How much should charities spend on expenses?
When people donate to charities they rightly expect their donation will go towards the charitable cause. However, charities, like all entities, inevitably incur expenses to enable them to do their charitable work. We were recently asked what proportion of charitable income can reasonably be spent on expenses.
In fact there is no “official” guidance and this is not surprising because every charity is different. It really comes back to the Trustee’s discretion to determine what is acceptable for their circumstances and to best advance their charitable purposes.
What expenses can be claimed?
The Charities Services website provides helpful examples of expenses and these include things like petrol, advertising, professional service fees, office supplies and staff training.
Who is responsible for keeping tabs on expenses?
The officers (trustees, members, directors) are responsible for the financial sustainability of the organisation and ensuring that financial accounting and reporting systems are accurate and transparent. In discharging their responsibilities as officers, they can and should rely on external expertise and services to ensure the financial well-being of the charitable trust; they would most likely be in breach of their fiduciary duties if they don’t do so.
The rules of a charity (Trust Deed, Constitution, Rules) should provide that the organisation may only act to advance its charitable purposes. The payment of salaries and other expenses (provided these payments are reasonable) to advance the charitable purpose is acceptable. It is usually possible to pay those in governance if the rules allow that and the payment is reasonable.
How can you find out what is spent on expenses?
The amount charities spend on expenses is included in their annual reports, which are all publicly available on the Charity Services website and monitored by the regulator, Charities Services. The new reporting thresholds that came into effect from 1 January 2022 require charities with over $550,000 in operating expenditure to be either audited or reviewed, which should also provide public assurance around how charitable funds are used. It is also important to know that there are four different tiers of charity when it comes to financial reporting.
What is the Government’s view?
In recent years a Tax Working Group considered whether there might be an issue in New Zealand with charities accumulating too many assets rather than using assets to further charitable purposes. The Group recommended that the Government periodically review the charitable sector’s use of what would otherwise be tax revenue, to verify that the intended social outcomes are actually being achieved. This shows that Government has a preference for a ‘proactive’ approach to charitable work, and arguably, that means Government encourages reasonable expenditure that enables charities to achieve their intended charitable social outcomes.
A change recently introduced is that charities need to report on how they use accumulated funds.
Key takeaways
Our advice to charities is to keep firmly in mind the need to deliver on their charitable purposes. When it comes to expenses, as long as they are reasonable and in service of the stated charitable purposes, they are likely to be acceptable to Charities Services.
We also recommend keeping good records that show any decisions relating to expenses were duly deliberated, properly authorised and followed due process (including noting and dealing with any conflict of interests), in the unlikely event that decisions are questioned.
Other resources
We have produced a comprehensive library of free resources to assist charitable entities:
Charities in New Zealand Legal Handbook – https://www.parryfield.com/wp-content/uploads/2021/03/Charities-Legal-Handbook.pdf
Incorporated Societies Information Hub – https://www.parryfield.com/home/blogs/resources-for-the-incorporated-societies-act-2022/
Recent changes to the Charities Act – Part 1 – https://www.parryfield.com/recent-changes-to-the-charities-act-part-i/
Recent changes to the Charities Act – Part 2 – https://www.parryfield.com/recent-changes-to-the-charities-act-part-ii/
Charities Healthcheck Guides – https://www.parryfield.com/release-of-charities-healthcheck-guides/
This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.
If you would like to discuss further, please contact one of our team on stevenmoe@parryfield.com, or annemariemora@parryfield.com at Parry Field Lawyers
