May 2015 Newsletter
Five Years CCA – And big cheers for small community organisations.
GST and Auctions – Auctioning donated goods? Read this.
Bank Accounting – How many bank accounts should you have?
The Road to 2016 – Confidentiality alert: are you at risk of infringing on someone’s privacy?
Five Years CCA
May marks the fifth anniversary of CCA becoming a registered Charity. Our aim was (and still is) to make accounting services accessible to the not-for-profit sector, not just in money terms but also by being available to help.
CCA exists to help small not-for-profits in particular. In financial terms they are almost by default less efficient than larger organisations, but in non-financial terms they are mostly irreplaceable, because they deliver superior value as a result of their local knowledge and their flexibility to meet individual needs. The larger an organisation grows, the less room there is for inefficiencies, such as time-consuming needy clients which generate few measurable outcomes. ‘Compassion’ is not fundable in today’s environment…
This doesn’t just apply to the social service sector. My daughters used to play soccer, until their club was asked by soccer’s national body to merge with another to create better teams and higher performance. Just playing soccer for the fun of it became a secondary consideration, and suddenly there were fewer resources available for all but the top teams in the club. The new club had improved its measurable outcomes and outputs – but the quality of the experience and its value to the community was now lower than before for many.
The small, often ‘invisible’ community groups form the social backbone of our society. As Sharon Torstonson, from Council of Social Services, reminded us, it was the not-for-profit sector that first responded and held things together after the earthquakes.
In the environmental sector, much focus is on Greenpeace’s and Forest & Bird’s efforts to fight global warming, but it is much smaller groups that are responsible for the fact that native vegetation cover on the Port Hills and Peninsula are increasing, that endangered and unique endemic plants can hold in in our city’s wetlands, and that a ‘river park’ in the red zone of the Eastern suburbs may become a reality.
It is a lot more complex to run a not-for-profit than to run a business of the same size. There is a much heavier compliance burden on not-for-profits, and higher structural demands on governance where almost every decision needs the consensus of several people. CCA is here to help make those processes as efficient as possible so community groups know where they stand financially at any time, and can get on with doing what they need to do, and do it well.
To me the last five years have revealed how important it is that there is an accounting organisation that does nothing else but not-for-profits. While many skills are transferable between business and community organisations, some of the concepts, thinking, mode of work and goals are fundamentally different between the two, and to properly understand this you need to be more immersed in the not-for-profit sector. I hope the next five years will be as satisfying and fulfilling as the last.
GST and Charity Auctions
Selling off donated goods and prizes through an auction is a great way to fundraise – though also often a lot of work to organise. The sale of donated goods or services does not attract GST and you get to keep all the money to yourself!
A lesser known fact is that because of this exemption you cannot claim back GST on any expenditure to do with this auction either. If, for example, you had to hire a hall, put on some food and drinks, and perhaps pay an auctioneer to do it for you, you cannot claim GST on any of these expenses, even if you hold a Tax Invoice for them!
It can get a little messy if there are other activities running besides the auction. For example if you are also using the opportunity to sign up new members or sell merchandise or other items, these are all ‘taxable supplies’ and GST has to be paid from that income. So what about the expenses?
Inland Revenue says that in the case where there is a mix of taxable and non-taxable activity you have to apportion a percentage generally based on your takings for that night. For example if you raised $3,500 in total (gross) at your event, and $500 of this was through the sale of merchandise, you can claim GST on 500/3500×100 = 14.3% of your GST-bearing expenses. Make sure you keep good records on that one!
Further, there is a difference between an auction and a raffle when it comes to GST. Raffle income is fully GST-liable, even if the prizes are donated goods or services. This is because the prizes are just the ‘hook’ to get people to purchase raffle tickets, and the items are awarded rather than sold for a specific price.
How many bank accounts do you need?
Quite a few community groups we work with create probably quite unnecessary administrative work for themselves by maintaining several bank accounts. These accounts often hold the monies received from a specific funder, or used for a specific project. This can get especially messy when the organisation is GST-registered, and there are organisations holding two or more GST registrations for the privilege of being able to pay each project’s proportion of GST separately. There tends to be a lot of transferring of money between accounts, as money is sometimes banked erroneously in the ‘wrong’ account, PAYE for some employees who are paid out of one account is paid from another, or similar.
Accounting software, including the CCA spreadsheets, offer tracking functionality to keep track of monies belonging to a specific project or programme, or expenditure from specific grants, and there is no need to hold this in separate bank accounts. By spreading your cash over several accounts you are also robbing yourself of the ability to pool your funds and earn some interest on them.
Every organisation needs one transactions bank account. There are two main reasons, however, why it may be a good idea to have other bank accounts:
- To earn interest: many online savings accounts bear much higher interest than ordinary transactions accounts, and do not allow to pay external suppliers from them directly.
- To create different signatories: you may have a pool of funds that is administered by a sub-group of your organisation or one that is under your ‘umbrella’. Some organisations have ‘petty cash’ accounts for key people in the organisation.
You can think of bank account as a box of cash that is locked in a room with a key. If you need different people to have access to different pots of cash, you have several cash boxes in several rooms, and people get a key for the room with the cash in it that they are responsible for. However, this is no longer useful if the same people have keys for all the rooms with cash boxes!
The Road to 2016
Monthly feature to prepare for the new Financial Reporting Standards for Charities.
The new Financial Reporting Standards require a lot more information to be disclosed than previous ‘Generally Accepted Accounting Practice’, or GAAP. This includes potentially private information.
The Charities Register being public has always presented problems for small organisations; for example if the organisation has only one employee, then someone who knows that that person works there can usually look up their earnings through the public Financial Statements.
The new rules require information about ‘outputs’ and ‘outcomes’, volunteer involvement, ‘related party’ transactions and other similar information that may, usually accidentally, reveal information about a member, staff or volunteer of the organisation that they do not necessarily want made public.
One organisation, eager to get used to the new format, used their Chairperson’s report as the ‘outcomes’ section – but this report contained names of individual volunteers or Board members in connection with various activities of the organisation.
We have also come across situations where a Board member of an organisation makes significant private donations to that organisation. Under the new rules these can no longer remain anonymous but need to be publicly disclosed.
The risk of someone’s personal earnings being publicly disclosed becomes much greater where an organisation has only one employee (or has several but discloses salaries/wages separately for the different functions) and a narrative of some sort is required as under the new rules. That person may accidentally be mentioned – or even deliberately, for example with a thank you, without realising the privacy implications of that acknowledgment in connection with other information in the same report.
Then there are organisations dealing with sensitive groups (for example prison inmates or their families; or victims of violence) who may be forced to disclose payments to volunteers as ‘related party transactions’ (maybe because they also play a role on the Board), with those individuals then having to be named and potentially being put at risk.
These are issues for small organisations only, as for larger organisations such transactions will be too small to be considered material enough to disclose, and the payroll figure is too high to allow conclusions about any individual’s earnings. This may be one reason why no other country has chosen to require these kinds of disclosures from small entities (business or not-for-profit).
It will be more important than ever to closely look at what potentially confidential and private information an outside party could glean from the new reports, and make sure that those working in the not-for-profit sector are not unduly disadvantaged.