Law Commission Report – Personal Gain for Society Members

The Dilemmas

Benefits to members, in themselves, are not inappropriate for a society or indeed a charity if those benefits are non-monetary or intangible (see Canterbury Orchestra Trust v Smitham [1978] 1 NZLR 787 (CA) and Royal Choral Society v Commissioners of Inland Revenue [1943] 2 All ER 101 at 104–5 (CA)). When benefits become tangible some dilemmas arise.

The 1908 Act contained what the Commission records as the “important innovation of drafter John Salmond [which] has been copied in other jurisdictions.” The Report records that “It appears from parliamentary debates that the particular issue that gave rise to the enactment of the 1908 Act was the inability of the Victoria University College Students Association to incorporate to run a hostel. This was presumably because of an intention to charge board for those staying at the hostel. This resulted in ss 4 and 5 of the 1908 Act, which allow incorporated societies to essentially trade so long as the profits of that trade are not to be distributed to members.”

A distinction is drawn in some countries between “member benefit” and “public benefit” societies. The Law Commission’s Report noted that reaction to the possibility that we might adopt that model “was somewhat mixed. Just over half of submitters thought it inadvisable to divide societies on this basis because many societies had both objectives and benefits to members and to the public, which cannot always be clearly separated. Most saw little value in the distinction, especially as public benefit is considered in determining whether a society has a charitable purpose and so can be registered as a charity.” The Commission concluded “… that there is limited utility and much confusion in creating a distinction between private and public benefit.”

Addressing what is known as the members’ “pecuniary gain” problem the Commission’s Report states that “… the Act currently uses a “double negative” way of defining which entities can be an “incorporated society”. Section 4 sets out the general provision that a society of at least 15 people, associated for any lawful purpose but not “for pecuniary gain” may become incorporated. Section 5 then sets out a number of activities that are not in themselves enough for a society to be considered to be operating for pecuniary gain. Eligibility is defined by what a society must not be, as opposed to what it must be.”

1908 to 2013

The Report states that “There has been little judicial consideration of ss 4 and 5 in New Zealand. It is clear from early files in the Registrar of Incorporated Societies’ office, that the definition of pecuniary gain created some difficulty, and that the particular exceptions detailed in s 5 are the result of earlier cases in which the registration of entities was challenged on the basis that there was a kind of indirect gain for some members.”

Resolving the Drafting Dilemma

The Commission was convinced that “the principle that incorporated societies should not operate for the pecuniary gain of their members remains a fundamental pillar of the regime,” but acknowledged that “what does and does not constitute pecuniary gain is often misunderstood.” They therefore recommended “that the new statute should refer to “monetary gain” instead of “pecuniary gain.”” The Commission concluded that “a negative definition, which excludes what cannot be registered, is inevitable.” However:

The phrase “operating for the monetary gain of members” should be defined so that the policy is clear; that is, in incorporated societies, members can have no ownership interest and cannot receive profits in the way that a shareholder of a company has either an ownership interest or the right to receive dividends. This would be similar to the relevant provision in New South Wales.

It follows that the new monetary gain section should not continue the current exemption from breaches of the prohibition against monetary gain, merely by reason that the members of the society are entitled to divide between them the property of the society on its dissolution. …

Recommendations

The Commission’s exact recommendations convey their intent:

The statute should prohibit societies from operating for the monetary gain of members.

  • Societies must not operate for the purpose of, or with the effect of, returning all or part of the surplus generated by their operations to their members, in money or in kind, or conferring any kind of ownership in the society’s assets on its members.
  • However, a society is not operating for the monetary gain of members in breach of the statute simply because:
  1. a. it trades on its own behalf;
  2. it provides a member with payments that are incidental to the purposes of the society, and that member is a body corporate or trust that is prevented by its constitutional documents or deed from acting for the monetary gain of its members;
  3. it reimburses a member for reasonable expenses legitimately incurred on behalf of the society or while pursuing the society’s purposes;
  4. it provides benefits to the public some of whom may be members or their families;
  5. it provides a member with salary, wages or other payment for services to the society, so long as such payment is at arms length and in accordance with normal commercial terms and does not include any profit share, percentage of revenue or other reward linked to gains made by the society; or
  6. it provides a member with incidental benefits such as prizes or discounts on products or services, provided that the purpose of the provision is in accordance with the purposes of the society.

However:

The definition should provide guidance in relation to common practical examples that were raised with us in consultation:

  • Members who are employed by a society can be paid appropriately for their employment.
  • Members can be reimbursed for reasonable expenses.
  • Societies can provide discounted services or goods so long as the provision of those services is incidental to the purposes of the society.
  • Societies may provide benefits to the public, some of whom may be members or their families.
This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.