Achieving Philanthropic goals with a Private Ancillary Fund (PAF)

For many individuals, families and businesses, the opportunity to contribute to their immediate or broader community is increasingly important. While not all contributions are financial, charitable giving is certainly high on the agenda. When it comes to fulfilling philanthropic objectives in the long-term, leveraging your assets by establishing a charitable fund is a flexible and tax-effective way to structure your giving over time - so you can contribute to the wellbeing of the community, environment, cultural or social causes close to your heart now, and into the future.

What is a PAF?

Broadly, a PAF is a fund that has charitable purposes and is structured as a trust with a corporate trustee. It is commonly the preferred structure for charitable giving used by individuals and families. A PAF may be endorsed as a Deductible Gift Recipient, in which donors that contribute to a PAF are able to claim tax deductions for their donations - if in excess of $2 cash or $5,000 in property.

What are the benefits of a PAF?

PAFs not only benefit whole communities in the long-term, but they also offer various advantages to their founders and contributors. Some of these advantages include:

• Flexibility, in that donors can make a tax-deductible donation now and decide which charities to support at a later date
• Income and realised capital gains derived by a PAF may be tax-exempt
• Funding can be sustainable, allowing donors to contribute over the long-term, continuing after death
• A learning opportunity for any participating family members - who may have limited investment experience - to learn first-hand about managing wealth prudently in the context of a long-term investment strategy
• Allows families to be engaged in the act of giving and the ongoing management of legacies – including decisions on grants to be made by the PAF each year.

Establishing a PAF

The establishment and ongoing management of a PAF requires consideration of the following:

A governing document

A PAF’s governing document (usually a trust deed) should outline its purpose, as well as the rules surrounding its operation. This includes a requirement that the PAF is maintained so that donations received by it are for charitable (and not business or private) purposes.

Application to governing bodies

Following the execution of the PAF’s trust deed, applications are made to:

• The Australian Taxation Office for Deductible Gift Recipient, Income Tax Exempt Charity, Australian Business Number, Tax File Number, GST, tax withholding and/or Fringe Benefits Tax purposes
• The Australian Charities and Not-for-profits Commission (for charitable status).

Directors and trustee

As the name suggests, a PAF is a private structure where adult family members typically comprise the majority of the board of directors of its corporate trustee. A minimum of two directors must be appointed.

One of the directors is required to meet the “responsible person test”, which is defined to mean a person who is not the founder or their family and who has “a degree of responsibility to the Australian community as a whole”. Often this will be the family accountant or lawyer, or another trusted person who belongs to a professional association with a code of ethics.

A trustee must be appointed to operate the PAF and protect the property of the fund - there are rules guiding the role of the trustee, including who can be appointed as a trustee, their responsibilities, including developing and maintaining an investment strategy, distributions and their liability.

Investment strategy

The trustee of a PAF must develop and maintain a written investment strategy, which should be reviewed at least annually and addresses the key objectives, potential risks and investment methods which it will adopt. All subsequent investment decisions must then be made in accordance with this strategy.

This formalised approach to managing the investments is typically provided with the assistance of an external investment adviser, who can help develop and/or review the strategy. It’s important to assess risk management and diversification – particularly in times of market volatility. The prudent management of PAF investments will generally involve a broadly diversified portfolio across major asset classes, such as shares, property and fixed interest, to manage risk and return. However, due to the tax-exempt status of a PAF, there is an incentive to hold a higher allocation to Australian shares and hybrids given that a PAF is entitled to a full refund of franking credits.

Donors

There are rules with respect to donors to PAFs, most importantly that a PAF must not solicit donations from the public nor accept donations in any financial year which total more than 20 per cent of the market value of its assets from entities other than its founder (or the associates, employees, relatives or deceased estate of the founder). In this context, the fund must issue a receipt for every gift it receives.

Distribution

The trustee of a PAF must develop and maintain a written distribution strategy. There are rules on distributions from a PAF, including how much it must distribute each year. Failure to comply with these obligations can result in penalties.

Ongoing compliance

While PAFs are an excellent way to structure giving, they are complex and highly regulated. This means they require expert tax, legal and financial advice for both their establishment and ongoing management, such as lodging reports and making minimum annual distributions.

How much do I need to establish a PAF?

There is no legal requirement that a PAF be established with a minimum amount of cash or other assets. One of the factors determining whether it is economically feasible to maintain a PAF is the degree to which the trustee performs relevant duties themselves, or outsources those tasks to paid third-parties. In this context, regard must also be had for the levels and types of income expected to be derived by the PAF.

How can BDO help?

BDO provide expert tax, strategic and financial advice to assist with the establishment, operation and winding-up of a PAF. This includes:

• Administration
• Accounting and auditing requirements
• Governance and compliance functions
• Management of investments
• Grant-making support
• Distributing funds annually, and
• Independent asset valuations
• Investment strategy review
• Ongoing investment management.

---

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO Private Wealth Advisers Pty Ltd ABN 62 805 149 677 AFS Licence No. 238280 is a member of a national association of separate member firms which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Private Wealth Advisers Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of separate member firms. Liability limited by a scheme approved under Professional Standards Legislation.

BDO is the brand name for the BDO network and for each of the BDO member firms.

© 2022 BDO Private Wealth Advisers Pty Ltd. All rights reserved.