Proposed reduction of red tape for companies limited by guarantee

On 4 December 2009, the Federal Government announced a proposal to amend the Corporations Law which will affect the not-for-profit 'company limited by guarantee' legal structure.  The proposed changes will be relevant to not-for-profit organisations that are:

• a company limited by guarantee; or
• currently an incorporated association, but are thinking of changing to a company limited by guarantee structure; or
• not yet legally incorporated, but are thinking of doing so. 

Currently all companies limited by guarantee must have their accounts audited by a registered company auditor. This can be a significant burden for small groups.  

The proposed changes will introduce a three-tiered reporting system.  This tiered system will mean companies limited by guarantee will have varying levels of reporting responsibilities, depending on the size of their annual revenue and whether the organisation is endorsed as a Deductible Gift Recipient (DGR) for tax purposes.  

To give you a quick feel for what is being proposed, the following is a summary of the key changes:

FIRST TIER
Companies limited by guarantee with annual revenue less than $250,000 without DGR status

• No financial report required (unless requested by 5% of members or by ASIC)
• No Director's report required (unless requested by 5% of members or by ASIC)
• No audit/review of accounts required (unless requested by 5% of members or by ASIC)

SECOND TIER
Companies with annual revenue less than $250,000 with DGR status
or
Companies with annual revenue over $250,000 but less than $1 million (with or without DGR status)

• Required to produce a financial report which can be 'reviewed' instead of audited*
• Required to produce a 'streamlined' Director's report (less detailed than a full Director's report)
• Members to be notified of annual reports (rather than automatic distribution)

THIRD TIER
Companies with annual revenue over $1 million (with or without DGR status)

• Required to produce an audited financial report
• Required to produce a 'streamlined' Director's report (less detailed than a full Director's report)
• Members to be notified of annual reports (rather than automatic distribution)

* Note: under the proposed laws, companies in the second tier will have an option to have their annual report 'reviewed' as opposed to 'audited'.  A review is less onerous than an audit - it does not provide an assurance that the annual statement is free from material misstatement.

PilchConnect has been advocating for this type of tiered reporting for not-for-profit companies since the issue was first raised in 2007. So, in general terms, these are welcome reforms!  

But be careful!  Even if your group is small, your members or Board may still want the accounts to be audited, or those that provide funding to you (such as government) may still require it.  You should check your constitution and funding documents to determine this.

PilchConnect will continue to keep you informed about these reforms over the coming months. It is currently proposed that these new reporting requirements will come into force by 30 June 2010. So please, watch this space! 

On 2 February, 2010 PilchConnect made a submission on the draft wording of the legislation (see link below). PilchConnect also made a submission in 2007 on the related discussion paper (called 'Unlisted Public Companies Discussion Paper', also see link below).

For the full text of the Bill, together with the Government’s explanatory material is available on the Federal Treasury website below.

Related links