IMHO: Charities Act reform – where to for social enterprise?

As the minister for the community and voluntary sector unveils the proposed new rules for the charitable sector in early June, including in relation to the “accumulated funds” of charities with operating expenses over $140,000 a year, an interesting and important conversation is opening up about the oversight of charity management and social enterprise.

The current review of the Charities Act and proposed reform of the sector under the Department of Internal Affairs is looking at funds held in reserve (or accumulated) by charities, and is considering, the minister says, new rules requiring distribution plans for funds, and requirements that a percentage of funds charities hold be distributed towards their charitable purpose. Cash holdings, assets like shares, and other resources are being reviewed.

This is a good thing. New Zealanders are staggeringly generous by global metrics, with about $3.8 billion in giving and charitable distribution annually, and there are significant advantages in sector reform – as long as change covers the full breadth of charitable purposes.

To start with, it's important to recognise that charities have quite a bit in common with for-profit enterprise, in that they need to have a sustainable funding base to deliver on their charitable purposes and have a safety net, as it were, to see them through any fallow periods (such as a pandemic, when many fundraising opportunities dried up). For any organisation, it's good practice to have reserves to maintain stability.

Charities must fulfil their charitable purposes as their primary objective, so this proposed element of reform should account for the context of the overall delivery and impact that any charity is providing, balanced by charities being allowed to have reasonable reserves in place for their sustainability.

Clarity needed

With perhaps 80% of all charities meeting the threshold of $140,000 in annual operating expenses, the sector will ask for clear guidelines from the government about what reporting is needed to meet the threshold of transparency and show why they have funds in reserve.

Secondly, reform creates a prime opportunity for social enterprise to be recognised and supported within the legislative structure.

Social enterprises sit at the intersection of business and philanthropy, as entities that generate a profit through trading or other activities, and those profits are used for community, society, or environmental benefit.

In Scotland, which has a similar population base to New Zealand, social enterprise has been actively enabled and supported through government strategy and policy.

As a result, the sector has created more than 88,000 jobs and contributes GBP2.3 billion to the Scottish economy each year. There's a range of legal structures for social enterprises, including community interest companies, and surpluses can be used for charitable purposes and also maintained within the business to enable sustainability.

New Zealand doesn’t yet have such structures available, and organisations such as Perpetual Guardian, which have interests in the social enterprise space and are equipped to support the growth of the sector, have raised these issues with the Department of Internal Affairs via a collective response through Philanthropy NZ, which has written its final reflections to the DIA on the Charities Act review.

Independent regulator

Charities law expert Sue Barker has written a comprehensive paper with recommendations  based on her review of sector oversight in different jurisdictions. 

One of the points the paper makes is that New Zealand would benefit from an independent regulator of the charitable sector to ensure a more robust approach, such as the UK's.

This makes a lot of sense, given the size of our sector. It would be based on best practice in other jurisdictions, would help build greater transparency across the sector, and would ensure appropriate resourcing for regulatory oversight, so engagement with organisations would be well-organised, fair and consistent.

The regulator could oversee all organisations which have a charitable purpose, so it could include social enterprises and churches, the latter of which is a particular focus of the proposed reform.

It's critical that reform creates a clear legal space and opportunity for social enterprise, because the sector is growing regardless, and has been for some years.

A great example is Ōtautahi/Christchurch-based Kilmarnock Enterprises, which creates meaningful jobs for people with disabilities. The enterprise offers high-quality outsourcing solutions for businesses, and services include collating and packing, assembly, labelling, shrink wrapping, and e-recycling.

The commercial operations sit alongside in-house training and upskilling programmes for employees and members of the community, supporting people to gain qualifications and diverse skill sets through the Kilmarnock Academy.

Reform can resolve the grey area where social enterprises cannot operate as charities – and receive the corresponding tax benefits – because they're perceived as being like businesses, but at the same time they're not eligible for business benefits because of their social focus.

Charitable funders, professional trustees and grant managers sit ready to give further guidance to the minister and cabinet as they work through the review process.

We can all agree that reform is needed and can only help a sector which provides enormous value to New Zealanders, and in many cases offers practical help or essential funding that the state cannot. 

This article was original published by BusinessDesk.

About the author

Liz Gibbs MInstD is group head of philanthropy at Perpetual Guardian. She has more than 30 years’ experience in philanthropy, NGO management and governance. She was part of the government-appointed Strategic Group on Social Enterprise which delivered the Social Enterprise and Social Finance: A Path to Growth commentary from former minister Jo Goodhew.

The views expressed in this article do not reflect the position of the IoD unless explicitly stated.

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