Private ancillary fund (PAF) - The vehicle of choice for tax - effective philanthropy

So what is a Private Ancillary Fund (PAF)?

A PAF is essentially a private charitable trust with a corporate trustee. It has Deductible Gift Recipient (DGR) status and, in most cases, has income tax-exempt charity status.

Established under a trust deed or a will, PAFs allow the donors total control over the distribution of funds, as long as recipients of donations are Income Tax Exempt Charities, have DGR 1 status, and the PAF complies with the PAF Guidelines.

Why have a PAF?

The advantages are numerous, both from the point of view of the cake (the philanthropic kind) and the taxation perks for the donors:

• All donations to a PAF are tax deductible. The tax deduction can be claimed in full immediately or spread over up to five years. This is particularly useful for those donors who have a spike in taxable income for a particular year, for example, due to an asset sale resulting in a significant capital gain.
• A PAF's income is usually exempt from income tax (if an application for the Income Tax Exempt Charity status is made to and received from the ATO). Income and capital gains are tax-free in the PAF, with any received franking credits refunded.
• PAFs give trustees significant control and flexibility in terms of defining and revising the PAF’s philanthropic and investment objectives as well as the timing and scope of donations, subject to a minimum distribution requirement: PAFs must distribute the greater of $11,000 or 5% of the market value of the fund’s net assets in each financial year.
• The director(s) of the corporate trustee of a PAF can be an individual, family member or corporate group. There is a requirement that one of the trustees is an independent party known as the ‘Responsible Person, and this role is most commonly performed by the family accountant, solicitor or financial adviser. Any professional body member with a code of ethics or rules of conduct will generally qualify as a responsible person.
• A PAF allows individuals to establish a philanthropic legacy in their lifetime with a vehicle that can continue into perpetuity if set up appropriately. The PAF can contribute to important causes and long-term support to various projects and programs that may not otherwise go ahead.
• A family-based PAF is also a helpful tool for intergenerational philanthropic commitments. Children under 18 can be involved by providing input into shaping the donation strategy and later taking on a more active role as trustees.
• Donors are also able to make their PAF a beneficiary of their estate.

What's the catch?

It is important to note that there are several requirements that a PAF must meet, including:

• Making decisions solely for the public benefit;
• Only donating to Income Tax Exempt Charities with a DGR status;
• Not soliciting donations from the public;
• Costs and time involved with ongoing record keeping, reporting and audit requirements add to the cost of administering a PAF.

Is a PAF right for you?

Establishing a PAF requires expert tax, legal and financial advice and should be undertaken with care. 

Some of the critical issues to be considered include the following:

• What are your long-term philanthropic goals?
• How much control do you wish to have over your donations?
• What type of charitable recipients do you want to support, and do they have a DGR 1 status?
• What is your level and pattern of donating, and how do you envisage it developing in the future?
• How much involvement do you or your family wish to have in running a philanthropic structure?
• Australian Philanthropic Services (APS) recommend a minimum of $1 million for an initial donation.

Is there an alternative?

One alternative may be a sub-fund with a non-for-profit community foundation account or with a private provider (otherwise known as a Public Ancillary Fund)

Sub-funds provide a more affordable and accessible entry point for many individuals and families to structure their giving. They are suitable for those seeking more guidance with their giving and do not want to be involved with any administration, compliance and due diligence.

A sub-fund can be with a community foundation or a charitable trust fund run by a not-for-profit, Trustee Company, private foundation or wealth adviser.

A community foundation typically focuses on supporting a geographical area by facilitating and pooling donations to address community needs and support local non-profits. Community foundations make it easy for individuals, families, corporates and more to develop grantmaking strategies that align with their specific interests.

The legal structure is a public ancillary fund (PuAF).

PUAF features

• Like a PAF, Sub-funds can only distribute funds to organisations with DGR 1 and charitable
  status (unless the sub-fund is established in a charitable trust that is not a PuAF, in which case
  no tax deduction is available)
• Sub-fund holders make recommendations for grants – however, the trustee of a PuAF is not under a legal obligation to comply (however, it is rare for a trustee to disagree with a recommendation)
• Donations are irrevocable, but ‘portability’ may be an option – this means that a sub-fund
  holder can request that the trustee transfers the assets in a sub-fund to either a PAF or to
  another sub-fund in another PuAF – it can be a good idea to ask about portability options
  before establishing a new sub-fund
• Funds are pooled within the corpus of the PuAF under a common investment strategy –
  they cannot be individually managed
• The Foundation corpus must distribute a minimum of 4% of the value of the fund overall
  as grants in each financial year, however, one of the benefits of a sub-fund is that this does
  not apply to the individual sub-fund but the PuAFs as a whole
• Sub-funds can raise funds from the public, whereas a PAF cannot
• Tend to be more economical to manage than a PAF as the annual fees are much lower
• And like a PAF,  the contributions are fully tax-deductible, and deductions can be spread over 5 years.  Assets are exempt from income tax

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