non-profit-fact-sheets
What are Related Party Transactions?
Published: November 30, 2023
Read Time: 4 minutes
Related party transactions are a normal part of the business if your organisation works closely with other entities or individuals and enters into agreements. The Australian government’s regulations for related party transactions likely apply to you. Related party relationships are a normal part of doing business. However, when a person in a leadership position has ties to two entities the organisation conducts business or collaborates with, these relationships can affect the way each entity will manage money, make decisions, or create policies.
Related Party Transactions
Related party transactions or RPTs are business dealings or agreements between two legal entities with ‘related parties’. Having business relationships with other entities and individuals who have ties to another organisation is a common occurrence. When a not-for-profit entity engages with other parties through related party transactions, it has entered a related party relationship. If any related party or person involved with the transaction has a conflict of interest, the relationship could pose a risk to each of the entities. A related party is a person or entity related to the company or organisation and involved in preparing the financial statements for the reporting entity. The most common type of RPR involves fundraising or an exchange of money. Other circumstances under which a person or organisation is considered a related party, according to the Australian Accounting Standards Board, involve:
- Having control or joint control of another entity.
- Being in a position to influence reporting activities and decision-making.
- Being a member of a management team or having authority to plan, direct or control activities.
- Two entities are member organisations of the same group, subsidiary, parent company, associate, or joint venture.
- One entity is providing key management personnel services such as financial reporting to the other entity or the parent company.
Entities often conduct activities through their subsidiaries, joint ventures, and associates. They may also enter into partnerships or collaborations to receive a grant or donation. If a person or organisation involved in a related party relationship may have influence on both entities, they may have a conflict of interest.
Conflict of Interest and RPTs
A conflict of interest occurs when a person’s personal interests are in direct conflict with their responsibility to act in the best interest of the organisation. Charities that work with other organisations, individuals, and businesses may become aware of a conflict of interest while managing a project. It is the responsibility of the board members to deal with any disclosures of conflict. As a best practice, not-for-profit organisations should develop a written conflict of interest policy and ask new board members and staff to disclose any potential conflicts of interest.
There are three types of conflicts of interest: actual, potential, and perceived. Actual conflicts happen when a person or organisation is being influenced by a conflicting interest. Potential conflict happens when you could potentially be influenced by a related party or entity. Perceived conflicts happen when you are being perceived as having a conflict of interest due to your ties with two entities working together on a project.
Having an actual, potential, or perceived conflict of interest could be damaging to the reputation of an entity and negatively affect its ability to govern or operate. This is especially true if the related party relationship influences decisions that are not in the best interest of the organisation, or its beneficiaries and members. A Conflict of interest increases the risk of bias, professional misconduct, and legal liability of the organisation. It can also lead to a loss of trust from the public.
How to Assess Risk
The Australian Accounting Standards Board explains how having insider knowledge or a commitment to both entities can pose a risk to an organisation and should be seriously considered. “Knowledge of an entity’s transactions, outstanding balances, including commitments, and relationship with related parties may affect assessments of its operations by users of financial statements, including assessments of the risks and opportunities facing the entity” 1.
Once a conflict of interest is disclosed, board directors must assess the risk. The first step is to evaluate the scope of the related party’s other interest and its significance for the organisation’s activities. Next, the board must identify specific areas where the conflict of interest may affect business activities or have negative consequences. The third step is to understand the level of involvement the related party has with the other entity and the potential for interference 2.
As part of your conflict of interest policy and risk assessment procedures, it is a good idea to develop a detailed list of the factors your board members will consider when conducting their risk assessment after a related party relationship is disclosed.
| Risk | Factors to Evaluate |
|---|---|
| Negative Consequences |
|
| Relevance to current activities |
|
| Level of involvement of the person or entity with a conflict |
|
| Potential for interference |
|
| Inspired by University of Newcastle Conflict of Interest Policy |
RPT Legal Obligations
The Australian Charities and Non-Profits Commission (ACNC) regulates non-profits and sets the requirements for charities to disclose their related party relationships and transactions, according to the ACNC Act.
Charities are obligated to record all related party transactions in a register and track key details such as transfers of property, salaries, loans, fees for services, and investments in a related party. They must also develop clear conflict of interest policies and procedures. At the time of writing, charitable organisations are required to disclose related party relationships and related party transactions to the ACNC if:
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A related party transaction occurs between the non-profit entity and any of its related parties.
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A related party transaction occurs between ministers, councillors, senior public servants and a public sector entity.
A related party transaction between related parties can consist of a transfer of financial or material resources, an exchange of services, the purchase of a property or material good, a donation, a loan application or lease agreement, delivery of goods, or assigning volunteers or employees to work for the other party 3.
What is the official definition of key management personnel?
Key Management Personnel (KMP) are people who have the authority to plan, direct, and control the activities of an organisation or company, either directly or indirectly. For example, KMPs are responsible for making decisions about financial reporting. The most common type of Key Management Personnel are C-level individuals such as the CEO, COO and CFO, Board Presidents and Chairs, and Managing Directors.
What key elements to include in a conflict of interest policy?
The structure of a conflict of interest policy can vary from one entity to another. However, the document should define the purpose and scope of the policy, provide key definitions of terms, list important organisational principles, and briefly quote the legislative framework. In addition, those developing the policy should ask themselves how they define a conflict of interest and what areas of business the policy covers. Lastly, the policy document should provide clear guidelines for managing conflict of interest disclosures.
How should I deal with a conflict of interest if it arises?
When a conflict of interest arises, the organisation must take further steps to remove the perception or risk of negative consequences. The decision-makers in the organisation can take several actions to resolve the problem. This could potentially include assessing the level of risk and the seriousness of the conflict of interest, ensuring the entity complies with any legal requirements such as holding a Board meeting to discuss and vote on the matter, and reviewing internal rules or policies related to dealing with conflicts of interest.
How can I disclose a related party transaction to the Australian Charities Not-for-Profit Commission?
As of July 1 2023, all registered charities in Australia must include related party transactions in their Annual Information Statement AIS) to the ACNC. The AIS is completed every reporting period and covers the organisation’s operations and finances for the past 12 months. Reports must be submitted via the ACNC Charity Portal. The information is published annually in the ACNC Charity Register and used to administer the ACNC Act and monitor trends in the not-for-profit sector.
Can two related entities jointly report their Annual Information Statement?
Yes. There are some circumstances under which collective and joint reporting may be approved by the Commissioner. Joint reporting involves a group of charities submitting a single Annual Information Statement and a joint financial report. Group reporting is possible when two or more charities receive permission from the ACNC to report as a collective. The ACNC will make its decision based on the public interest, transparency and accountability of the group, and its ability to ensure compliance.
Additional Resources
To read the Australian Charities and Not-for-profits Commission Act 2021, visit the Federal Register of Legislation.
For information on how to effectively manage a conflict of interest and record related party transactions, visit the ACNC website.
References
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Australian Accounting Standards Board. (2023). Related Party Disclosures. ↩︎
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University of Newcastle. (2020). Conflict of Interest Procedure. ↩︎
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Lambert-Smith, R & Yoni, U. (2023). Requirements – Related Party Transactions. Moores.com (blog article). ↩︎
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Better Boards connects the leaders of Australasian non-profit organisations to the knowledge and networks necessary to grow and develop their leadership skills and build a strong governance framework for their organisation.
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