Community Organisations

Contributor: Professor Stephen Bottomley

Currency of information: April 2009

Introduction

It is common for people who share common interests or concerns to form a group or association to pursue those goals. Examples include local sports clubs, tenants' associations, and arts and craft societies. Forming such an association inevitably gives rise to legal issues for the members of the group, and for people who have dealings with the group. This chapter deals with some of those legal issues - in particular, the type of legal structure that might be adopted by such an association.

There is no 'best' type of legal structure for community organisations. The factors which should be considered when deciding which type of legal structure is appropriate include:

• the personal legal liability of individual members of the organisation for debts and liabilities arising from the organisation's activities.
• the costs and complexity of establishing and maintaining the legal structure, including continuing legal requirements such as annual reporting.
• the stability and flexibility of the legal structure, taking into account the size and scope of the organisation's activities (present and future), and the ways in which members wish to participate in the organisation.
• whether key sources of funding (for example government grants) will require a particular type of structure.

It is important to bear in mind that some types of legal structure may constrain the processes and structures by which decisions in a community organisation are made. For example, a company limited by guarantee must have a board of directors which is ultimately responsible for guiding the company's actions. This type of structure might not fit well into an organisation that wishes to allow all of its members to be involved in making decisions.

Types of Community Organisations

With these factors in mind, there are five main types of legal structure that are available to not-for-profit community organisations:

• unincorporated association;
• company limited by guarantee under the Corporations Act;
• cooperative;
• Aboriginal and Torres Strait Islander corporation;
• incorporated association.

It is not possible to give a definitive account of each of these types of legal structure in this chapter. Instead, the chapter gives an overview of types 1 to 4, considering their relative advantages and disadvantages. Part then deals in greater detail with the incorporated association. Further information on all five structures may be found in the sources listed under Contacts and Links.

Unincorporated Association

From a legal perspective an unincorporated association is regarded simply as a collection of individuals. Such an association does not have corporate status, and so is not recognised as a legal entity in its own right. This means that the association cannot enter into contracts or own property in its own name. All property that is used by the association must belong to individual members. This can be a source of possible dispute between members and should be dealt with clearly in the association's rules.

There are few legal requirements to be met in setting up such an association. An unincorporated association therefore has the advantage of being relatively simple and inexpensive to set up.

The association may choose to adopt its own constitution or rules. The constitution should deal with matters such as: the agreed purposes or objects of the association; the criteria for membership of the association; the composition of the committee to run the association's affairs and the powers of that committee; requirements for holding meetings of the association (for example notice, quorum, voting); methods of ending the association, including provision for any property used by the association; and procedures for amending the constitution.

Because the law does not recognise the existence of the association itself, liability for the association's legal obligations attaches personally to the officer-holders in the association. Members of the association are not liable just because of their membership.

Company Limited by Guarantee

A company limited by guarantee is a legal entity that has rights and liabilities that are separate from those of its members and officers. Like any other company, it is registered under the Corporations Act 2001 (Cth) ('the Corporations Act'). This is a Commonwealth Act that is administered by the Australian Securities and Investments Commission (ASIC).

Unlike other companies, a company limited by guarantee does not have a share capital. This means that members are not required to pay any capital to the company while it is a going concern. Instead, the members undertake that if the company is wound up and it has insufficient assets to meet its liabilities, they will contribute a specified amount of money (usually a small sum, for example $20.00) to the property of the company. The liability of the members is thus limited to the amount they guarantee to pay.

Without the input of share capital these companies must rely on other sources for funds, such as membership subscriptions, donations or grants.

A company limited by guarantee must have a constitution, and must appoint a minimum of three directors. The company and its directors are bound by the various requirements of the Corporations Act, including rules governing the holding of meetings, the auditing and lodgement of annual financial statements, and the duties and responsibilities of officers and directors. At the time this chapter was written, the fee for registering a company limited by guarantee was $330 (plus $40.00 to reserve a name for the company) (at April 2009).

