COVID-19 and the not-for-profit sector

12 minute read  17.04.2020 Geraldine Johns-Putra

To assist NFPs, we have prepared the following guide to help navigate the impacts of COVID-19.

As with all organisations in these challenging times, not-for profits (NFPs) need to focus on finding a balance between acting within the law, preserving precious resources, continuing their operations as best as possible and looking after the interests of multiple stakeholders. For NFPs, these include customers, employees, volunteers, clients and donors – as well as those served by its mission or purpose.

Directors and Boards

Insolvent trading

With the economic stress imposed by this crisis, NFP boards need to especially keep watch on whether the organisation can continue to meet its financial obligations as and when they fall due.

For NFPs that are companies incorporated under the Corporations Act 2001 (Cth), the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) relieves company directors from personal liability for trading while insolvent for the next six months (until 25 September 2020). Directors must, however, continue to act in the 'ordinary course of business', which is expected to alter to facilitate responses to the pandemic. The directors must also continue to act in good faith and in the best interests of the company.

See COVID-19 response - six month suspension of insolvency laws for more information.

The introduction of the new legislation increases the threshold of statutory demands from $2,000 to $20,000. Similarly, the threshold amount for bankruptcy notices increases from $5,000 to $20,000. The time frame to comply with a statutory demand has been extended from 21 days to six months.

However, any debts incurred will still be payable by the company. Directors should make careful consideration to the existing Corporations Act duties that continue to apply including acting in the best interest of the company and acting with care and due diligence. Any cases of fraud and dishonesty will continue to be subject to criminal penalties.

For charities registered with the Australian Charities and Not-for-Profits Commission (ACNC), the ACNC also provides directors of charities temporary relief under ACNC Governance Standards from personal liability to prevent insolvent trading if a relevant debt is incurred in the ordinary course of business from 25 March 2020 until 25 September 2020 and before the appointment of an administrator or liquidator. This will apply to all ACNC registered charities (not just those that are companies limited by guarantee). Charities must, however, still inform its members and the ACNC if it trades insolvent.

Board meetings during COVID-19

To ensure appropriate communication and enable quick decision-making, all boards should consider meeting more frequently with management and employees, and seek to establish a rhythm of frequent meetings, for the duration of the crisis. Directors may also consider establishing a crisis management team, which reports back to the board on the company response to the crisis.

A structured agenda becomes important during times of uncertainty, as they channel the direction of the meetings and provide a clear plan.

Agendas are also particularly useful when boards are adjusting to meeting electronically for the first time. Directors should ensure they have access to electronic platforms that will enable the board to function electronically. There are a number of platforms that provide cost-effective meeting technology including Zoom (free to download), Skype (free to download), google hangouts premium (free until 1 July 2020), Microsoft Teams (free for six months), and GoToMeeting (free for three months). Be mindful of utilising appropriate security and privacy measures for online meetings such as protecting passwords and meetings IDs.

Postponing Annual General Meetings (AGMs) and reporting

The ACNC has advised that AGMs of registered charities can be postponed if they cannot be conducted safely, and will not take action unless there is evidence of wider non-compliance.

For NFPs that are companies, ASIC has additionally announced it will withhold the 'use of appropriate technology' requirement in an effort to make AGMs more convenient. ASIC will take no action if AGMs do not take place before the end of July. This timeframe will likely be revised pending the impact of COVID-19 over the coming months. Directors should review the company's governing document for guidance on whether the AGM can be held electronically and remotely, including consideration to the cost of running an audio or video meeting. If directors do decide to postpone the AGM, directors should consider alternate ways to demonstrate accountability to members.

The ACNC Commissioner has clarified that NFPs with Annual Statements due between 12 March 2020 and 30 August 2020 now have an extension until 31 August 2020.

