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Incorporated Societies: New legislation is on the way – here’s how to prepare

The Incorporated Societies Bill

Incorporated societies make a major contribution to New Zealand’s culture, sporting and recreational activities, education, health, social services and environmental protection. For well over 100 years the Incorporated Societies Act 1908 has enabled community related organisations to become incorporated for a wide variety of purposes. However, this Act is now outdated and deficient in many respects. A new Bill was introduced into Parliament on 17 March 2021 to modernise the legislation governing New Zealand’s estimated 24,000 incorporated societies.
The purpose of the Bill is to put in place a modern framework of basic legal, governance, and accountability obligations for incorporated societies, and those who run them guided by the following broad policy objectives:

  • Members of a society have the primary responsibility for holding the society to account
  • A society should promote the trust and confidence of its members
  • A society should be self-governing
  • A society should not distribute profits to its members

The Bill seeks to hold members to account by putting in place six explicit duties on the officers of a society. The duties are closely aligned to directors’ duties in the Companies Act 1993. As such, officers who might have previously accepted positions of responsibility on purely philanthropic grounds and wanting to ‘do their bit’ in the local community will need to give due consideration to their explicit obligations under the proposed law. Specifically, officer holders:

  • should act in good faith and in best interests of the relevant society
  • must exercise their powers for a proper purpose
  • must not act, or agree to the society acting, in a manner that contravenes the Bill or the constitution of the society
  • must show the care and diligence that a reasonable person with the same responsibilities would exercise in the same circumstances
  • must not let the activities of the society be carried on in a way likely to create a substantial risk of serious loss to the society’s creditors
  • should not agree to a society incurring an obligation unless they believe that the society will be able to perform the obligation when it is required to do so.

The Bill contains a range of offences, financial penalties and potential terms of imprisonment for breaches of officer holder duties.
Among the many other provisions contained in the Bill, particular highlights include:

  • specific rules about the distribution of society property if the society is dissolved
  • a requirement for a minimum number of 10 members
  • an incorporated society will have the powers of a natural person (e.g., to enter contracts),
  • a prohibition on operating for financial gain of any member
  • allowing a Court to recover any financial gain a member has made from the society
  • requiring each society have a Constitution, including details of the minimum requirements for that Constitution
  • that each society must have a management committee consisting of at least three office holders with specific rules regarding eligibility for becoming an officer or a committee member
  • rules about the level of financial reporting including the requirement to complete an annual return together with additional obligations (if applicable) guided by the requirements to prepare financial statements under the Charities Act 2005 or the Financial Markets Conduct Act 2013
  • rules about how incorporated societies might amalgamate with other societies
  • a range of other administrative provisions relating to the operation of a society together with various offences for failing to comply with the provision outlined in the Bill.

If you are a member of an incorporated society, and particularly if you are an officer or a committee member of a society, we suggest that you start planning for changes that will almost certainly be coming. It is all but inevitable that nearly every society will need to agree and register a new Constitution (often called Rules) that will need to comply with the new Act.

Transitioning from Special Purpose to Public Benefit Entity (PBE) Financial Reporting

Many incorporated societies currently prepare special purpose financial statements. Once the Bill becomes law, many societies will be required to prepare financial statements based on PBE reporting standards for the first time. PBE reporting standards have differing requirements depending on the size of the entity, as determined by the total operating expenditure of the society. More information on these size thresholds and their application to PBEs can be found here.

Each society will need to transition from their current reporting framework to the relevant PBE tier. For example, an entity transitioning to tier 3 will follow the relevant standard from the start of the year of transition. In that case comparative information is not required. However, the entity shall attach its previous financial statements and a list of its previous accounting policies. Further guidance on transitioning from special purpose reporting to the relevant tier can be found here.