Charities form a fundamental part of our society, supporting and providing for those in need and the community. However, many charities have rules which really need a refresh as they have been in place for a long time.
One common question we get is where those rules contain a clause in their founding documents stipulating that consent from Inland Revenue Department (“IRD”) is required before making changes to particular clauses. This article will address what a founding document is, what these clauses look like, whether they are still necessary and whether they can be changed.
What are the founding documents of Charities and what clauses require IRD approval?
As charities can be created in various ways, founding documents vary depending on what kind of organisation or structure a charity adopted when it was created. In general, a founding document is a set of rules detailing how the charity is to operate, what the purpose of the charity is, and what exactly the charity does. The three main ways a charity can be structured according to a founding document are:
- A Charitable Trust, via a Trust Deed;
- A Charitable Company, via a Constitution; and
- An Incorporated Society, via a set of Rules, also known as a Constitution.
Within the founding documents of older charities, there is often a clause that states:
“No addition to or alteration of the charitable objects, the personal benefit clause or the winding up clause shall be approved without the IRD’s approval”.
These clauses are usually included within the “Amendment” section of a charity’s founding document. Older formed charities have this clause within their founding documents as it was recommended by past IRD commissioners. The idea behind this clause was to ensure that key clauses could not be easily changed or amended.
Is this clause still necessary? If not, can it be removed and replaced?
Within both Operational Statements 06/02 and 22/04 issued by the IRD, it clearly states that the Commissioner of the IRD no longer gives prior approval to clause changes. Instead, the IRD strongly recommends that charities remove any clauses like this from their founding documents. From these statements, it is evident that IRD approval clauses are no longer relevant and have no effect or use for charities.
Operational Statement 22/04 suggests these clauses be replaced with a new clause that will not permit an alteration, addition, or removal of clauses within a founding document if it does not align with the charitable nature of your charity or provide a pecuniary benefit to any individual. This demonstrates that these clauses can be replaced with another clause that still ensures the founding document cannot be changed too easily.
We frequently help charities amend their founding documents. If you are aware of particular changes you need assistance with or would like us to update your charity’s founding document, please feel free to contact one of our charity specialists Steven Moe, Michael Belay, Sophie Tremewan or Yang Su at Parry Field Lawyers.
This article 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.