Finance – preserving funding, reducing costs

Existing sources of funding

NFPs need to consider whether the organisation has existing funds which can be accessed to carry it through the short term. Directors and management should review the current allocation of funds and how these funds are intended to be utilised. Now may be the time to review if the NFP can access any reserves it may hold. Reserves are unrestricted funds that may be applied at the NFP's own discretion. This is especially relevant for charities whose usual sources of funds have a specified purpose for use, as reserves may generally be use at the charity's discretion. Any expenditure of reserves should be carefully recorded.

Donor relations are as vital as ever in these times. NFPs need to maintain clear lines of communication with donors and keep donors updated regularly. For larger donors, the NFP may consider regular and customised communication, including providing frequent updates and seeking donor input. Smaller donors may be contacted via regular all-donor bulletins. Where donations or grants are tied, discussions could take place to seek flexibility to allow funds to be re-purposed to allow flexibility in use or to facilitate a 'pivot' of the business in light of current circumstance which may impact ability to deliver programs.

Where the NFP has received money committed through fundraisers and events that have had to be cancelled or postponed, the NFP should be transparent about what will happen to the funds already raised - for example, if they will be refunded, held over until the event can proceed, or dedicated towards a future fundraising appeal or effort. Each State and Territory has its own charitable fundraising laws and the NFP will need to ensure that it acts in accordance with the laws that apply to it, including any requirements around accounting for proceeds.

Accessing government funding and relief

Government stimulus funding is an important alternative source for funding for all organisations at present. One of the most important of these is the 'cash flow boost' announced by the federal government, which will provide a tax-free cash boost of between $20,000 and $50,000 to support eligible businesses (small to medium size businesses), including NFPs.

The cash flow boost is available to companies with an aggregated annual turnover under $50 million (which is generally based on prior year turnover). A company will need to have had an ABN on 12 March 2020. To be eligible, the company will also need to have made payments to an employee or director where there is a withholding obligation (even if the amount withheld is zero).

In order to receive the 'cash flow boost', a separate application is not required. The boost will be delivered as credits not payments when a company submits its activity statement (either a monthly March 2020 or quarterly March 2020 activity statement).

See: Latest COVID-19 Government stimulus package: new support for business

NFPs should also carefully consider their eligibility to apply for government grants or, where they already obtain grant funding, check if they are able to obtain accommodation on grant conditions if this is needed, for example if the purpose for which the grant was provided cannot be currently pursued. A number of government departments who provide grants (such as the Commonwealth Department of Social Services [DSS]) are continuing to process new grant applications while being prepared to extend flexibility on grant conditions. More information is available at the Federal government's Community Grants Hub.

NFPs should also consider whether they may be able to access any of the federal and state tax concessions/reliefs that have been announced in the aftermath of the COVID-19 outbreak. For example, the various state and territory revenue authorities have made changes to the way in which their payroll tax laws will be administered – including tax waivers and payment deferrals – which some NFPs who do not qualify in full for the charities exemption may be able to access. The Australian Taxation Office (ATO) will also allow businesses on a quarterly GST reporting cycle to opt into monthly GST reporting in order to obtain quicker access to GST refunds that they may be entitled to. NFPs who pay fringe benefit tax can also request a payment deferral of up to six months where the original payment due date was after 23 January 2020, and can apply for a remission of any interest and/or penalties that were incurred on or after 23 January 2020.

Some concessions have also been introduced to the way in which the compulsory superannuation guarantee (SG) contribution regime will be administered.

Although SG contributions must still be made, and the ATO does not have any discretion to extend the due dates, NFPs who are facing difficulties in making contributions on their employee's behalf in full and on time can enter into payment arrangements with the ATO which may avoid them being subject to penalties which are otherwise payable.

NFPs should contact the ATO's Emergency Support Infoline (1800 806 218) to request access to any of the above relief measures.

