Joining a charitable trust – make sure you go in with your eyes open

Although trustees generally have the very best intentions, some inadvertently don’t follow the rules. These issues are particularly common with new trustees, or people who don’t have any experience with governance or running an organisation. People are enthusiastic about becoming a trustee, but don’t fully grasp the obligations that come with their new role.  

Five mission-critical areas of focus for trustees 

Do you know how to play by the rules?  

Every charitable trust has a board of trustees, comprised of at least two trustees. The board will likely operate under a Trust Deed. The Trust Deed typically sets out the following rules and guidelines including, but not limited to: 

• the organisation’s charitable purpose 
• the structure of the board 
• how to appoint and remove trustees 
• trustee duties and obligations 
• how the board will operate 
• how trust assets will be managed.  

As a trustee, it’s your responsibility to make yourself familiar with the Trust Deed and ensure the rules are being adhered to. Don’t assume that what the trustees have done in the past is compliant, or that trustees who have been on the board longer than you have this under control. The charity rules are readily available to trustees and to the public on the Charities Services website.  

Do you understand the sector’s legal and regulatory environment? 

When you become a trustee, you may be signing up to legal obligations such as becoming an employer, being party to contracts for services, as well as needing to lease property, plant and equipment.  

You need to be aware of what you are signing, and how these obligations impact you as a trustee, or even how you can become personally liable under these contracts. For example, if you sign a long-term lease and the trust cashflow is insufficient, are you liable for this cost as a trustee? 

There will be certain laws and regulations that apply to your charity, and you must be across all of these to avoid the financial and reputational risks of non-compliance. For example, our latest research report about the sector revealed that while 90% of charities surveyed are aware of the Privacy Act 2020, over a third hadn’t aligned their policies with the new legislation, and only 22% had reviewed third-party contractual agreements with providers who store or process personal information they receive from these organisations. A further 40% didn’t have a suitable privacy officer in place – a key requirement for any organisation that holds personal information and data about people.  

It is important that you understand and comply with your obligations under the Charities Act 2005, Trusts Act 2019 and the Charitable Trusts Act 1957 where relevant.  

I don’t need to worry about tax – do I? 

This is a big yes for all trustees. Many tend to know charities are exempt from tax provided the charity has met the requirements of the tax exemption process, but they don’t always understand this is only limited to income tax – it’s not a blanket exemption. Trustees must continue to consider and comply with other indirect taxes such as Goods and Services Tax (GST), and Employee Deductions (PAYE). 

Why does my charity need to confirm how it spends money? 

If your trust applies for grants, these often come with obligations to undertake accountability reporting. When you apply for these grants, they are normally tagged to cover a very specific type of expenditure, and declarations are often required at the end of the funding period to confirm the money was spent in accordance with the conditions of the grant.  

There’s also a flipside to each coin a charity has to spend – and this involves demonstrating funds are invested in advancing the cause of the organisation. Our research contained a word of caution for charities carrying large reserves, as this requires the need to articulate to all stakeholders and funders why the reserve are being held and what they’re going to be used for. In fact, last year’s Charities Act review recommended organisations with annual operating expenses over $140,000 will be required to disclose information about the reserves they hold, and why they hold them. This information will also be available to the media and general public. 

Are you confident around finances and understand your reporting requirements? 

From time to time we see challenges arising from trustees who lack confidence when it comes to finances including year-end reporting. This could include not having an audit when required by legislation or your own deed.  

The trustees must understand their charity’s financial metrics, how they align with their charity’s strategy and goals, and how they link this information through into the statement of service performance.  

Charities are obliged to file an annual return with Charities Services. This is due six months after balance date. These disclosures will include:  

• Ensuring the charity’s contact details, purpose, structure, and officers’ details are up to date, and providing details of paid and unpaid work undertaken for the charity. 
• The trustees must present the charity’s financial statements which must be compliant with the relevant reporting requirements. There are different tiers of reporting which are fit for purpose depending on the size of the charity. You must confirm you have prepared the financial statements according to the required reporting tier. 
• Some charities will require these financial statements to be audited. This may be governed by the Trust Deed rules, it may be a requirement of the funders of the charity, or it may be a legislative requirement due to the size of the charity. 
• The financial statements will likely need to include a Statement of Service Performance, a report which uses both written and numerical information to demonstrate what were the outcomes of the trust’s activities for the year. 

What are the potential outcomes of getting it wrong?  

Your organisation could be the subject of a Charities Services review. Much like a tax audit, this would be a fairly labour-intensive and costly process. You certainly want to avoid this if you can.  

You could also potentially lose your charitable status. This would be catastrophic, as your entity is then liable for income tax and donations would no longer be tax deductible to your donors.  

Even minor mismanagement by trustees can lead to reputational damage. People like to donate to well-managed charities, because it gives them confidence their funds are being put to good use. If the community loses faith in your organisation, it could lead to a major reduction in funding, donations and volunteers, and other organisations may no longer wish to be affiliated with yours.  

Financial reporting compliance is not only a problem for charities, but will increasingly be a concern for incorporated societies under the new requirements. 

You should by no means be discouraged from becoming a trustee of a charity. You just need to ensure you know what the obligations of your new role are, so your efforts strengthen the organisation rather than steering it into choppy waters.