purpose of your charity.

They mentioned that graphs, charts and pictures can be used to show what you do. There is a template on the Charities Services website. Note that tier 4 only needs to record the outputs whereas tier 3 needs to record both outputs and outcomes.

The standards also require that previous years be compared to eg “100 attended” vs last year “90 attended” – this is not needed in the first year the report is done.

The webinar emphasised the positive aspects of preparing the document – it can be used for strategic planning, improving governance and marketing purposes. Clearly because it is new there must be many who are feeling like this is an added obligation on them and so they are trying to emphasise why it can assist a charity.

More information is available on Charities Services website here.

As the report is now compulsory for registered charities it is good to be aware of the requirements and get up to speed with these new requirements. If you have any questions about what is required then let us know as we are seeing some examples coming through and happy to share some ideas about preparing them.

We are providing new updates on other cases and developments in the charity sector regularly so sign up for our newsletter to stay up to date with the latest developments.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation.
Reproduction is permitted with prior approval and credit being given back to the source. 
Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions.
Copyright © Parry Field Lawyers 2017.

Muhammad Yunus was in Christchurch this afternoon and spoke to several hundred people. He is from Bangladesh and received the Nobel Peace Prize in 2006 for his work in microfinance and microcredit. He founded Grameen Bank (http://www.grameen.com/) which focuses on loans being given to people in villages who are too poor to receive traditional bank loans.

He told us the idea began from wanting to help local people to avoid loan sharks and he thought – “why not loan the money myself”? So he was solving an immediate problem back when he began in the 1970s. He told us that he studied how banks operate and then he purposefully tried to do the opposite. For example, banks usually required collateral for the loans they make but Grameen Bank do not. Now there are 2,600 branches throughout Bangladesh with 9 million borrowers.

He also talked about social business and the idea that this could help to solve problems while still making money. He compared this with pure charity where the money has a “one time use” as it is used and then gone compared to a social business which is sustainable. In this context he talked about how profit might not be the only incentive for people to set up a business and that there could be other incentives – such as making people happy. It would have been interesting to gain more insights about what form of social business might work best in a New Zealand context.

He finished by commenting on the fact that the top 1% of the population owns 99% of the world’s resources and that the wealthiest 8 people in the world own more than 50%. This concentration of wealth into ever fewer hands is what he sees as a great danger and there need to be new ways to combat this. HIs main theme was to work to try and reverse the way the system currently runs and what motivates it to try and address this.

The session ended with some questions although I felt at the very end like there were a lot of unanswered questions and details that would be fascinating to find out more about and explore. I was also left wondering how the ideas, which seem to have worked well in rural impoverished Bangladesh, might apply in relatively wealthy/middle class New Zealand.

It was great to hear the challenges from a Nobel Peace Prize Winner and wonderful that the event could be hosted in Christchurch – well done to the SingularityU Christchurch (which led this) and the other partner organisations: Akina Foundation, Ministry of Awesome, OHU, Te Putahi, XCHC and CCC.

In the last blog post that you can access here on the JB Were “New Zealand Cause Report” we mentioned two key points it highlighted. This post quotes from the report and comments on some other aspects raised.

I thought the easiest way to quickly provide bite size information would be to include a few of the most interesting quotes:

The entire charitable sector plays a really important role in society: “There needs to be greater recognition that society works better with a strong and sustainable NFP sector.”
Regarding the amounts involved in the sector: “These values underestimate the real worth of the social output from the sector as they do not capture the true cost saving to society of their activities.”
As for the risk of charities not obtaining funding: “This risk of capital blockage may be starting to break with the growing interest in social and impact investing and the continued blurring of the lines between for-profit and NFP organisations.”
The number of new charities: “Since 2010 there have been 2.5 new charities commence each business day.” They note this may lead to an overall burden on supporters as more and more people are needed to be in Board positions.
On potential duplication of charities: “The real issue with charity numbers is the potential duplication of energies, ideas, incomes and assets and the lack of shared knowledge and potential public confusion and then inaction. It is a discussion worth continuing.”
Self-earned income: “Self-earned income needs to be a growing focus for most organisations. The blurring of the line between for profit and NFP will continue. While some will have philosophical debates, there is little doubt that economic growth (along with technology) has been the greatest driver of rising living standards and poverty alleviation, particularly n developing nations with microcredit a leading example. Business with a mission focus needs to be a large part of the future of the sector.”

