Linkedin
Facebook
Email
more
AUTHORS
Want to leave a lasting legacy? Consider using a Private Ancillary Fund (PAF) in your succession planning.
A Private Ancillary Fund (PAF) is a great option for families looking to create a lasting philanthropic legacy. By using a PAF, families can effectively align their charitable goals while enjoying potential tax advantages. Additionally, it serves as a valuable learning platform for future generations, setting the stage for ongoing generosity in your family.
Key Highlights
- PAFs support a family’s charitable strategy, giving it purpose and alignment across generations.
- PAFs offer significant tax advantages as Deductible Gift Recipients (DGRs).
- PAFs are regulated, thereby ensuring transparency and accountability.
- Getting professional advice is essential to ensure ongoing compliance.
Understanding Private Ancillary Funds in Australia
PAFs are essential charitable trusts in Australia that are regulated by the Australian Taxation Office (ATO). If they meet specific eligibility criteria, these funds may be able to qualify as Deductible Gift Recipients (DGRs). This designation allows donors to claim immediate tax deductions, which in turn encourages more generous giving to charitable causes.
The ATO reviews the eligibility and approval process for DGR registration to ensure that PAFs fulfil their mission through transparent, accountable and ethical practices.
What is a PAF?
A PAF is a pool of assets governed by an instrument of trust such as a trust deed. The fund can be established during the lifetime of the donor or through the operation of a Will.
The fund must be operated on a not-for-profit basis and be established solely for the purpose of providing money, property and benefits to other DGRs. It is administered by a trustee who, in accepting the role, has agreed to comply with the Private Ancillary Fund Guidelines 2019.
Donors to a DGR-registered PAF are entitled to tax deductions for their contributions.
Impact on Australian philanthropy
Typically, a family will establish a private ancillary fund because they want to ensure that their donations are governed by a giving plan that reflects their values. This gives them the freedom to control where their charitable contributions go, allowing them to direct funds toward causes they believe will have the biggest impact. Essentially, the PAF allows families to have more say in how their donations are invested and which issues they choose to support.
This personalised approach encourages families to get involved in philanthropy and can lead to meaningful change in Australian society.
Frequently Asked Questions
Contributing to a PAF offers several benefits:
- Sustainable giving - By growing the fund's value over time, a PAF provides ongoing support for your chosen causes.
- Oversight and professional support - PAFs benefit from expert investment management, maximising returns and enhancing charitable contributions.
- Significant tax advantages - This includes immediate tax deductions and refunds on franking credits.
- Flexibility in fund distribution - PAFs allow donors to manage how and when donations are made.
- A lasting philanthropic legacy - PAFs involve family members in the management and decision-making processes for an ongoing impact that will last generations.
Yes, a PAF can support international causes, but there are specific conditions. PAFs primarily support Australian DGRs. However, they can fund international causes if those organisations have Australian DGR status.
PAFs are designed for private philanthropy, often established by families or individuals to manage their charitable giving: providing autonomy and control over their contributions. They are regulated by the ATO and must distribute a minimum percentage of their assets annually to DGRs. Unlike public ancillary funds, which solicit donations from the public, PAFs do not seek public donations and are typically funded by a single entity or family. This allows for greater control and flexibility in managing and distributing funds. Additionally, PAFs offer significant tax benefits, including immediate tax deductions for contributions and refunds on franking credits.
Strategic advantages of using a PAF for succession planning
Incorporating a PAF into your succession plan offers more than tax benefits; it aligns your values with your family's future well-being, fostering philanthropy within your legacy.
By establishing a PAF, you sow the seeds of charitable involvement for generations to come.
Aligning philanthropic goals with succession plans
The terms of the deed establishing the PAF will designate the causes you wish to support now and into the future. Generally, these are causes which exhibit specific traits, as opposed to nominating specific charities.
At a minimum, a PAF must make annual distributions equivalent to at least 5% of the market value of the fund’s assets as at the end of the previous financial year. This requires an active approach to managing the PAFs giving strategy and promotes a collaborative approach to doing so within the family. This instils responsibility and a culture of giving with purpose within the family, supporting a lasting legacy of generosity.
Setting up a Private Ancillary Fund
Establishing a PAF requires careful planning and adherence to specific requirements as set out in the Private Ancillary Fund Guidelines 2019. The governing rules of the fund must specify particular requirements, so it is important that the deed establishing the PAF is conforming at the time of establishment. Regular reviews and updates are encouraged to ensure continued compliance with the rules of a DGR registered PAF.
