Circumstances where the establishment of Disaster / Community Funds create a controlled entity
The purpose of this guideline is to outline the circumstances which will cause a community appeal fund to be regarded as a controlled entity of the local government and therefore subject to inclusion in the annual financial statements and part of the audit process.
Local Governments MUST refer to the following bulletins if creating a controlled entity:
15/11 Financial arrangements requiring the Treasurer's approval - under the Statutory Bodies Financial Arrangements Act 1982 council may need to seek the Treasurer's approval before the establishment of an entity.
02/11 Controlled public sector entities of local governments - where the fund is considered to be a controlled entity, section 33 of the Auditor-General Act 2009 requires the Minister to give the Auditor-General written notice of the creation of the entity. This ensures the Auditor-General can arrange to undertake the audit of the controlled entity.
Following the 2011 natural disasters, many local governments supported or established community appeal funds to raise and distribute funds to members of the community who had been adversely affected.
Many of these funding arrangements have been established in a way which has made these arrangements controlled entities of the local government, and therefore subject to audit by the Auditor-General.
Section 5 of the Auditor-General Act 2009 defines a controlled entity as an entity controlled by one or more local governments or other public sector bodies. It defines control as "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable the other entity to operate with it in pursuing the objectives of the controlling entity." It should be noted that the capacity to dominate is the critical factor, even if such capacity is not exercised in practice.
AASB127 "Separate Financial Statements" elaborates on the issue of control.
Control over an entity is presumed to exist when the parent entity has direct or indirect ownership of more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.
Control also exists when the parent owns half or less of the voting power of an entity when there is:
- power over more than half of the voting rights by virtue of an agreement with other investors
- power to govern the financial and operating policies of the entity under statute or an agreement
- power to appoint or remove the majority of members of the board of directors or equivalent governing body and control of the entity is by that board or body, or
- power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
Factors to be considered when determining the existence of control include:
- Substance rather than form (Note: UIG Interpretation 112 Consolidation – Special Purpose Entities (SPE) and the consensus paragraph stating "An SPE shall be consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by that entity").
- The effect of potential voting rights that are currently exercisable or convertible. (Note: this excludes potential voting rights which lack economic substance, e.g. the exercise price which is set in a manner that makes the conversion commercially unrealistic).
- The role of dominance can be passive and not necessarily actively exercised.
- Majority ownership interest in an entity is not necessary for control to exist (e.g. in the absence of another entity dominating the composition of the board of directors, voting rights of less than 50% held by the reporting entity may constitute control).
- The power govern may be direct or indirect.
- Whether the parent derives benefit from the actions of the subsidiary.
- A loss of control may occur without selling an ownership interest in the subsidiary.
AASB127 defines control as "the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities".
The definition of control in AASB 127 refers to the parent being able to "obtain benefits from its activities". It should be noted that this is not limited to financial benefits. It would be sufficient if the activities undertaken by the fund represent a furtherance of the activities and interests of the council. Given that these funds are established for the benefit of the community within the local government area this could be seen as the council benefitting from the activities of the fund. Accordingly, in establishing these funds, careful consideration should be given as to whether the activities performed are those that either are being or could be presently undertaken by the council itself.
AASB127also contains specific provisions for the not-for-profit sector, including the public sector. Relevant requirements specific to not-for-profit entities include: 'Control in the public sector may be evidenced by legislative or executive authority or administrative arrangements'.
If a community appeal fund is established by local government resolution it is likely to be regarded as a controlled entity. Similarly, if local government appoints the majority of the members of the fund's controlling body, it would also be likely to be considered as a controlled entity of the local government. However, if local government merely resolves to support a community appeal fund or nominates a minority of the governing body membership, this would not of itself create a controlled entity situation.
Many community appeal funds are established as a trust. The wording in the Trust Deed will be critical in determining if a fund is a controlled entity. If the Trustee is the local government or a local government nominee, it would also be likely to be considered as a controlled entity. If the Trust Deed specifies that any remaining proceeds belong to the local government, it is likely to be regarded as a controlled entity.
It is recommended that councils discuss the establishment of any future funds with the Department of Local Government and Planning and the Queensland Audit Office (QAO) at the earliest possible convenience to ensure that the appropriate establishment and audit arrangements are identified and can be put in place. This will also ensure that any required approvals under the Statutory Bodies Financial Arrangements Act 1982 or the Local Government Act 2009 and associated regulations are met.
Local government financial or administrative support does not necessarily create control. A control situation would arise if local government or its officers can exercise operational decisions, such as operation of bank accounts, signing cheques, or use of local government bank accounts. A local government could provide secretarial support without creating a control situation, provided it is clear that the role is supporting and not controlling in nature. A local government could also use its website or other communication methods to provide links to the fund or indicate support for the fund, without creating a control situation, provided there is no implication that it is a local government fund. Similarly, a local government could use its logo to indicate support for the fund, but the use of the local government's logo as the fund's logo could imply to the community that the local government controls the fund.
Other Legislative Requirements
The Local Government Act 2009 and the Local Government (Beneficial Enterprises and Business Activities) Regulation 2010, together with the Brisbane City Council equivalent legislation, govern the conduct of beneficial enterprises. Many of the methods of support outlined under "Specific Factors" as not creating a controlled entity could create a beneficial enterprise if the activity is an enterprise.
The department's guideline on beneficial enterprises notes that "enterprise" is not defined by the legislation and therefore has the dictionary definition. A community appeal fund properly established under Commonwealth and Queensland law would not be regarded as an enterprise. Commonwealth law currently includes Australian Taxation Office requirements for tax deductibility of donations to charitable funds, and emerging requirements associated with the regulation of charities and the establishment of a Charities Commission. Queensland requirements include registration as a charitable association with the Office of Fair Trade (including fundraising sanctions). The fund would also need to comply with the Collections Act 1966, which sets out the requirements for community collections.
Where funds are not controlled by council
Where a local government supports a community appeal fund but has established that the fund is not "controlled" by the local government, there may still be a public perception that the fund is associated with the council. For example, the name of the fund may imply an association in instances such as "the Mayor's Disaster Appeal Fund". In this instance council should ensure that the fund has a proper accounting process in place, and appoints an external auditor. It is advisable to ensure that these processes of accountability and transparency are in place prior to approving support for the fund.
It is important that where a council establishes funds which are not controlled by the local government that this is clearly understood by the parties to the fund and the community in general.
The department's postal address is:
Local Government Financial and Funding Services
Office of Local Government
Department of Local Government and Planning
PO Box 15009
Brisbane QLD 4002