Strictly speaking, a company limited by guarantee must include the word "Limited" or the abbreviation "Ltd" at the end of the company's name. For many community organisations this may not be desirable, because it conveys an impression of commercial operation that is contrary to the non-profit or community-oriented aims of the organisation. Accordingly, ASIC has the power to permit the registration of a company limited by guarantee without the word "Limited" in its name if the company's constitution:

• requires the company to pursue charitable purposes and to apply its income in promoting those purposes;
• prohibits distributions to its members and the payment of fees to its directors; and
• requires directors to approve all other payments made by the company to the directors.

An application to remove the word 'Limited' currently costs $330 (at April 2009).

Cooperative

The cooperative form of organisation is appropriate for groups that have a common service motivation, and where the intention is for members to pool their money for mutual benefit. The legal requirements for forming and operating a cooperative are complex, and it is not commonly used by community organisations.

Each Australian State and Territory has legislation that provides for the incorporation of cooperative societies. In the ACT that legislation is the Cooperatives Act 2002 (ACT) ('the Cooperatives Act').

The Act contains a series of "cooperative principles" with which registered cooperatives must comply. These principles emphasise voluntary, active membership; the democratic control by members of policy and financial decisions; the provision of education and training for members, directors and employees; and autonomy and independence from other organisations.

A cooperative must be registered either as a trading or a non-trading cooperative. A trading cooperative must have a share capital. This is the appropriate structure if it is intended that members will receive a share of any surplus funds, or a return on capital if the cooperative is wound up. A non-trading cooperative may also have a share capital, but it is not mandatory. It is the appropriate form of cooperative structure if members are not to receive any surplus through shares, or if they will only receive the original value of their shares on winding up. A non-profit organisation that seeks to register as a cooperative will use the non-trading structure.

The Cooperatives Act gives members of a cooperative limited liability. If the cooperative has issued shares, this means that members are only liable to pay to the cost of their shares. If there is no share capital, a member's liability is limited to the amount of any charges or fees specified in the rules of the cooperative. The Act emphasises the idea of democratic and active membership. An active member is one who uses or supports activities of the cooperative, or who maintains a relationship or arrangement with the cooperative.

The Cooperatives Act requires that a cooperative should have at least three directors, and a majority of them should be members of the cooperative. The directors are subject to duties and obligations of honesty, care and diligence, and the proper use of information and position.

When it is registered, a cooperative is issued with a certificate of incorporation. It is then a separate legal entity, with the same legal attributes as other bodies corporate (for example a company, or an incorporated association).

Aboriginal and Torres Strait Islander Corporation

The Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (the CATSI Act) provides for the incorporation under the Act of associations in which at least 51% of the members are Aboriginal or Torres Strait Islander people. Under the CATSI Act, Aboriginal person means a person of the Aboriginal race of Australia, and Torres Strait Islander person means a descendant of an Indigenous inhabitant of the Torres Strait Islands.

The CATSI Act was passed by the Australian Parliament in October 2006, replacing the Aboriginal Councils and Associations Act 1976 (Cth) (ACA Act) and commenced on 1 July 2007. Under the CATSI Act, the law governing Indigenous corporations have been modernised while still retaining special measures to meet the specific needs of Indigenous people.

The Office of the Registrar of Indigenous Corporations (ORIC) administers the CATSI Act. ORIC supports and regulates the corporations that are incorporated under the Act. It does this in a variety of ways, for example, by advising them on how to incorporate, by training directors, members and key staff in good corporate governance, by making sure they comply with the law and intervening when needed.

Incorporated Association

A not-for-profit community organisation can incorporate as an incorporated association under the Associations Incorporation Act 1991 (ACT), or equivalent legislation in the States or the Northern Territory. See the discussion of incorporated associations in the ACT at Part [60.3].

Incorporated Associations in the ACT

Which associations are eligible for incorporation?

To be eligible for incorporation under the Associations Incorporation Act 1991 (ACT) ('the Associations Incorporation Act'), an association must satisfy certain membership and activity requirements. The membership requirement is that the association must have at least five members. A member can be an individual or another incorporated body.

The activity requirements mean that an incorporated association must be formed or carried on for a lawful purpose, but must not have the purpose of trading or making pecuniary profit for its members. Nor is an association eligible for incorporation if it has a share capital, or if it is eligible to register as an employer or an employee association under the Workplace Relations Act 1996 (Cth). The restriction on trading and profit making activities is discussed in more detail later in this Part (see 'Activities of an association').

