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Examples of common clauses for rules
If your organisation is an incorporated society, you will already have a clause in your rules that explains the way in which those rules can be changed. This is required under the Incorporated Societies Act.
Although a charity registered with the Commission must notify us of any changes to its rules, we do not need to be consulted before a change is made. Please do not put a clause in your rules saying that any amendments must be approved in advance by the Commission.
When you notify us of a change, we consider whether the change affects your registration as a charitable entity. If you change something that might affect your registration status, we send a formal notice to your address for service and give you the opportunity to have your say on the matter.
If you have a clause in your rules that says you must get prior approval of proposed amendments from Inland Revenue, you should check the IRD website for the current legal status of such clauses. Inland Revenue has agreed to the removal of any such clauses. Click on the other examples below for more detail.
Private profit clauses
To register your organisation under the Charities Act, we must be satisfied that your organisation is not carried on for private financial benefit or profit to an individual.
Your rules should clearly reflect this and provide that your organisation may only act to advance its charitable purposes. The payment of reasonable salaries and other expenses to advance your charitable purpose is acceptable.
If a trust wants to be able to make payments or provide benefits to its trustees, its trust deed must clearly show that this is allowed.
An example of a combination of clauses that would be acceptable is as follows:
- All income, benefit, or advantage must be used to advance the charitable purposes of the organisation.
- No member of the organisation, or anyone associated with a member, is allowed to take part in, or influence any decision made by the organisation in respect of payments to, or on behalf of, the member or associated person of any income, benefit, or advantage.
- Any payments made must be for goods or services that advance the charitable purpose and must be reasonable and relative to payments that would be made between unrelated parties.
In addition companies must also have clauses in their constitutions that either:
- prevent distribution of dividends or payments to shareholders or
- restrict current shareholders and the transfer and issue of shares to registered charitable entities or trustees of a trust for charitable purposes.
Here is an example of a clause that prevents distribution of dividends or payments to shareholders:
No shareholders of the company shall be entitled to receive any benefit from the company by way of dividend or other payment from the company by virtue of a shareholder holding shares whether ordinary or any other class of shares in the company.
Here are examples of clauses that restrict the transfer and issue of shares to registered charitable entities or trustees of a trust for charitable purposes:
The directors shall refuse to register any transfer of shares unless the proposed transferee is a registered charitable entity or a trustee who holds those shares in trust exclusively for charitable purposes as defined in section 5(1) of the Charities Act 2005.
No shares shall be issued to any person unless that person is a registered charitable entity or a trustee who holds those shares in trust exclusively for charitable purposes as defined in section 5(1) of the Charities Act 2005.
Purpose Clause
Purpose clauses, often called "objects" clauses, state what an organisation aims to achieve.
You should clearly identify a list of purposes in your rules and the list should begin with the organisation's main purpose or purposes.
All purposes must be lawful and should not be so vague, general, or uncertain that they do not clearly show a charitable aim (for example they should not say "to fulfil social needs").
You may wish to show how your organisation's purposes fit with the four categories of charitable purpose like this:
- "To relieve poverty by. . ."
- "To advance education by. . ."
- "To advance religion by. . ."
- "To be beneficial to the community by. . ."
as appropriate.
A non-charitable purpose which is undertaken to further a charitable purpose and is not an independent purpose, will not stop your organisation from qualifying for registration.
For more details about ancillary (secondary) purposes see our guidance on charitable purpose.
We suggest you keep your purpose clauses separate from any "powers" clauses ". "Powers" clauses set out the things that your organisation may do to achieve its purposes, for example - employ people; borrow and invest money; purchase, lease, and hire land, buildings and vehicles.
Winding-up clauses
We suggest all organisations include a clause in their rules that sets out what will happen to their assets if they ceases to operate and are voluntarily or involuntarily wound up.
If your organisation is an incorporated society, you will already have a winding-up clause, as it is required under the Incorporated Societies Act.
If your organisation is a trust, you are not required to have a winding-up clause in your rules. If your rules have a clause that refers to winding-up in accordance with section 27 of the Charitable Trusts Act, that is, as the court directs, this is acceptable.
To meet the requirements of the Charities Act, winding-up clauses must direct all assets to charitable purposes or charitable organisations.
Here are three different examples of winding up clauses:
- A general winding-up clause: If a decision is made to wind up or dissolve the organisation and any property remains after the settlement of the organisation's debts and liabilities, that property must be used to further a charitable purpose or purposes as defined in section 5(1) of the Charities Act 2005.
- A winding-up clause that distributes remaining property to another organisation: If a decision is made to wind up or dissolve the organisation and any property remains after the settlement of the organisation's debts and liabilities, that property must be given or transferred to another organisation for a charitable purpose or purposes as defined in section 5(1) of the Charities Act 2005.
- A winding-up clause that distributes remaining property to another organisation that has similar purposes: If a decision is made to wind up or dissolve the organisation and any property remains after the settlement of the organisation's debts and liabilities, that property must be given or transferred to another organisation for a similar charitable purpose or purposes as defined in section 5(1) of the Charities Act 2005.
Amendment clauses
We suggest all organisations include a clause in their rules that sets out the procedure for changing their rules.
If your organisation is an incorporated society, you will already have a clause in your rules that explains the way your rules can be changed. This is required under the Incorporated Societies Act.
Although a charity registered with the Commission must notify us of any changes to its rules, we do not need to be consulted before a change is made.
Please do not put a clause in your rules saying that any amendments must be approved in advance by the Commission.
When you notify us of a change, we will consider whether the change affects your registration as a charitable entity. If you change something that might affect your registration status, we will send a formal notice to your address for service and give you the opportunity to have your say on the matter.
Helpful tip - Do you have a clause in your rules that says you must get prior approval for proposed amendments from Inland Revenue? If you do, please note that such approval is no longer required and Inland Revenue has agreed to the removal of such clauses. Check the Inland Revenue website for more details.