Understanding your Church Structure
Summary of differences between the types of entities
Understanding Your Church Structure
Understanding the church’s structure is the first step in managing and accounting for your church activities. It will help in determining your legal obligations (including taxation), understanding who is responsible for different areas of the church, and will assist with monitoring the financial performance of different church activities.
The church can be an unincorporated entity, an incorporated association or a company limited by guarantee. The entity status of a church will determine reporting requirements, statutory requirements and treatment of specific items for accounting and other purposes.
A non-profit organisation uses its ABN to:
- Register for goods and services tax (GST) and claim GST credits;
- Register for pay as you go (PAYG) withholding;
- Apply to the Tax Office for endorsement as a deductible gift recipient (DGR), tax concession charity or income tax exempt fund; and
- Interact with the Tax Office on other taxes, such as fringe benefits tax (FBT).
Churches are considered charities by the Australian Charities and Not-for-profits Commission (ACNC) and if registered with the ACNC, is given charity status and income tax exemption.
Once registered with the ACNC, Churches are considered concessional and the Australian Tax Office status makes available to them the following tax concessions:
- FBT Rebate;
- GST Concessions; and
- Refunds of Franking credits.
Detailed information on the benefits of charitable status can be found at the ATO website. (https://www.ato.gov.au/Non-profit/)
Many churches, particularly smaller churches, operate as unincorporated entities. This essentially means that the church is not a separate legal entity to the members associated with it. Apart from the agreement to establish a church, no action is required to set up an unincorporated association.
Many churches are congregations of main stream denominations and whilst unincorporated, operate under the denominational mandate.
What is an Incorporated Association?
An incorporated association is an organisation established as a separate legal entity to its members. The entity is incorporated in accordance with legislation applicable under the state or territory where the association is based.
Operating as an incorporated association has consequences for a church. Some advantages of incorporation are:
- Protection of the members against personal liability for debts and other legal obligations of the organisation;
- The ability to buy and sell property in the name of the organisation;
- Potentially greater certainty and acceptability to lenders and suppliers;
- The ability to sue and be sued in the name of the association;
- The ability to invest and borrow money;
- Greater eligibility to apply for grants; and
- Greater financial accountability to a statutory body.
Some disadvantages of incorporation include:
- Greater complexity; and
- Subjecting the church to legislation and requirements that do not apply to unincorporated associations.
Incorporated associations must also comply with certain legal requirements, including:
- An annual general meeting must be held within 5 months of the church’s year end;
- Annual financial statements must generally be lodged within one month of the meeting with the government department that oversees the state legislation. The financial statements typically must include a statement of comprehensive income, a statement of financial position, details of any mortgages, charges or securities over property and details of any trusts connected with the church;
- The church must notify the government department that oversees the state legislation of changes to its details or any special resolutions made;
- Adequate financial records must be maintained. If a church is classified as a “Tier 2″ or “Tier 3” incorporated association, it must have its financial statements accounts reviewed or audited by an approved auditor each year; and
- The church must include the registered name on all notices, advertisements, publications and business documents.
What is a Tier 2 or Tier 3 Incorporated Association (Victorian Legislation)?
Under part 7 of the Associations Incorporations Reform Act 2012, an association falls within one of three tiers according to its total revenue:
||Tier 1 – less than $250,000
||Tier 2 – between $250,000 and $1 million
||Tier 3 – more than $1 million.
A Tier 2 associations have the option to have its financial statements reviewed or audited. A Tier 3 association must have its financial statements audited.
What is a Company Limited by Guarantee?
A company limited by guarantee is an organisation set up as a company under federal legislation. If a company that is limited by guarantee is wound up, its members are limited to paying a guaranteed nominal amount (usually between $20 and $100). A company limited by guarantee has all of the advantages of an incorporated association discussed above but also has some additional advantages:
- It can carry out activities anywhere in Australia, not just in the state or territory where it is based; and
- It can carry on unlimited trading activities on a not-for-profit basis.
The legal requirements of a company limited by guarantee are even more onerous than those of an incorporated association. Companies limited by guarantee must comply with all of the relevant legislation in the Corporations Act 2001. A copy of the act is available at the Commonwealth of Australia Law website (https://www.legislation.gov.au/Details/C2020C00137).
Companies limited by guarantee have a three tier reporting framework prescribed by the Corporations Act 2001.
||Tier 1- Small company limited by guarantee
A company is a ‘small company limited by guarantee’ in a particular financial year if:
- it is a company limited by guarantee for the whole of the financial year
- it is not a deductible gift recipient at any time during the financial year
- its revenue (or consolidated revenue if that applies) for the financial year is less than $250,000.
- Tier 1 companies do not have to prepare financial reports or be audited.
||Tier 2- Company limited by guarantee with annual (or consolidated) revenue of less than $1 million.
- Tier 2 companies must prepare financial reports and have the financial statements audited or reviewed.
||Tier 3- Company limited by guarantee with annual (or consolidated) revenue of more than $1 million.
- Tier 3 companies must prepare financial reports and must be audited.
More information about the obligations of companies limited by guarantee can be found on ASIC’s website (https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-financial-reports/companies-limited-by-guarantee/obligations-of-companies-limited-by-guarantee/).
How do we find out what type of entity our church is?
Information on the status of your church is available from the ABR website (http://www.abr.business.gov.au). This also contains details of taxation status.
Summary of Differences Between the Types of Entities
Company Limited by Guarantee
Not a separate legal entity.
|Separate legal entity.
||Separate legal entity.
No specific legislation applies to the entity.
|Must comply with the relevant state legislation.
||Must comply with the Corporations Act 2001.
Individuals can carry out activities anywhere.
|Can carry out activities in the state of incorporation.
||Can carry out activities anywhere in Australia.
Individuals can carry out trading activities.
|Can carry on some trading activities.
||Can carry on unlimited trading activities on a not-for-profit basis.
Not legally required to prepare financial statements. May be required to prepare statements under a denomination or church constitution.
|Must prepare annual statements. If prescribed, must prepare financial statements that comply with relevant accounting standards
||Tier 2 and 3 companies must prepare financial statements that comply with all relevant accounting standards.
Not legally required to be audited, however the denomination head office, governing rules of the church or the church leadership team may require an audit be carried out.
|May need to have the financial statements audited or reviewed, depending on he state the association is incorporated in.
||Tier 3 companies must be audited.
|Not legally required to have an annual general meeting
||An annual general meeting must be held within 5 months of its year end
||An annual general meeting must be held within 5 months of its year end
|Not legally required to lodge statements
||Statements must be lodged within one month of the annual general meeting
||Statements must be lodged within 4 months of its year end
Where churches are associated with a particular denomination they can have certain financial reporting obligations and there may be specific treatment required of some items, such as property, plant and equipment, investment management and salary packaging. You should consult with the relevant denominational authority to find out its specific accounting and financial reporting requirements.
The church’s financial report may also be required to be audited.
Structure diagrams are a useful tool that can assist church members and leadership in clarifying their understanding of different areas of the church. They can also be used for future church treasurers and leaders to quickly obtain an understanding of the church.
You may wish to include the following in your structure diagrams:
- All areas related to the church including charitable funds, opportunity shops, book shops and special interest groups;
- ABNs of each related area of the church;
- Tax treatments for each area e.g. GST treatment, PAYG withholding tax payable;
- Tax concessions available e.g. DGRs, public benevolent institutions, non-profit sub-entities;
- Contact name and phone number for the person(s) responsible for each area;
- Operating hours for ministries that deal with the public, such as opportunity shops and book shops; and
- Meeting times and places for special interest groups.
Example Structure Diagram