FAQs – External Audits

In 2019 the rules for what constitutes a large proprietary company changed, effectively doubling the criteria threshold.
As of 1 July 2019, a proprietary company is defined as ‘large’ for a financial year if it satisfies at least two of the following three criteria:

Large proprietary companies are required to prepare and lodge a financial report and a director’s report for each financial year. The accounts must be audited by a registered company auditor unless an audit relief is granted by ASIC.

If a company doesn’t meet at least two of the criteria to be considered a large proprietary company, it’s considered a small proprietary company instead.
In practical terms, a small proprietary company would be a business operating under a company structure with:

• At least one shareholder;
• No more than 50 non-employee shareholders;
• At least one director (who is an Australian resident); and
• A company secretary, if one is appointed.

There are no standard requirements for a small proprietary company to lodge any form of financial reports or director’s reports to ASIC.

However, some circumstances may determine otherwise. For example, if the company is a wholly owned subsidiary of a company incorporated outside of Australia.

As defined in section 111AC of the Corporations Act 2001 (Corporations Act), a disclosing entity is a corporation with enhanced disclosure requirements that the entity must adhere to.

For example, disclosing entities may be:

• Listed entities and listed registered schemes
• Entities and registered schemes which raise funds according to a prospectus
• Entities and registered schemes which offer securities other than debentures as consideration for an acquisition of shares in a target company under a takeover scheme.

Under section 323D of the Corporations Act 2001 (Corporations Act), the first financial year for a company, registered scheme, or disclosing entity starts on the day it gets registered with ASIC. The first financial year typically lasts for 12 months, or—contrary to common logic—a period no longer than 18 months, as determined by the company’s directors (section 323D(1)).

Each following financial year must:

• start at the end of a previous financial year; and
• be exactly 12 months long.

It sounds counterintuitive, but a financial year isn’t always a set 12-month period. While most companies operate under a full 12-month financial year, some entities may be allowed to operate under different rules.

In simple terms, public accountability means that a publicly listed company is accountable to shareholders and other external parties who may be making economic decisions, but they aren’t able to request specific information or reports from the company.

As an example, a shareholder of a publicly listed company would probably not be able to request specific information or reports from the company and would have to rely on what the company publishes through ASX announcements.

On the other hand, a stakeholder of a local bowls club would likely be able to receive specific information from the club if requested.

An entity is considered publicly accountable if:

a) its debt or equity instruments are traded on a public market, or they’re in the process of issuing such instruments; or
b) it holds assets for a broad group of people in a fiduciary capacity, as part of its primary business.

Not every business is considered publicly accountable. The following for-profit entities have public accountability:

• disclosing entities, even if their debt or equity instruments aren’t traded in a public market;
• co-operatives that issue debentures;
• registered managed investment schemes;
• superannuation plans (as regulated by APRA); and
• authorised deposit-taking institutions, such as banks.

This means that, generally speaking, not-for-profit private sector companies aren’t publicly accountable.

A company limited by guarantee is a public company registered under the Corporations Act 2001, that’s formed on the basis that, if the company winds up, its members’ liability is guaranteed to be limited to the amount that they individually contribute. This amount is set out in the company’s constitution.

It’s a company structure that’s typically used by not-for-profits and charities that reinvest their surplus profit back into the organisation.

In a company limited by guarantee, you’ll usually find that:

• It issues securities, rather than shares;
• It cannot pay dividends to its members;
• Directors have the same duties and liabilities as those in public companies—unless they’re registered as a charity with the Australian Charities and Not-for-profit Commission.
• A board of directors is required, which comprises three directors and a company secretary;
• Each member gets one vote.

When it comes to financial reporting, the Australian Accounting Standards (AAS) consists of two tiers of reporting requirements which determine the general purpose financial statements (GPFS) that your business must prepare.

Your company will fall under one of these two tiers.

• Tier 1 Australian Accounting Standards. Tier 1 features requirements that are specific to Australian entities and incorporates full International Financial Reporting Standards. Entities that are publicly accountable typically fall under Tier 1 requirements.
• Tier 2 Australian Accounting Standards – Simplified Disclosures. Tier 2 includes the recognition and measurement requirements of Tier 1, but with substantially reduced disclosure agreements. These are set out in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-For-Profit Tier 2 Entities. An entity that isn’t publicly accountable has the option to use either Tier 1 or Tier 2 reporting requirements.

The diagram below shows how the Tiers work in relation to financial reporting for for-profit private sector entities under the revised Australian Accounting Standards.

‘ Includes Commonwealth, State and Territory legislation
” When preparing financial reports according to Australian Accounting Standards by other than legislation (e.g., constitution, trust deed), only if document is created or amended (for any reason) on or after 1 July 2021. Those created before 1 July 2021 are grandfathered to be permitted to prepare special purpose financial statements

Different types of companies have different ASIC reporting timelines. It can be quite convoluted, so we’ve aimed to break them down clearly and simply in this table.

