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Related party transactions for Tier 3 and Tier 4 charities
Related party transactions for Tier 3 and Tier 4 charities
The Tier 3 and Tier 4 financial reporting standards require charities to report related party transactions. Related party transactions are recorded in the Notes section of the Performance Report.
A related party transaction is a transfer of money, goods or services between a charity and those who are closely associated and have the ability to influence the charity.
Charities typically rely on volunteers and donated goods or services, especially from related parties such as officeholders and members of the governing group. Therefore, reporting related party transactions is an important requirement to ensure accountability and transparency of transactions between the charity and any related parties. It will also show the level of contribution and support the charity receives from related parties through donated and discounted goods or services.
Related parties can be people or organisations, including:
Note: People are not considered to have significant influence if they are involved only in the day-to-day running of the charity and have no involvement in its strategic or financial decisions.
A related party transaction is a transfer of money, goods or services between a charity and a related party.
You must report transactions with a related party that are:
What is considered ‘significant’ will mean different things for different charities. What is considered significant for a small charity may not be significant for a larger charity. Use your best judgement to decide what is significant. Ask yourself, could including or excluding the information change a reader’s understanding of your charity and its Performance Report?
‘Normal terms and conditions’ is how a type of transaction would normally take place. Because of the relationship a related party has with the charity, terms and conditions can often be different. For example, a charity might pay less than the market price (including free goods or services), or the opportunity or agreement would not be available to someone who was not a related party.
Charities are required to show the following information about related party transactions:
The focus should be on the separate reporting of transactions that are:
Other related party transactions may be sufficiently reported by grouping them together or providing a general statement.
For example, members of the governing group will often use their professional skills and knowledge to assist the charity. A general statement that members of the governing group have used their professional skills to provide services at no charge to the charity will be sufficient to acknowledge the normal day-to-day role of members of the governing group.
Charities will need to use their best judgement to decide which transactions should be separately reported and when a general statement or grouping them together is sufficient.
Conflict of interestAll officers of registered charities have a duty to act in the best interests of their charity. A conflict of interest will occur when an officer could benefit or could be perceived to benefit from the transaction. Following good policies and procedures will ensure that if transactions are brought into question, you will be able demonstrate that decisions were made in the best interests of the charity. Refer to the Charities Services resource ‘Conflict of interest’ for more information. |
The following fictional examples have been created to help you understand how to report related party transactions. Three questions are used to help decide when and how to report:
Judy West, an accountant, is a trustee and the treasurer for a small charity. Judy uses her expertise to manage the charity’s finances and prepares financial reports, free of charge.
Description of Related Party Relationship | Description of the transaction (whether in cash or amount in-kind) | This Year Value of Transactionss | Last Year Value of Transactions | This Year Amount Outstanding | Last Year Amount Outstanding |
Trustees |
Regularly provided their time and skills to the oversight and operation of the trust at no charge. |
- | - | - | - |
Example 2: Tim – a trustee who provides professional services
Tim Jones is a trustee of a large Tier 3 trust and is also a partner of TUV Law Firm. The trust owns a building and there have been some serious legal issues in relation to the building. The trustees need to involve a lawyer to resolve the issues. The trustees ask TUV Law Firm to act on behalf of the trust and agree they will be charged at the usual rate. The matter gets resolved by TUV Law Firm at a cost to the trust of $10,000. The last invoice for $750 for these services was received just before year end and is yet to be paid.
Description of Related Party Relationship | Description of the transaction (whether in cash or amount in-kind) | This Year Value of Transactions | Last Year Value of Transactions | This Year Amount Outstanding | Last Year Amount Outstanding |
Tim Jones is a trustee and also a partner at TUV Law Firm |
TUV Law Firm provided legal services, which were charged at standard rates. |
$10,000 | 0 | $750 | 0 |
Karen Lee is a member of the committee of the charity Project Green. Karen makes a significant donation of $12,000 to Project Green on the basis that it remains anonymous. The donation is for the particular purpose of building a glass house at their plant nursery.
Description of Related Party Relationship | Description of the transaction (whether in cash or amount in-kind) | This Year Value of Transactions | Last Year Value of Transactions | This Year Amount Outstanding | Last Year Amount Outstanding |
A committee member |
Made a donation for building a glass house at the Project Green nursery. |
$12,000 | 0 | 0 | 0 |
Scenario one:
Maraea Paki is employed as the chief executive of Central Community Centre. Her son, Sam Paki, is an electrician who often helps out at working bees and doing odd jobs, which have included replacing a broken light fitting and installing an outdoor sensor light.
Description of Related Party Relationship | Description of the transaction (whether in cash or amount in-kind) | This Year Value of Transactions | Last Year Value of Transactions | This YearAmount Outstanding | Last YearAmount Outstanding |
Close family members of the Board and Chief Executive |
Helped out at working bees and did odd jobs for the Central Community Centre at no charge. |
- | - | - | - |
Scenario two:
Another year, Central Community Centre had to rewire the premises it owns. Sam did all the electrical work and only charged for the cost of materials, which was $2,000. It would have cost about $7,000 in total had Sam charged his usual commercial rates.
Description of Related Party Relationship | Description of the transaction (whether in cash or amount in-kind) | This Year Value of Transactions | Last Year Value of Transactions | This Year Amount Outstanding | Last Year Amount Outstanding |
A close family member of the Chief Executive |
Rewired the Central Community Centre’s premises for the cost of materials only. The estimated total value of the work if charged at commercial rates is $7,000. |
$2,000 | 0 | 0 | 0 |
If the charity does not know how much the work would have cost at commercial rates it could say “The commercial value is not known.”
Kerry O'Brien is a board member of the Little Bay Arts Centre, a small Tier 4 charity. Kerry’s husband, Paul O'Brien, is employed by the Little Bay Arts Centre as a full-time administrator to look after the day-to-day running of the centre. Paul is the only employee and a large portion of the charity’s operating payments are used to pay his salary, which was $44,500 this year and $42,500 the year before.
Description of Related Party Relationship | Description of the transaction (whether in cash or amount in-kind) | This Year Value of Transactions | Last Year Value of Transactions | This Year Amount Outstanding | Last Year Amount Outstanding |
A close family member of a board member |
Employed full-time and paid a salary. |
$44,500 | $42,500 | 0 | 0 |
Paul and the Little Bay Arts Centre are concerned about the privacy implications of disclosing Paul’s salary in their performance report. While Paul is not named, it is easy for those involved in the charity to know that it is his salary that is disclosed. Charities in these situations can request, when submitting their annual returns and performance reports to us, that this information be withheld from the publicly-accessible Charities Register. We can restrict access to information on the register where it is in the public interest to do so. While we consider each request on a case-by-case basis, protecting the privacy of individuals employed by charities is likely to be a public interest that justifies restricting public access to the information. Further details about restricting access to information on the register is available here.
More information
Further guidance can be found in the Tier 3 and Tier 4 standards.
In the Tier 3 Standard (external link) , refer to Section 9, A202 – A207.
In the Tier 4 Standard (external link) , refer to Section 7, A109 – A114.