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Related party financial benefits

When a corporation gives an asset or money to a person or group with a close relationship to the corporation, this is called a giving a related party a financial benefit.

Unless it is exempt under the CATSI Act, only the corporation members can approve giving related party financial benefits.

Related parties

A related party can be an individual. These include:

directors of the corporation
directors of an entity that controls the corporation
people making up the controlling entity (for corporations controlled by an entity that is not a body corporate)
a member or group of members of the corporation
spouses, including de facto relationships of the people above
parents and children of the people above.

A related party can be an entity – for example, a body corporate, a partnership, an unincorporated body, a trustee or a natural person. These include:

an entity that controls the corporation
an entity controlled by people who are related parties – unless the entity is also controlled by the corporation
an entity that was a related party of the corporation at any time in the 6 months prior
an entity that believes, or has reasonable grounds to believe, it will become a related party of the corporation in the future
an entity that works together with a related party of the corporation on the understanding that if the corporation gives the entity a financial benefit the related party will get one too.

Financial benefits

A financial benefit is an advantage, profit, reward or gain that has a monetary value. For example:

money
goods
services
discounts
business contracts
jobs
loans.

Examples of a corporation giving a financial benefit include:

giving a director goods, such as money, a car, fuel or food
giving a director or a director’s family a corporation house without asking for rent or below market value rent
buying a building from, or selling a building to, an organisation that controls the corporation
buying land from or selling corporation land to a director
loaning money to a director without asking for interest payments or if loans are not available to other members
loaning money to a director’s daughter without asking for interest payments
giving a contract to provide professional advice, such as financial management, or services, such as repairing houses, to an organisation that is controlled by one of the directors
giving a job to the wife or husband of a director
not requiring payment of a debt owed to the corporation by an organisation that one of the director’s controls.

Approval to give related party financial benefits

Corporations must conduct business in an open, transparent manner and for the best interests of the members. That’s why you must get members’ approval to give a related party financial benefit.

This is because the corporation and the receiver have a close relationship. There is a risk that the transaction may:

not be in the best interests of the corporation – for example, the corporation may not have negotiated the best deal
create a conflict of interest.

Getting member approval

Members give their approval by passing a resolution. You can do this:

at a general meeting
by a circulating a resolution and getting it signed by all members.

The corporation must lodge certain documents, like a proposed notice of meeting, an explanatory statement and any further document proposed to accompany the notice, with the Registrar at least 14 days before the notice convening the relevant meeting is given to members. Failure to lodge these documents is an offence under the CATSI Act.

The Registrar may give written comments on the documents to the corporation, which must be provided to each member of the corporation.

If a related party, or an associate of a related party, is also a member of the corporation, they cannot vote on the proposed resolution to approve giving them a financial benefit.

Learn more about members’ decision-making.

Approval for giving regular and quick financial benefits to related parties

If you think the corporation may need to regularly or quickly give financial benefits to related parties, set up a process to manage this.

You might seek member approval for an internal process giving a staff member or the chair the authority to approve financial benefits up to a set amount in emergencies without full member approval. The process should include reporting all instances of using this authority to members at the next general meeting.

When you don’t need member approval

You don’t need to seek member approval when the financial benefit is:

reasonable remuneration (salary) for the corporation’s officers or employees
paying a reasonable expenses of an officer or employee of the corporation
given to a member of the corporation when all members are eligible for that same benefit
given to meet a native title obligation
given under a court order.

Getting an exemption

Sometimes the corporation can apply to the Registrar for an exemption from the CATSI Act rules about related party transactions.

Learn more about exemptions.

Writing the explanatory statement

The explanatory statement for the proposed resolution should say:

what the proposed financial benefit is
why the corporation should give it.

The statement must be in writing and set out:

the related parties who the proposed resolution says would get the financial benefit
a description of what the financial benefit is.

For each director of the corporation, it should say one of the following:

a recommendation to members about the proposed resolution and the director’s reasons for it
the reasons why not, if the director doesn’t want to make a recommendation
what the director’s interest is, if they have an interest in the proposed resolution.

The statement should also included all information that is:

reasonably required by members to decide whether it is or isn’t in the corporation’s interests to pass the proposed resolution
known to the corporation or any of its directors.

An example of ‘all other information’ includes providing the true potential costs and detriments of giving the financial benefit, such as:

opportunity costs (what other things the corporation might do with the benefit if it isn’t given to the related party)
tax consequences (for instance, liability to pay fringe benefits tax)
benefits given up by whoever gives the financial benefit (this is what the corporation would be giving up).

This description is based on section 290–10 of the CATSI Act.