How to incorporate

An application for incorporation of an association is made to the Registrar General through the ACT Office of Regulatory Services (ORS) (see Contacts and Links for details) by completing an application form and paying the prescribed fee (in 2008-09 the fee is $138). Before making the application, the association will have to:

• approve a statement of the objects of the association;
• adopt rules of the association;
• appoint a committee of at least three members of the association;
• appoint a Public Officer (who must be resident in the Territory);
• reserve a name for the association;
• decide the address of the association's registered office, if any;
• authorise someone who is an ACT resident and who is at least 18 years old to make the application;

The Statement of Objects

An association's Statement of Objects sets out what the association intends to achieve and how it intends to do this (for example through fund raising, social events, meetings and so on). It is implicit in the Act that one of these objects will be the principal object of the association.

After it has been incorporated, an association may alter its objects. This requires passing a special resolution at a general meeting of the association, a copy of which is then lodged with the Registrar-General. A special resolution is one for which 21 days notice has been given, and which is passed by at least three quarters of the members who choose to exercise their voting rights.

The Rules of the Association

An association may draft and adopt its own set of rules, or it may adopt the model set of rules that are set out in Schedule 1 to the Associations Incorporation Regulations 1991 (ACT).

If the association adopts its own set of rules, these must be set out in consecutively numbered paragraphs, and must include the following matters:

• qualifications, if any, for membership; the and subscriptions payable by members.
• the liability, of any, of members for payment of the association's debts and liabilities or for the costs of winding up the association.
• the procedures, if any, for disciplining members.
• the name, constitution and powers of the committee of the association, and the election of committee members, their terms of office, vacation of office, and the quorum and meeting procedure of the committee.
• the frequency and convening of General Meetings, and the quorum, procedure, proxy voting and notice requirements for those meetings.
• the end-date of the association's financial year.
• the sources of the association's funding and the management of those funds (in particular, the handling of cheques drawn on the association's account).
• the custody and use of the association's common seal, books, documents or securities.
• the inspection by members of the association's books or documents.

When drafting the rules of an association it is also important to consider the contents of the model rules. If the association's rules do not make provision for something that is covered in the model rules, then the relevant provisions in the model rules will be treated as though they are part of the association's rules.

After it has been incorporated, an association may alter its rules, either wholly or in part. This includes adopting the model rules, or substituting the previously adopted model rules with specially drafted rules. Any such alteration requires passing a special resolution at a general meeting of the association, a copy of which is then lodged with the Registrar-General.

The Committee of the Association

Every incorporated association must have a committee comprised of at least three of its members. The committee has the task of managing the association. Under the model rules, a committee consists of three ordinary members and four office-bearers (a president, vice-president, treasurer, and secretary).

A person cannot be a member of the committee if, within the previous five years, they have been convicted of an indictable offence relating to the formation or management of a body corporate, or an offence involving fraud or dishonesty punishable by imprisonment for at least three months. Nor can a person who is insolvent under administration be a committee member. The Supreme Court may permit a person in any of these situations to accept an appointment.

The duties and liabilities of committee members are dealt with later in this chapter.

The Public Officer

Every incorporated association must have a Public Officer. This person must be at least 18 years old and a resident of the ACT. They may also hold another office in the association (for example they may be the Secretary of the association).

The Public Officer is, in effect, the official point of contact between the association and those people and organisations, particularly the Registrar-General, with which the association deals. Furthermore, a document or proceeding that requires authentication by an incorporated association may be authenticated by the signature of the public officer (or the secretary, if any) of the association and need not be authenticated under the common seal of the association.

Naming an association

Prior to applying for incorporation, an association may apply to the Registrar-General for reservation of a name. The name will be reserved unless it is considered by the Registrar-General to be undesirable, or it is already reserved, being used by another association, or it is likely to be mistaken for the name of another association. What constitutes an 'undesirable' name is not specified in the Act, but the Registrar-General has indicated that the name should not be misleading or offensive, nor should it suggest a connection with Government.

If the name is acceptable, it will be reserved for four months. If a name is refused by the Registrar-General, the association may apply to the Minister for a review of the decision.