Guidelines for Private Ancillary Funds
The ATO provides detailed guidelines for the administration and maintenance of PAFs. To be endorsed as a DGR, a PAF must meet several requirements, including having an Australian Business Number (ABN), being established and maintained in Australia, and complying with the Private Ancillary Fund Guidelines 2019. The fund must be established and operated on a not-for-profit basis and solely for providing money, property, or benefits to DGRs. Trustees must agree to comply with the guidelines and notify the ATO of any changes to the governing rules within 21 days.
The deed establishing the PAF must outline the fund’s objectives, procedures and distribution strategies guiding its philanthropic mission. The investment limitations imposed on a PAF through the governing rules prevent a conflict of interest and annual reporting ensures transparency and appropriate oversight over the integrity and ethical conduct of the trustee.
Key steps in creating a PAF
The key steps in creating a PAF can be summarised as follows:
- Setting up the trust deed: This legal document establishes the terms under which your PAF will operate, including its objectives, management structure, and process for making grants.
- Appointing a trustee: The trustee is responsible for managing the PAF in accordance with the trust deed and relevant regulations.
- Registering your PAF: You must register your PAF with the ATO and obtain an ABN.
- Investing the funds: The PAF's funds must be invested in accordance with the investment strategy outlined in the trust deed and comply with the investment rules set by the ATO.
These steps ensure that your PAF is set up correctly and operates within the legal framework established for charitable trusts in Australia.
Managing your Private Ancillary Fund
A PAF must be properly managed to achieve the desired impact and ensure longevity. This involves strategic investments, accurate record-keeping, and compliance with ATO guidelines.
Compliance and reporting obligations
PAFs have several compliance and reporting obligations to ensure they operate within the legal framework established by the ATO.
The key requirements can be summarised as follows:
- Annual distribution: PAFs must distribute a minimum percentage of 5% of their net assets annually to DGRs. This ensures that the funds are actively used for charitable purposes.
- Financial reporting: PAFs must prepare and lodge annual financial statements in accordance with Australian Accounting Standards. If the fund's revenue (which includes contributions made to the fund) or assets exceed $1m, an audit is required; otherwise, a review is sufficient.
- Investment strategy: PAFs must have a documented investment strategy that complies with the investment rules set by the ATO. This strategy should be reviewed regularly to ensure it remains appropriate.
- Audit and review: Depending on the size of the fund, PAFs may need to undergo an audit or review of their financial statements. This ensures transparency and accountability in the fund's operations.
- Lodgement deadlines: The audit or review must be finalised before the fund is required to give its income tax return to the Commissioner for the year.
- Compliance with guidelines: PAFs must comply with the Private Ancillary Fund Guidelines 2019, which outline the operational and governance requirements for these funds.
Failure to comply with these obligations can result in penalties and the loss of DGR endorsement, which is crucial for maintaining the fund's tax-exempt status.
PAFs must also comply with the Australian Charities and Not-for-profits Commission (ACNC), ensuring transparency in operations by maintaining records, governance protocols, and promptly reporting changes.
Engaging future generations in your philanthropic legacy
Succession planning for your PAF involves more than financial management; it's a way to preserve your philanthropic vision and inspire future generations to engage in charitable giving. Involving family in grant allocation decisions allows them to see the impact of their contributions firsthand by discussing values and causes important to you. Encouraging younger members of the family to engage with supported organisations deepens their understanding and shows how their involvement can drive positive change.
To engage future generations effectively, consider these strategies:
- Appoint family as trustees or advisory board members to impart responsibility and insight into the PAF’s dynamics.
- Establish a family giving circle to collaboratively choose charities to support, fostering teamwork.
- Share success stories by highlighting transformative outcomes from recipient organisations, emphasising the impact of each contribution.
- By nurturing a philanthropic culture within your family, you leave a lasting impression on loved ones and causes dear to you.
Professional support
Engaging professional support when setting up a PAF is crucial for navigating the complex regulatory landscape. Experts can assist in drafting a comprehensive trust deed, ensuring compliance with the ACNC and ATO guidelines. Professional assistance will also play a vital role in obtaining and maintaining DGR status and can provide ongoing advice on managing philanthropic activities effectively.
FOR MORE INFORMATION
Are you considering a Private Ancillary Fund in your succession plans? Contact an RSM expert today to get started.