Introduction

Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
Lewis Carroll in Alice in Wonderland

New Zealand has an abundance of creative people with ideas for interesting businesses that often have social purposes at their core. Whether they know it or not, they probably fit in the definition of “social enterprises”. The number of individuals starting such social enterprises is growing. This will only continue as the next generation increasingly looks for meaning in work beyond simply returning a profit to shareholders. However, one thing New Zealand lacks in this space is a legal entity structure designed specifically for the implementation of those social enterprises.

The Cabinet paper released on 9 December 2016, “Social Enterprise and Social Finance: A Path to Growth”, is welcomed. However, more is needed than a cross-agency working group, the collection of statistics for further analysis and encouragement of investment. Instead, serious discussion of a new legal structure should be more firmly placed on the agenda. Failing to do that at this critical time represents a missed opportunity to proactively lead the way in this area.

The UK, Canada and the United States have all developed new types of social enterprise entities in the last decade. The key paper that started the process in the UK was issued in 2002, 16 years ago, so this is by no means a new concept. The lack of a legal structure in New Zealand is a real deficiency and we should not let the ‘number 8 wire’ mentality take over and mean that we simply make do and work within the existing frameworks.

If Roger Federer were given a cricket bat to play tennis I might have a chance at beating him. We use the right equipment that has been crafted specially for the particular game we are in. He could try and make do (after all, both a cricket bat and a tennis racquet are used to hit a ball) but despite being one of the best players ever he just won’t be as effective at playing the game. In the same way we can make do with existing structures for social enterprises that have some of the characteristics that we want. However, they do not recognise the key differences that distinguish social enterprises and set them apart. We need to ask for more.

In Part 1 of this paper we move beyond what exists currently and dare to dream big about what we would one day like to see. In Part 2 we discuss working within the existing constraints and what the current options are. A lot of time and energy is being spent on ways to create a better ecosystem for social enterprises. While that is important the hope is that this paper will generate discussion about the more fundamental point of the form of legal structure. If that were changed it would result in many other benefits for social enterprises which are now being focussed on as distinct issues at present (such as the ability to raise capital and a better profile and understanding of what social enterprises are).

Part 1: What could be (… the dream)

“I think there is a world market for maybe five computers.”
Chairman of IBM Thomas Watson in 1943.

There is real value in social enterprises because they do not rely on government funding or donations and instead operate as a business which employs people. However, their goals are not traditionally profit driven and instead may work to advance cultural, environmental, educational, social or other goals. They may also employ marginalised people and build locally based businesses which can contribute to particular geographic areas more than mass market or franchise models.

There are many barriers for social enterprises to overcome before they can flourish. It is easy to become distracted by all of those important issues (lack of specialised incubation, mentoring, funding options, financial and business experience, and immature support networks). The list is a long one although it is getting better. One could well argue that those issues need to be addressed prior to focussing on any development of a new legal structure. However, if we do not make changes now it will be even harder to do so in the future once more social enterprises, that have not even been thought of yet, have had to twist themselves around in order to fit into the current legal structures.

Instead of making do with what we have, a bold and innovative new approach is now required. This would place the debate about social enterprise and what it is at the top of the list for discussion. It would raise awareness and ensure this was also front of mind for those who are creating such businesses, as well as the broader community and traditional “for profit” businesses which could be challenged in their thinking and assumptions about their own business as well. Most important, it would result in a new form of legal entity tailored specifically for social enterprises.

Other countries have adopted legal structures specifically with social enterprises in mind. In the UK these are “Community Interest Companies” and in the United States there are “Benefit Corporations” and in Canada there are “Community Contribution Companies”. As this discussion progresses each of those will need greater analysis of how they work and what are the positives and negatives that can be learned from. The point for now is that they do exist and are a distinct form of new legal structures in those jurisdictions.