The registered office

An incorporated association may have a registered office in the ACT to which communications and notices may be sent. A Post Office box is not acceptable. A registered office must open for at least three hours each day between 9 am and 5 pm Monday to Friday (excluding public holidays). It is not mandatory to have a Registered Office.

The consequences of incorporation

When an association is incorporated it is issued with a certificate of incorporation. From the date specified in that certificate, the association has a legal identity that is separate from that of its members. This means that the association can, its own name, enter into legal agreements, purchase and sell property, and may sue or be sued.

After an association has been incorporated, the name of the association must be shown in full, followed by the word 'Incorporated' or 'Inc.' on all association documents.

An incorporated association must have a common seal. This is a stamp (usually a rubber stamp) bearing the association's name. The common seal has effect as the 'signature' of the association.

Activities of an association

As noted previously, an incorporated association cannot be formed for the purpose of trading or making pecuniary gain for its members. This does not mean, however, that there is a total prohibition on an association trading or making gain. The Associations Incorporation Act says that an association may:

• make a profit itself, provided that this is not passed on to the members.
• buy, sell or deal in goods or services where this is ancillary to the principal object of the association and these transactions are not substantial in number or value, or they consist of admission fees to displays, exhibitions, contests, sporting fixtures or other events organised to promote the association's objects.
• provide facilities or services for its members.
• protect a trade, business, industry or calling, provided that the association does not engage or take part in that trade, business, industry or calling.
• allow members to derive a pecuniary gain from the enjoyment of facilities or services.
• pay remuneration to a member for goods or services supplied by that member.
• award prizes or trophies to members in contests directly related to the objects of the association.

Obligations of an association

Accounts and financial reporting

Throughout the financial year, an incorporated association must keep accounting records that correctly record and explain all of its transactions and its financial position. These records must be kept for at least seven years after the transactions to which they relate.

At the end of the financial year, and before the association's annual general meeting, the committee of the association must take steps to have a statement of the association's accounts prepared. These accounts must then be independently audited. If the association has a gross income of over $150,000 or has gross assets of more than $150,000, or has more than 1,000 members or holds a licence under the Liquor Act 1975 (ACT) then the auditor must be a member of one of the professional accounting bodies or be registered under the Corporations Act 2001 (Cth).

Within six months after the end of the association's financial year an association must lodge an annual return with the Registrar-General. This is done on a standard form available from the Registrar-General's office. The audited accounts and the auditor's report must be attached to this form.

Register of members

An incorporated association must maintain a register of its members. The register is kept either at the association's registered office or at the address of the public officer. The register should be available for inspection by members at all reasonable times, or at times that are specified in the rules of the association.

Meetings

An incorporated association must hold an annual general meeting (an AGM) in each calendar year. The AGM must be held within five months after the end of the association's financial year (as specified in the association's rules). The first AGM of an incorporated association must be held within 18 months of the date of incorporation. The association may also hold general meetings at other times during the year.

The formalities of calling a general meeting, and the conduct of the business at the meeting, will be governed by the rules of the association. At an AGM, the Associations Incorporation Act requires that the following documents should be presented to the members:

• the audited accounts for the most recent financial year
• a copy of the auditor's report in relation to the accounts
• a report signed by two members of the committee of the association that states the name of each member of the committee during the financial year, the principal activities of the association during that year (including any significant changes in the nature of those activities), and the net profit or loss of the association for that financial year.

Two members of the committee must certify in the association's annual return to the Registrar-General that the audited accounts have been presented to the AGM.

Membership

The process by which a person can become a member of an incorporated association will be specified in the rules of the association. The rules will also specify the amount of any joining fee or annual membership fee.

The rules of the association will also deal with the members' liability for the debts and obligations of the association. The basic position is that each member has limited liability. This means that after a member has paid any fees or subscriptions that are due, they are not liable for the debts or obligations of the association.

Duties and liabilities of committee members

There are certain duties and requirements that must be observed by any person who is a member of the committee of an incorporated association, or who is its public officer, treasurer, executive officer or the holder of any other office. These duties also extend to anyone who is involved in the management of the association's affairs, even if they have not been appointed to a formal position in the association.