For a complete summary of the tax concessions and relief measures announced by the Commonwealth, State and Territory governments, Revenue Authority and ATO, see: Latest COVID-19 Government stimulus package: new support for business

Reducing costs – tenancy & contracts

In addition to protecting income, NFPs must urgently consider reducing costs. One of the most significant costs for NFPs, as with many organisations, is rent. The Federal government has agreed to a six month moratorium on evictions for commercial tenants which companies can utilise. This has prompted many tenants to renegotiate rent under leases with landlords.

See: COVID-19: additional funding and further restrictions

To further manage costs, NFPs should consider options that may be available in its contracts with suppliers, service providers and government. A force majeure clause, for example, might operate to relieve the NFP from performing its contractual obligations due to COVID-19 (a force majeure is an event that is outside the reasonable control of the affected party and may offer grounds for suspending performance of obligations). When reviewing force majeure clauses, consider whether the definition of a force majeure event includes circumstances such as 'infectious disease', 'epidemic', 'pandemic' or similar. It is also possible that COVID-19 could lead to the occurrence of other events usually included in a force majeure definition such as 'government action', 'national emergency' or 'labour shortages'.

In entering into new contracts, consideration should be given to including appropriate force majeure provisions.

See: COVID-19: Force majeure and frustration of your contracts

By proactively having conversations with suppliers and service providers, NFPs could seek to extend terms of trade where this is needed, or explore options for termination if this would be more cost-effective in the long run. However, one needs to be mindful of any wrongful termination provisions in the contract, in the event a party's right to terminate is disputed.

Operations during COVID-19 pandemic

Operating within purpose

Some NFP operations may still be permitted to continue as an essential service under restrictions introduced by the National Cabinet. It may be necessary to seek clarification from the state or territory government where the NFP operates if any uncertainty exists. As with many organisations, the NFP will need to explore shifting operations online to the extent necessary.

Consideration should be given to alternative strategies for delivering on mission in the current climate and whether it is possible to deliver programs in another way or whether other opportunities exist or are emerging as a result of transitional or structural changes that are emerging in these disrupted times.

Whatever the modifications, the activities must still be consistent with the NFP's objects or charitable purpose, unless it is a charity registered with the ACNC and complies with the ACNC's announced changes to the way in which it will enforce compliance at this time. The ACNC has determined that it will not enforce breaches of its Governance Standard 1 and External Conduct Standard 1 requiring a charity to operate within its charitable purposes, provided that the charity can reasonably show that its members would approve of the activity and documents how it believes the new activities align with its charitable purposes or is incidental or ancillary to its charitable purposes.

Employees and volunteers

NFPs rely extensively on volunteers. Volunteering Australia advises that volunteers are under no obligation to continue to volunteer if they do not feel comfortable doing so. NFPs should be cognisant of their WH&S responsibilities to volunteers and adjust volunteering roles as much as possible to protect the safety of volunteers during COVID-19. This could include moving volunteering to online platforms, reducing the number of hours required, facilitating working from home, and reducing or eliminating all face-to-face contact (or ensuring appropriate safety equipment and steps are taken to appropriately manage risk and ensure employee safety). NFPs should also consult with their insurers about implications of maintaining volunteer roles during COVID-19, as it is likely health and safety insurance will not cover pandemics.

When it comes to retaining employees, the Federal government's 'JobKeeper' wage subsidy is a key measure. The government has introduced legislation that will enable a charity registered with the ACNC to access the JobKeeper scheme if it has had a reduction in revenue of 15% or more since 1 March 2020 (regardless of the annual turnover of the charity). This revenue test may impact future grant and donation applications.

Under the JobKeeper scheme, employers will receive $1,500 per eligible employee, per fortnight for at least six months. Eligible employees include full -time, part-time and long term casuals (who have been employed on a regular basis for at least 12 months).

See: Understanding the COVID-19 'JobKeeper Payments'

Notably, the Australian Government and its agencies, state and territory governments and their agencies, foreign governments and their agencies, local governments and wholly-owned corporations of these bodies are not eligible for the JobKeeper payment.

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