The fact that there is not a greater cry out for a change is a symptom of people facing other more pressing day to day challenges and not knowing that there might even be another option. And yet if another structure were available that might also be a way to address those pressing concerns regarding sourcing investors and funding, explaining the vision of a social enterprise and raising awareness of this sector.

To be specific, what we would like to see here in New Zealand is a new form of legal entity introduced which has the following key elements:

Clear name: A name for the new form of entity which makes it clear it is not a traditional limited liability company but also not a trust or incorporated society. This would assist to alert investors and others as to what type of entity it is.
Purposes: Requirement for clear articulation of the purposes (social, environmental, cultural etc) which show how they align with the social good while wrestling with the tension of also being a business.
Capped dividends: Restrictions in place on returning profits to investors to ensure that profit making is not the ‘primary’ objective.
Tax exemptions: Make the structure flexible enough so that for those who wanted to do so, and meet criteria, they could still apply for tax exempt status (this is not really a change since it can be done now).
Reinvestment: Profit/surplus to be reinvested into the purpose. Consider if there is a guideline or percentage fixed of what must be reinvested or it is left as a dynamic tension.
Reporting: Include a requirement for reporting not just on profit making goals but also on other social benefit goals.

Many of these concepts are foreign to traditional “for profit” business models and will take time to be discussed and understood. That there could be something more than maximising the dollar amount a company earns will take time to penetrate into the consciousness of society but it is something to be aimed for.

Of critical importance is the fact that the publicity around the new form of legal entity would raise awareness of social enterprises in New Zealand. As a result they would gain a new level of legitimacy and become better known. In addition, investment would be encouraged so they can grow because investors would understand what it was that they were supporting.

Part 2: What is (… the reality)

Door: It’s simply impassible!
Alice: Why, don’t you mean impossible?
Door: No, I do mean impassible. (chuckles) Nothing’s impossible!
Lewis Carroll in Alice in Wonderland

In New Zealand those who have a good idea for a social enterprise do not have a tailored legal entity structure that can be used. This means that when setting up here existing structures need to be adapted for use. Of course, as the quote says, “nothing is impossible”, and this section outlines the different models most commonly used. It also serves the purpose of illustrating why a new legal structure would be beneficial.

The most common approach we see is to set up an incorporated charitable trust or society which has a charitable purpose (so it is a “not for profit”). This approach can limit the scope of what such an entity does since it is constrained by staying within those purposes. We often see that the charity sets up a limited liability company which then operates as a trading entity making income and which ultimately seeks to maximise profits for its parent charity.

Other social enterprises adopt a direct limited liability company structure with charitable components, but operate in a manner consistent with their social enterprise purposes.

So, turning to the options in brief:

Incorporated charitable trust: The Charitable Trusts Act 1957 provides the framework for trusts and societies to incorporate. The entity needs to have a charitable purpose at its core (relief of poverty, advancement of education, advancement of religion or purposes that benefit the public). Profit is not distributed to private individuals. Provided its purposes are charitable it can also register with Charities Services under the Charities Act 2005. This type of entity can also apply for donee status (under the Income Tax Act 2007) so that donations are not taxed.

Limited liability companies: The Companies Act 1993 provides for companies to be registered where there is at least one director and one shareholder (they can be the same person). Profit is typically distributed to shareholders. It is possible to “write in” (by restrictions on activities) some social enterprise purposes in the Constitution of a company. Note that companies can also register under the Charities Act 2005.

Incorporated societies: The Incorporated Societies Act 1908 provides that members can form a society which requires a minimum of 15 members. The constitution or rules must set out its objectives.

Limited partnerships: Under the Limited Partnership Act 2008 there is a general partner and limited partners. This form of entity is slowly growing in popularity in New Zealand as it allows both commercial and charitable entities to work together without compromising their tax status. While it could be potentially used we do not think it is commonly considered as the other options are less complicated.