The basic duty to the association is that the person must act in good faith when exercising their powers. This means that the person must make decisions by reference to what is in the association's interests, rather than their own interests. This also means that officers must declare any conflict of interest they have.

In particular, the Associations Incorporation Act says that if a committee member has a pecuniary interest in a contract which the association has entered, or is about to enter, then that person must disclose the nature and extent of that interest to the committee and to the next AGM. The committee member must not take part in any vote regarding the contract. Breach of these requirements may result in a fine of up to $2,000.

An officer of the association must not use his or her position to gain an advantage for anyone other than the association, or to cause detriment to the association. An officer who breaches this requirement faces penalties of up to $5,000 and or six months imprisonment. In addition the officer must account to the association for any profits which he or she has made.

Each member of the committee of the association must take reasonable care to ensure that the association complies with the Act. This includes ensuring that the account keeping and financial reporting obligations are met, and that the Registrar-General is duly notified of any changes in the association's address, name, rules, or details of its committee members or public officer.

An officer of an association is not personally liable for the debts or liabilities of the association (unless the rules of the association provide otherwise). Because it is a separate legal entity from its members and officers, an association is responsible for its own debts and liabilities.

An officer will be personally liable for breaches of duty to the association. This means that the association can seek to recover any loss it has suffered as a result of the officer's breach of duty. In addition, the Associations Incorporation Act imposes criminal liability for certain breaches of duty.

Ending an incorporated association

An incorporated association may come to an end in one of four ways:

• transfer to the Corporations Act;
• amalgamation with another incorporated association;
• winding up, voluntarily or by a court order;
• cancellation by the Registrar.

Transfer to the Corporations Act

An incorporated association may apply to the Registrar-General to transfer its incorporation from the Associations Incorporation Act to the Corporations Act 2001 (Cth). The association then becomes a company limited by guarantee. An association may also be directed by the Registrar-General to transfer its incorporation. This might occur where the size or scope of the association's activities makes it more appropriate that it be regulated under the Corporations Act.

Amalgamation

An incorporated association may amalgamate with another incorporated association. In this case, the two associations are merged together to be a new incorporated association and the assets and liabilities of each association are deemed to be those of the new association.

Winding up

An incorporated association may be wound up, either voluntarily or by a court order. A voluntary winding up requires the members pass a special resolution to this effect. The Supreme Court may order that an association be wound up if:

• the association passes a special resolution that it be wound up by the court;
• the association does not begin its operations within one year after it is incorporated;
• the association suspends its operations for more than one year;
• the association is unable to pay its debts;
• the association trades or secures pecuniary gain for its members other than as permitted by the Act;
• the association acts outside the scope of its statement of objects;
• the committee of the association acts outside the scope of the objects or against the interests of the members;
• the court believes that it is just and equitable to make the order.

An application to the Court for winding up can be made by the association, a member, a creditor, or by the Registrar-General.

Cancellation of incorporation

The Registrar-General may cancel the incorporation of an association if there are reasonable grounds to believe that:

• it is not in operation; or
• it has fewer than five members; or
• it was incorporated as a result of a fraud or mistake; or
• it has not convened an AGM or lodged an annual return during the previous three years.

Taxation of Community Organisations

Community organisations, unless they are specifically exempt, will generally be required to pay tax on income and money received from people who are not members. This could include money received as a result of fundraising functions, raffles, street stalls and similar activities.

Tax benefits and concessions may be available for organisations in the community and not-for-profit sector. These include income tax exemptions, which are available for a charitable organisation, or a society, association or club that is established for community service purposes and which is not carried on for profit or gain of individual members. A not-for-profit organisation is permitted to make a surplus, but any surplus it makes must be used to carry out its purpose and must not be distributed to its members or other people.

It is necessary for the organisation's constitution to be appropriately drafted in order to attract these benefits (including clauses that prevent the distribution of profits or assets to members, both while the organisation is operating and on winding up).

In order to obtain income tax exemption as a charitable organisation, an organisation must be 'endorsed' by the Australian Tax Office. One pre-condition to being endorsed is that the organisation must have an Australian Business Number.

