Shake-up for incorporated societies includes political parties

The law that governs New Zealand’s 23,000 incorporated societies is more than 100 years old, and well-overdue for a refresh. Laura Walters reports on what this means for a range of organisations, including political parties.

Long-overdue changes to the laws governing incorporated societies are set to improve transparency, but political parties that don’t want the intricacies of their financials to be public knowledge will likely find a new mechanism.

The Incorporated Societies Act is 111 years old – it was set up the same year the Edmonds Cookery Book was first published, and New Zealand competed in the Olympics for the first time.

But the 1908 law is out of date and has long been pegged for modernising. The Law Commission published a review in 2014, and the previous government began work on changes, but it has not been a priority. But in May, Commerce and Consumer Affairs Minister Kris Faafoi took updated proposals to Cabinet.

Part of the push to change the law comes in the desire to standardise financial reporting and increase transparency.

The current act has no standardised form of financial reporting, leaving the country’s 23,000 incorporated societies to decide what to declare, and how. This makes it hard to scrutinise and compare accounts.

This low level of compliance works for many of the thousands of small non-profit community organisations, such as the Banks Peninsula Memorial Society with an annual income of just $5889 in 2016.

New Zealand First has multiple arms to its party structure, including an incorporated society that never declares any income or assets. Photo: Lynn Grieveson

However, there have been concerns about the lack of regulations regarding financials and governance for the large end of town.

In 2016, the largest income of an incorporated society was $162 million, and the structure is often used for major entities such as unions and national campaign organisations.

Political parties also use incorporated societies as an arm of their organisations, sometimes as a way to hold their assets – particularly property.

Incorporated societies are their own legal entity, and should something happen or should it collapse, those who funded it were not left with the responsibility. This is different to an unincorporated society, where the liability sits with those running the association.

New Zealand First, National, Labour, the Green Party and the Opportunities Party all have incorporated societies, and the difference in reporting is stark.

Labour Party Properties Incorporated’s 2018 financial statement shows a basic breakdown of $5.72 million worth of property assets.

The New Zealand National Party Centre Incorporated’s latest financial statements show $772,198 in working capital funds. Again it’s a basic breakdown of where the assets are held.

Meanwhile, TOP chose to offer more information in its latest statements, including its entity information and mission, statements of cash flows and financial position, a statement on accounting policies, and an independent auditors report. While this level of detail was not required under the current law, the party chose to offer further information and verification.

“I don’t think it’s particularly sinister; they don’t gain anything by publishing it."

At the other end of the spectrum, every year for its 25 years, New Zealand First Incorporated’s officer has proferred essentially the same single sentence: “On behalf of the Members I declare that there were no financial transactions for the year ending…”

No income or assets have been declared, which have called into question the entity’s purpose, especially when in 2008, three high-level party officials told The Listener New Zealand First Incorporated was the party itself.

Then-party president George Groombridge, past treasurer Brent Catchpole (a former MP and an accountant) and now-estranged party founder Brooke McKenzie all told The Listener this was the structure through which New Zealand First existed.

The proposed law changes, which would set a standard for reporting of finances and assets, and likely improve oversight and transparency should work to remove some of this type of opaqueness.

However, political blogger David Farrar, who has written about this issue in the past, said he did not think the changes would impact on political parties, and more specifically their incorporated society arms.

Most parties were also registered as unincorporated societies, and had other mechanisms they could use if the incorporated society structure was no longer a useful vehicle, Farrar said.

Companies and trusts did not have to publish detailed financial statements, meaning there were other options for parties that did not want their finances closely scrutinised.

“I don’t think it’s particularly sinister; they don’t gain anything by publishing it,” he said.

There was a level of “strategic intelligence” that came with parties’ finances, and making those public potentially opened them up to scrutiny.

Legislation behind the times

While it is debatable whether the changes would have a material impact on political parties, there are still very good reasons for modernising the law that is no longer fit-for-purpose.

Under the proposed changes, there would be standardised financial reporting, auditing requirements for larger entities, a requirement for entities to report performance information as well as declare any officer conflicts of interest, and adherence to the newly regulated basic set of officer duties.

During consultation, there was some concern over compliance costs and burdens for many of the country’s small incorporated societies. However, a proposed tiered system means larger entities would have more compliance obligations and smaller entities would be able to avoid heavy costs and time-consuming reporting responsibilities.

Incorporated societies that are not registered charities would be required to report using specific standards issued by the External Reporting Board if they had either $10,000 or more in annual payments, assets of $30,000 or more, or donee status under the Income Tax Act.

Research from March 2016 found more than 40 percent of entities had expenditure of less than $10,000.

Again, only those larger entities would be required to be audited, including those with annual expenditure over $2m or assets over $4m.

Nicola Hankinson, the national technical manager at accounting consultancy Baker Tilly Staples Rodway said there was a need to update the law.

“It’s a beautiful thing to still have a 1908 act,” she said. But the law was not fit-for-purpose and now out-of-step with the laws that governed charities.

Nicola Hankinson, the national technical manager at accounting consultancy Baker Tilly Staples Rodway, says the proposed changes can only be a good thing, with improved transparency, standardisation and modernisation of the laws that govern 23,000 entities. Photo: Supplied

The proposed changes would improve transparency, allow for comparing entities through standardisation, and allow people to better understand what the societies were set up to do.

The requirement to report their performance would better articulate to communities what the entity was about, and what it had achieved.

And the proposed tiered system should ensure accountability, without a crippling compliance burden on small, volunteer-based organisations.

The call to modernise the law had come up multiple times, but there was no “burning platform”, Hankinson said.

Commerce and Consumer Affairs Minister Kris Faafoi said the law had been raised on a number of occasions but had never been a priority. However, there had been a recent push from the volunteer sector to modernise and standardise the regulations.

The law was now "out-of-date and deficient in a number of respects", he said.

As it currently stood it was also was incomplete, inaccessible and unclear, and was also difficult to enforce.

It is expected the bill will be introduced next year, with the costs including a $850,000 capital investment, $240,000 in one-off operating costs, and $240,000 annual ongoing operating costs.

Part of the transition to the new regulations would include an education campaign. Hankinson said it was important small entities were aware of the changes and their requirements.

And for those that had not been active for some time, the change could be an opportunity to shut up shop, and help cleanse the register.

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