Co-operative companies, Maori land trusts and industrial and provident societies: We will not go into these in detail as we have only seen them used rarely and in specific situations but we simply note that they do exist and could potentially be structures that are used. The framework for them is the Co-operative Companies Act 1996, the Industrial and Provident Societies Act 1908 and the Te Ture Whenua Maori Act 1993.

We believe that the scenario we outlined above (a charitable trust which eventually incorporates a limited liability company as a subsidiary to run its trading arm) is most common and that is borne out by both anecdotal discussions and the limited research on this. The Department of Internal Affairs in 2013 published a paper on this topic and pointed to 421 respondents which it had surveyed. Of those 52 per cent (218 responses) were set up as charitable trusts. Incorporated societies made up 37 per cent while limited liability companies made up only seven per cent.

One of the main factors for any new business is access to capital. If a charitable trust structure is adopted then that lends itself to approaching individuals and groups for philanthropic grants or donations (particularly if it has tax exempt status). However, it is more difficult to attract private investors who share the risk since these entities do not return profits to shareholders and remain “charitable” under the Charities Act 2005. On the flip side of this dilemma, a limited liability company may struggle with attracting such private funding since there is an assumption that it is “for profit” because of the form of entity which is being used – in fact it has other objectives beyond returning a profit. Even if charitable purposes are built into the constitution this is still something which needs to be explained and automatic assumptions will need to be clarified.

Conclusion

Change is the law of life. And those who look only to the past or present are certain to miss the future.
John F. Kennedy

Where are we, and where do we want to be. Any new change will be difficult to understand at first – see an amusing example here. But we owe it to future social enterprises to try and make things better. This paper has outlined the currently available legal structures in New Zealand used by social enterprises. It has also set out the dream of what we would like to see some day in the future. We need change in this area. We need to request the right equipment to play the game.

In the foreword to the UK report “Private Action, Public Benefit: A Review of Charities and the Wider Not-For-Profit Sector” published in 2002, Tony Blair (it is long enough ago that he was the Prime Minister), commented as follows and about 17 years later these statements still resonate here and now for New Zealand:

“Much of the legal context for charity and voluntary action is now outdated … law and regulation have not kept pace with developments … There is also insufficient recognition in the legal system of the particular needs of social enterprises, a rapidly growing group of businesses carrying out a wide range of activities for the benefit of society rather than the individual. This report sets out a package of measures which will modernise the law …”

The result in the UK was the introduction of a new form of legal entity more than a decade ago. It is hoped that this paper will promote discussion about the possibility of turning the dream of such an entity for New Zealand into a reality sooner rather than later. Doing so would ensure that social enterprises are given a new framework in which to operate and succeed. That will ultimately benefit all of New Zealand and ensure that we continue to be forward looking and encourage even greater growth and investment in social enterprises.

Not unlike Alice in the quote at the start we need to work out where we want to go. How we get there will be complicated as there are many competing interests and points of view. Our intention in preparing this paper is to promote further discussion and engagement on this issue so that New Zealand can show real action in the area of social enterprises. With the social enterprise world forum being hosted in Christchurch in 2017 it is the right time to consider this issue and take action now.

Contact: stevenmoe@parryfield.com

This article contains a discussion of a fascinating case that came out at the end of 2016. The reason it is interesting is that the Judge had some frank words about the process that the Charities Registration Board had followed when looking at applications from two related groups for charitable status. In her conclusion the Judge notes that, “The Board has simply made mistakes”. Let’s have a look at what went on in more detail and see what we can learn from what happened. Most important let’s see what conclusions this may have for charities involved in research of some kind and whether they can (or cannot) obtain charitable status.

Two entities had applied for incorporation as charities. They were involved in research into “cryonics” and the extension of human life through preservation of humans and their reanimation in the future. They applied for charitable status in late 2011 and were declined in July 2013. There were many requests for additional information in between the application and the decision. The key finding by the Board was that:

“…the Foundation is not qualified to be registered as a charitable entity … we consider that the Foundation pursues an independent purpose to fund cryonics research (research into the cryopreservation and reanimation of people). This purpose does not advance education and or any other purpose that is charitable at law. Further, we are also not satisfied that the Foundation’s purposes provide sufficient public benefit, which is a requirement for charitable status.”

