Rules and the Charities Act 2005
Your rules are the documents that set out your charity's purposes, what you do and how you operate. For example, they may be your trust deed, constitution or charter. If your organisation was specifically set up under an Act of Parliament, your rules may be set out in that Act.
Why do we need a copy of your rules?
When we receive an application for registration, the organisation’s rules document is assessed, as are the activities, to ensure that the charity meets specific registration requirements. While we do not require any particular wording in these rules, they must satisfy the following criteria:
- they are the legally binding rules for your organisation
- they clearly set out a charitable purpose
- they do not have powers clauses which would allow your organisation to undertake activities that further non-charitable purposes
- they have sufficient protection to ensure the organisation cannot be carried on for the private pecuniary profit or benefit of any individual, and
- they restrict distributions on winding up (or dissolution) to charitable purposes.
What do we mean by ‘legally binding rules’?
When applying for registration as a charitable organisation, you must send us a copy of your legal rules with your application form. These rules need to name your organisation and directly relate to your organisation (rather than an umbrella body or affiliated organisation).
You need to send us the most recent version of your organisation’s rules.
If your organisation is incorporated (under the Charitable Trusts Act 1957, Incorporated Societies Act 1908 or Companies Act 1993), you should also ensure that you have provided the current version of your rules to the Companies Office.
Your rules need to identify your organisation’s aims (often called “purposes” or “objects”.) You should clearly identify a list of purposes in your rules and the list should begin with the organisation’s main purposes.
All purposes should show a clear charitable aim. They shouldn’t say things like “to fulfil social needs” because this is too vague, general and uncertain to clearly demonstrate a charitable aim.
You may wish to show how your purposes fit within one or more of 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. . .”
It's important to note that your organisation may still qualify for registration as a charitable entity, even if some of its purposes are not charitable. This is the case as long as the non-charitable purposes are undertaken to further a charitable purpose and are not independent (can be pursued separately from the charitable purposes) purposes.
We suggest you keep your purpose clauses separate from any “powers” clauses.
Read our guidance on Charitable purpose for more details.
The Supreme Court recently re-confirmed that an organisation’s purposes may either be identified through its statement of objects, or inferred from the activities it undertakes. For this reason, Charities Services asks registration applicants to provide information about their activities.
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.
Powers clauses must not allow the organisation to undertake activities that further non-charitable purposes or provide private benefits.
Private profit clauses
To register your organisation under the Charities Act, we must be satisfied that it is not carried on for private pecuniary benefit or profit to an individual.
Your rules should show that your organisation may only act to advance its charitable purposes. The payment of reasonable salaries and other expenses (provided these payments are reasonable) 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.
Here is an example of a combination of clauses that would be acceptable:
- 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.
Your rules should not include clauses that would allow private pecuniary profit for individuals or other organisations. For example, Charities Services is unlikely to accept clauses which would allow the organisation to:
- provide remuneration to someone where that person can influence the remuneration paid
- provide loans or advances at below market interest rates
- sell, exchange, or lease the organisation’s property at below market rates
- purchase, lease, or exchange property at above market rates
- provide remuneration to individuals at above market rates
- place an officer’s, or any other individual’s, interest above its duty to the beneficiaries and its charitable purpose.
Companies must also have clauses in their rules 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 organisation 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 organisation or a trustee who holds those shares in trust exclusively for charitable purposes as defined in section 5(1) of the Charities Act 2005.
We suggest that all charities include a winding-up clause in their rules. This sets out what will happen to the assets if the charity ceases to operate and is voluntarily or involuntarily wound up.
If your organisation is a society or company you are required to have a winding-up clause in your rules. If your organisation is a trust, you are not required to have a winding-up clause in your rules, however we strongly recommend including one.
To meet the requirements of the Charities Act 2005, winding-up clauses must direct all assets to charitable purposes or charitable organisations.
We do not accept winding-up clauses that allow funds to be given to organisations with “similar purposes”. “Charitable purpose” has a special meaning in law and two organisations may have similar purposes, but the specific nature of each organisation may mean that one organisation's purposes are charitable whereas another organisation's purposes are not.
Here are three different examples of winding up clauses that meet registration requirements:
1. 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.
2. 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.
3. 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.
Another acceptable option for trusts is for the winding-up clause to refer to winding-up in accordance with section 27 of the Charitable Trusts Act (that is, as the court directs).
Governance clauses explain how your organisation is managed. They should include the following information:
- Who governs the organisation – for example, “the organisation is governed by a management committee”.
- How many governing officers your organisation should have and how they are appointed – for example, “a management committee of between six and eight members will be elected at each AGM”.
- How decisions are made – for example, “by majority vote”
- What will amount to a conflict of interest – for example, “a conflict of interest exists for an officer if the officer’s interests or duty in a particular matter conflicts, or might conflict, with his or her duty to the charitable entity.”
- How a conflict of interest should be managed – for example, “when a conflict of interest exists for an officer, that officer must declare the nature of the conflict or the potential conflict; the officer must not take part in deliberations or proceedings including decision-making in relation to the conflict of interest. The officer must not be counted in the quorum required for decision-making on the matter for which he or she has the conflict of interest.”
A conflict of interest is any situation in which an officer’s personal interest or loyalties could affect the ability to make a decision in the best interest of the charity. Refer to the Charities Services resource ‘Conflict of interest’ for more information.
We suggest all charities include a clause in their rules that sets out the procedure for changing their rules. If you do not include an amendment clause this could cause you difficulties should you be required to change your rules to meet registration requirements or you wish to amend your rules at a later date.
Although a charity registered with Charities Services 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 Charities Services must approve amendments.
Tip - Do you have a clause in your rules that says you must get approval for changes to your rules from Inland Revenue? If you do, please note that this is no longer required, because Inland Revenue has agreed to the removal of such clauses. Check their website www.ird.govt.nz for more details.