Charitable Giving

A private ancillary fund, often referred to as a PAF, is a philanthropic trust structure that helps you take a more planned approach to your giving. A PAF gives you more control over your giving strategy. It also enables you to continue your giving over time rather than making a large one-off payment. When you establish a PAF, your donation is invested and the earnings from those investments are distributed to charities of your choice in perpetuity.

A private ancillary fund is a type of charitable trust, your own foundation that you control with the purpose of providing funding to charities. Put simply, when you establish a PAF, you donate capital into it (usually an initial donation of $500,000-$1 million) and receive an immediate tax deduction for the donation. Alternatively, the tax deduction can be spread over up to five years. The capital is then invested long term, and a minimum of 5% of the value of the PAF assets must be distributed as grants to charities each year.

A private ancillary fund also gives you total control over how your capital is invested, and the amount you give each year to support your favourite causes. Giving is planned and effective. Giving through a private ancillary fund inspires future generations, and provides families with unexpected and welcome rewards, as you share your philanthropic values.

The money you donate into your private ancillary fund (both now and into the future) is tax exempt, and franking credits are refunded, so your philanthropic dollar goes much further.

Establishing and managing your own PAF is the most flexible and hands-on approach to giving and will require financial resources to engage an independent trustee, hold formal meetings, prepare and lodge annual tax returns, as well as manage the capital in the PAF from which minimum distributions of 5% of the capital are made to your preferred DGR charities. We can assist in sourcing reputable providers of these services upon request.

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What is a sub-fund in a public ancillary fund?

A public ancillary fund (PuAF) has the same tax advantages as a PAF but is a communal structure. Unlike a PAF, there is no requirement to establish a new trust or trustee company, so a sub-fund can be established immediately, and there’s minimal set-up cost to do this. Amounts donated are usually smaller with a minimum of $50,000, and the contribution is tax deductable. The tax deduction can be claimed in full immediately or spread over the next five years.

A minimum of 4% of the sub-fund’s balance must be distributed to charities each year, allowing you to achieve a regular ongoing flow of distributions to your preferred charities as opposed to making larger one-off lump sum direct donations. You can also nominate successors to advise the Trustee, ensuring your giving legacy continues beyond your lifetime.

In a Public Ancillary Fund, you may have less control over how your funds are invested (although there are ethically screened options available). You still have a say over where the donations are made, however the trustee has the ultimate power to direct donations. To join a Private Ancillary Fund, there are low set up costs, however there is likely to be an ongoing administration fee.

Sub-funds in public ancillary funds are one of the fastest growing charitable structures in Australia. They give a tax deduction immediately with the flexibility to determine the charitable recipients later, can be established immediately (which is especially helpful in the final days of June), and cost nothing to set up.

You then advise the Trustee of the public ancillary fund which charities are to receive a distribution from your sub-fund and the quantum of the distribution. To be eligible, a charity must have Deductible Gift Recipient Item 1 status, and there are over 25,000 charities to choose from.

Whilst you take the time to do your due diligence in deciding which charities you want to support from your sub-fund, the balance is invested. Investment returns are tax-free and franking credits are refunded so there is real potential to grow the amount that you give to charity over time.

After you have built up the balance through donations and investment returns, should you decide that you want to take full control of investment and administrative responsibilities, you can choose to establish your own private ancillary fund. This makes sense for balances over $1,000,000 and you are usually able to transfer your sub-fund to a new private ancillary fund (some providers have restrictions on this, so it is best to check before establishing the sub-fund).

Why set up a philanthropic structure?

Tax deductions are a great incentive to set up a philanthropic structure of your own, but that’s by no means the full story. People choose to establish a foundation for a range of reasons, including a wish to involve the family in giving, concerns around succession planning, and a desire to be actively involved in the charities they support over the long-term.

Family is perhaps one of the most powerful incentives as giving through a PAF is a good way to engage other family members. It can increase children’s social awareness and help to inspire future generations.

Clients who receive a taxable gain (such as a business/ equity sale or large redundancy payout) often want to share their good fortune with others, but do not want to make a quick decision and donate the entire amount in one go. A PAF or PuAF allows an immediate tax deduction while the choice of charity can be made at a later stage when there’s more time for research.

Philanthropy isn’t just for the super wealthy

There is a perception that philanthropy is only for the super-wealthy. Certainly, you do need a reasonable level of wealth to set up your own structure, but it is by no means the realm of high profile business people and the ultra-rich alone. A sub-fund can be established with a donation of $50,000, and the funds can be invested according to your ethical criteria.

When people first start and are still growing the assets of their foundation, the grants being distributed are likely to be relatively modest in size. This does not mean that they are ineffective. Part of the beauty of having your own structure is that you are not bound by the bureaucracy of some of the larger, more established foundations. Donors can be nimble and responsive, using their intuition and stepping in quickly where other funders may not be able to respond promptly.

Small grants given in a considered way can be very impactful. Many people like to fund those areas that are overlooked by government, or to support slightly riskier, pilot projects that seek to find new ways to respond to some of society’s most entrenched and difficult issues. Many people will also make a contribution that is much more powerful than dollars alone, using their expertise, skills and networks to support the charities in which they are involved.

Getting started

Setting up a PAF is straightforward but, as a new entity has to be established, you’ll need to allow a reasonable amount of time to get something up and running before 30 June. A sub-fund, on the other hand, can be established right up until the end of the financial year, creating an immediate tax deduction for the entire amount, while leaving the decisions on which charities to support spread out over time.

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PAF’s: A SUMMARY

How often do I have to contribute to my fund? As often or as infrequently as you like.

Can I get a tax deduction? Yes – can be spread over 5 years.

Can the general public contribute to my fund? No.

Who is the trustee? You must use a special purpose company, for whom you nominate directors, to act as trustee.

Who are the directors of the trustee? You can choose. Directors will generally be family members and/or business associates and one independent person (the ‘Responsible Person’).

Can I have a say in grantmaking decisions? Yes. The directors of the trustee company have the final say.

Who can receive grants? Charities with Deductible Gift Recipient (DGR) Item 1 status.

Who manages the investments? We can manage the investments for you on your behalf.

Are there establishment and ongoing costs? Yes, contact us for details.

Can I make withdrawals from the PAF? No, once you have made a contribution, the funds must stay invested in the PAF.

Contact us to arrange a meeting to discuss your philanthropy strategy on 08 9322 1110.

 Sources: Australian Philanthropic Services, Philanthropy Australia