So what was the reasoning behind this conclusion? The Board felt that cryonics research was not an “accepted academic discipline” or that it was an area of “current science” or had any benefit to be researched. The Judge noted that in coming to this conclusion there had been independent research by the Board of material on the internet which helped it to come to that decision. The Judge had a dim view of that extra research which went beyond the information that had been provided by the applicants – this could be the subject of a whole article itself but the following quote gives the flavour: “…the perils of the internet are legend. It is possible to obtain web support for almost any proposition one cares to name… I consider the Board was wrong to put any store in the information obtained from the internet by the chief executive here.”

As for the conclusion regarding their educational purpose and whether there was sufficient usefulness of the research being done, the Judge disagreed on the conclusion and commented on why:

“…what all the authorities make clear is that “usefulness” as that term is applied in the cases constitutes a minimal standard designed only to exclude the “nonsensical” – areas of research and study that are demonstrably devoid of merit. While the concept of merit may raise more difficult, subjective, issues of “taste” where (for example) literature or art is the focus of an educational advancement analysis. I would think that such difficulties are much less likely to arise in matters of science. There may be some areas of research whose objects are so at odds with provable reality that purported scientific pursuit of them can be dismissed as nonsensical or an exercise in certain futility. Attempting to prove that he earth is flat might be one such endeavour. But absence of merit of that sort will be easy to establish (or refute) by reference to objective evidence.

The existence of scientific or academic controversy in a particular area is far from determinative. Nor is an acknowledgement that the goals of the research might only be achieved in the relatively distant future. By way of example only, the mars Society New Zealand Charitable Trust, whose purposes are to encourage and inspire space science and research leading to New Zealand’s participation in the exploration and settlement of Mars, was registered as a charity … the pursuit of such long term goals is likely to yield much useful knowledge along the way, regardless of whether the endpoint is ever achieved. And if that research that will be undertaken in order to work towards such a goal is likely to advance the sum of human knowledge the “usefulness” threshold will be met.”

This analysis is very helpful because it shows just what the Court will view as being “useful” – clearly it is to be interpreted in its widest sense. This is helpful to understand for any charities which may be involved in research and wondering if what they do will qualify. Having performed that analysis above, the Judge turned to the facts of the particular case before her and concluded:

“The evidence is that the proposed research is likely to lead to advances in areas such as organ transplant medicine, in vitro fertilisation, stem cell research, treatment of a range of diseases and disorders and enabling biodiversity…in the absence of clear evidence that cryonics research is “nonsense” and will not advance human knowledge, it matters not whether such research is presently “accepted academic discipline” or “current science” (whatever those terms may actually mean)… In my view the Board erred in its interpretation and application of the “usefulness” test.”

The Judge also concluded based on this that the purposes were clearly charitable under the “advancement of education” head of charitable purposes. For more on charitable purposes see here.

We hope this summary is useful and will help to better understand what research will qualify as being useful. If you have any questions about it feel free to contact us to discuss your situation. We are providing new updates on other cases and developments in the charity sector regularly so sign up for our newsletter to stay up to date with the latest developments.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation.  Reproduction is permitted with prior approval and credit being given back to the source. Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions.
 Copyright © Parry Field Lawyers 2017.

Reasons for a Trust Board to incorporate

Step 1: Review what the Trust Deed says

Step 2: Do what the Trust Deed provides: Likely a Deed of Distribution

Step 3: Wind up Trust by Trustees Resolution

Step 4: Notify Government departments

Navigating the rocky shores of “control” where a Church may exercise some power over other organisations and the implications that may result in the need for consolidation of accounts and a change in the reporting tier used by that Church.

Introduction

Part A: What are the accounting standards that apply?

Part B: What does Charities Services have to say?

Part C: Analysis of different hypothetical situations

Conclusion

Christchurch CBD

Christchurch – Riccarton

Rolleston

Hokitika

Auckland