In order to fulfil its licence obligations, a financial services business must adhere the obligations set out in Section 912A of the Corporations Act 2001.

ASIC have created a guide to support these requirements, Regulatory Guide 166: Licensing: Financial requirements, which was updated in July 2022. This guide helps users understand the requirements of their financial licence, and their obligations under this licence.

A brief summary

There’s a lot contained within the guide. But in summary, there are three base level financial requirements that financial services businesses must meet.

These are:

• Solvency and positive net assets. At all times, the licence holder must be solvent and have total assets that exceed their total liabilities. Essentially, they must be able to pay their debts.
• Cash needs requirements
  The licence holder must have sufficient resources to meet any anticipated cash flow expenses.
• Audit requirements
  The licence holder must ensure that their audit report includes information demonstrating their compliance with the financial requirements.

Additional financial requirements

The Regulatory Guide includes a table that summarises the financial requirements for all categories of licence holders. It explains the base level requirements in more detail and include additional requirements that licence holders may need to be aware of (such as net tangible assets, surplus liquid funds, and other adjusted surplus funds requirements).

These additional requirements require individual calculations that the licence holders need to make, which should be monitored regularly, in order to meet the licence holder’s policy.

We want to make sure that all of our clients understand the financial requirement obligations you’re subject to as an AFS licence holder. Click here for a table that summarises the requirements based on your category of licence.

A charity is a not-for-profit organisation—but being a not-for-profit doesn’t make an organisation a charity. So, what’s the difference?

A charity:

• Is a not-for-profit entity where all charitable donations must be used for public benefit.
• May perform secondary work that isn’t charitable in itself, but goes towards supporting the business’ charitable purposes.
• Is governed by the Australian Charities and Not-for-profits Commission Act 2012.
  A not-for-profit organisation:
• Provides services to support a community but doesn’t operate for profit or personal gain of its members.
• Does not distribute profits to owners or members. All profits that it makes are invested back into its services.
• Is governed by the incorporated association act of its state or territory—unless the organisation is incorporated as a company.

We’ve summarised the reporting requirements for charities registered with the Australian Charities and Not-for-profits Commission (ACNC).

For more information, you can find a more in-depth explanation of each requirement on their website.

The reporting requirements for not-for-profit organisations, which aren’t registered charities, differ from state to state. We’ve summarised them in the following tables.

Western Australia follows the Associations Incorporation Act 2015.

New South Wales follows the Associations Incorporation 2009.

Victoria follows the Associations Incorporation Reform Act 2012.

Queensland follows the Associations Incorporation Act 1981.

Northern Territory follows the Associations Act 2003.

South Australia follows the Associations Incorporation Act 1985.

Australian Capital Territory follows the Associations Incorporation Act 1991.

Tasmania follows the Associations Incorporation Act 1964.

Ancillary funds provide the important link between donors and organisations that receive their donations. There are two types of ancillary funds:

• Private ancillary funds. These are charitable trusts set up privately by organisations, families, or individuals, that provide an investment structure for their philanthropy.
• Public ancillary funds. These are the typical organisations we think of as charities, which are set up to fundraise and receive charitable donations from the broader public.

There are some major differences between private and public ancillary funds:

Variable outgoings can mean different things in different contexts. In this context, we’re addressing variable outgoings in relation to each state or territory’s Tenancy Act.

Generally found in retail and commercial real estate, variable outgoings are sometimes also referred to as outgoings, or operating expense outgoings.

In its simplest form, a variable outgoing is an operating expense for the property that the tenant is required to pay.

When a commercial, retail, or industrial tenant takes hold of a lease, their lease agreement will include costs payable by the tenant, in addition to rent, that covers a proportion of the landlord’s operating expenses. These operating expenses typically cover any general or common area costs incurred in operating, repairing, or maintaining the property, such as:

• cleaning costs;
• air conditioning;
• security;
• insurances;
• rates; or
• taxes.

For retail tenants, your state might have specific legislation that imposes certain provisions about what can and cannot be recovered by the landlord—so check with your relevant state or territory legislation.

Variable outgoings usually aren’t something that residential tenants need to worry about.

While state and territory has its own Tenancy Act, they all follow similar definitions of the different types of leases within commercial and retail real estate.

These are:

Interestingly, the commercial real estate reporting requirements for every state and territory in Australia are remarkable similar. The only exception is Tasmania, which differs slightly.

Under each applicable piece of legislation, the reporting requirements are:

• The reporting period is within 3 months following the end of the accounting period; and
• An audit is required, subject to exemptions.

In Tasmania, reporting requirement and audit requirements are only relevant if they’re requested by the tenant.

The exemptions to each state’s legislation are also similar, and in fact, some may be exactly the same from state to state. However, there can be nuance in their wording, so it’s important to read the relevant exemptions for your state carefully.