It may also be possible for an organisation to be endorsed as a deductible gift recipient (meaning that donations to the organisation are tax-deductible to the person making the donation). In the context of this chapter, this form of exemption is generally only available to public benevolent institutions. A public benevolent institution is a non-profit institution that has the dominant purpose of directly providing services to people in situations of poverty, sickness, suffering, distress, misfortune, disability or helplessness.

It is necessary to obtain expert advice about the income tax status of a particular community organisation. Further information is available from the Australian Taxation Office.

ABN and GST

An Australian Business Number, or ABN, is a unique identifying number for an enterprise (for tax purposes, the term "enterprise" covers both business and community organisations). Not all organisations will fall under the definition of "enterprise". Even if your organisation is eligible, there is no compulsion to obtain an ABN. The main disadvantage of not having an ABN is that people who make payments to the organisation may have to withhold 48.5% (the current withholding tax rate) of those amounts. Another possible disadvantage is that, as noted earlier, having an ABN is a precondition to obtaining Tax Office endorsement for the purposes of tax exemption.

Registration for Goods and Services Tax (GST) is independent of obtaining an ABN. GST registration is compulsory if a not-for-profit organisation has a turnover of more than $100,000 per year (the figure is $50,000 in the case of a for-profit organisation). If your organisation's turnover is less than this, it may nevertheless choose to register.

If an organisation is registered for GST then it will be eligible to claim input tax credits. This means that it can obtain a refund of the GST it pays when purchasing goods or services. Equally, it will be required to remit to the Tax Office the amounts of GST that it collects when charging for goods or services (including membership fees or subscription charges). There are significant reporting, accounting and compliance costs associated with this.

The rules governing Australian Business Numbers and GST are complex, and expert professional advice should be sought.

Insurances for Community Organisations

Depending on the type and scope of its activities, it may be prudent for a community organisation to consider taking out appropriate insurance cover. If the organisation has corporate status (for example, an incorporated association), then this can be done in the name of the organisation. Different types of risk are covered by different types of policy, and it is not possible to give a full description here. Instead, four types of particular relevance to community organisations are mentioned.

Public Liability Insurance

Public liability insurance protects an organisation against claims made by people who are injured or who suffer property damage that is caused by the negligent acts in the operation of the organisation's business. Some policies may also cover injuries resulting from products sold or supplied, such as food or goods sold in fundraising activities.

Advice should be sought about the appropriate amount of cover to ensure that policy is relevant to your organisation's particular needs. You should also check to see to what extent your volunteers are covered.

Personal Accident Insurance

As noted above, public liability insurance protects the organisation with regard to negligent actions on behalf of the organisation that injure third parties. Personal accident insurance provides funds to meet claims made by members, officers, or volunteers, for loss resulting from accidental injury, disability or death while working on behalf of the organisation.

Directors and Officers Liability Insurance

Incorporation as an incorporated association, company, or cooperative does not give limited liability to members of the board or management committee for acts of negligence. If your community organisation is incorporated and has a large operating budget or is involved in activities involving risk, it may also be appropriate to take out directors and officers liability insurance (D&O).

Worker's Compensation

This form of insurance is compulsory where the organisation has paid employees. It is designed to cover items such as wages and medical bills if a person is injured at work and is charged as a percentage of the total wages bill.

Professional Indemnity Insurance

Professional indemnity insurance (PII) protects employees and the organisation against liability for negligent advice or actions which affect clients of the organisation. PII is compulsory in some settings (for example legal or medical services) and highly desirable in some other settings such as counselling.

Fund Raising

Contacts, Links and Resources

ACT Registrar-General www.ors.act.gov.au

ACT Government On-Line Risk Advisory Service for Community Groups www.insuranceriskadvice.act.gov.au/riskadvisory/risk.nsf

ACT Planning and Land Authority (ACTPLA) www.actpla.act.gov.au

Australian Securities and Investments Commission

• Home Page: www.asic.gov.au
• Fido Consumer Website: http://fido.asic.gov.au

Australian Taxation Office www.ato.gov.au

Canberra Connect www.canberraconnect.act.gov.au

Department of Families, Housing, Community Services and Indigenous Affairs www.fahcsia.gov.au

Registrar of Indigenous Corporations (ORIC) www.orac.gov.au