By Lachlan Clark, Law Graduate

The economic and social upheaval stemming from the COVID-19 pandemic has left the Australian not-for-profit sector searching for practices to ensure its viability in these uncertain times. As charities experience both increased costs and demand for their services, they may need to seek new avenues to generate revenue or manage their operations. Charities may consider exploring mergers and collaborations, or evaluating new commercialisation opportunities. In the event that a charity determines its operations are unviable, it may be forced to dissolve.

What is the impact of COVID-19 for charities?

The COVID-19 pandemic has resulted in a sharp decline in revenue and an increase in costs for Australian charities. Amidst calls for the Federal government to extend its JobKeeper program, some charities have been forced to reduce the scope of their operations.[1] A recent report by Social Ventures Australia has modelled that a 20% drop in revenue flowing from the pandemic would result in 17% of Australian charities being at high risk of being forced to wind up within six months.[2] Such a fall in revenue would also result in over 200,000 jobs (almost one-fifth of the sector) being lost.[3] The not-for-profit sector has a proportionally large reliance on the JobKeeper program, as also indicated in a recent survey conducted by the Australian Institute of Company Directors.[4] Charities will need to act prudently to mitigate the effects of the impending ‘October Cliff’, when the JobKeeper program ceases. For further information, law graduate Ariane Thierry’s article discussing Social Ventures Australia’s report can be accessed here.

Income Generation

Australian charities are increasingly turning to commercialisation opportunities as a means of generating income.  These can range from the sale of related goods to performing paid not-for-profit services. As a guiding rule, the subject matter of a commercial venture should be directly related to the charity’s objects.  This allows the charity to generate additional income whilst still complying with the law as regulated by the Australian Charities and Not-for-profits Commission (ACNC) and the Australian Taxation Office.[5]

A venture into commercialisation can take a number of forms. A charity may wish to integrate commercial activities into its existing structure, or even incorporate a separate entity that controls the commercial activity. These structures bring a number of specific considerations and provide a degree of flexibility to meet the charity’s needs. Commercialisation requires creative thinking, but can become a potentially valuable undertaking for a charity affected by COVID-19. Mills Oakley has created a useful Income Generation Toolkit for charities which can be found here.

Collaboration

In the event that a permanent commercial venture is not an appropriate avenue, entering into a collaboration agreement could assist a charity through the hardship caused by COVID-19. In its simplest form, collaboration occurs between two pre-existing organisations for mutual benefit. A common example of this is a for-profit company selling products to the public, with an agreement in place to donate a portion of the sale proceeds to the charity.

An emerging trend in the Australian not-for-profit sector is the establishment of social enterprises. This is a structure that is driven by a public cause, trades for profit, and applies the majority of those profits to the cause. Social enterprises can be created in a number of different forms in order to best serve the needs of a charity. For more information on establishing a social enterprise and the considerations that this entails, please view our Social Enterprise Toolkit here.

Mergers

A charity experiencing greater hardship may wish to consider a merger with another similar entity. In the event that an entity is no longer viable, exploring the options around mergers could allow a charity (or charities) to continue their work. Finding a compatible organisation for this process can be an arduous task. A merger will require careful consideration of the best interests of both organisations, as well as stakeholders such as employees and beneficiaries.

Where two such entities have a shared vision that involves a merger, there are a number of options available to them. The structure of a merger generally can take one of four forms:

• Entity ‘A’ subsumed by Entity ‘B’ – One entity transfers all of its property, employees, contracts and assets to another and then ceases to exist. Entity ‘B’ continues on.
• Entity ‘A’ as a subsidiary of Entity ‘B’ – One entity becomes the parent of the other, and both continue to exist with separate legal liability.
• New parent Entity ‘C’ – A new entity is created that sits above both Entity ‘A’ and ‘B’. This allows both to continue on with a new parent entity.
• New parent Entity ‘C’ and Entity ‘A’ and Entity ‘B’ cease to exist – Both Entity ‘A’ and ‘B’ transfer all of their property, employees, contracts and assets to Entity ‘C’ and are then wound up or deregistered.

With careful planning the entities can enjoy the benefits of economies of scale and increased funds whilst maintaining their good brand images. For further information on mergers, please view the Mills Oakley Mergers Toolkit here.

Dissolution

A charity that finds itself unviable due to the economic climate may be forced to commence dissolution. This is a final, permanent action that a charity can take in the event that it is unsustainable into the future. Dissolution can be broadly grouped into three distinct forms:

• Voluntary Deregistration – A relatively simple process whereby a charity with limited assets and outstanding liabilities is deregistered.
• Voluntary Winding Up – A more involved process in which members appoint a liquidator to distribute the entity’s assets. This has the advantage of significantly reducing the risk that a claim can be brought against the charity in the future.
• Involuntary Winding Up – A charity that is insolvent must appoint a liquidator to manage the charity. If a charity is insolvent and has not acted to appoint an administrator or liquidator, a court may order that the charity be wound up.

It is of critical importance that any form of dissolution is performed in line with the charity’s governing documents. Charities are strongly encouraged to seek independent professional advice if they wish to commence voluntary deregistration or winding up.

Mills Oakley is developing a resources package to assist charities during and post-COVID-19. Please keep an eye out for these toolkits and more, along with an upcoming Question and Answer with Vera Visevic from Mills Oakley, and Vishal Modi and Anita Cohen from Nexia Australia.

[1] Luke Michael, ‘COVID Crisis forces closure of charity co-op medical clinic’, Pro Bono News Australia(10 June 2020).

[2] Social Ventures Australia, ‘Will Australian charities be COVID-19 casualties or partners in recovery? A financial health check’, (June 2020).

[3] SVA, ‘Will Australian charities be COVID-19 casualties or partners in recovery? A financial health check’,(June 2020) p 3.

[4] Australian Institute of Company Directors, ‘The governance impact of COVID-19; AICD Member Survey Findings’, (June 2020) p 16.

[5] For further information see the ACNC ‘Charity money myths’ fact sheet here or Tax Ruling 2011/4 which can be accessed here.