Are you an individual, family or business considering philanthropy? A Private Ancillary Fund (PAF) may be for you.
With many individuals, families and businesses placing importance on social consciousness, there’s a growing need for them to take a more considered approach in the way they give. 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. It may be endorsed as a Deductible Gift Recipient, in which case it is able to make donations to certain other Deductible Gift Recipients with the donations it receives itself. Further, if it’s endorsed as a Deductible Gift Recipient, donors that contribute to a PAF are able to claim tax deductions for their donations (in excess of $2 cash or $5,000 in property) which they have made to it.
Although the operation of a PAF is similar to that of a public charitable fund, the public must not be invited to make donations to it – although a PAF may receive donations from the public, there are restrictions.
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 those advantages include that:
- PAFs are flexible, 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 to funds over the long-term and continuing after death
- PAFs allow families to be engaged in the act of giving and the ongoing management of legacies.
Do you want more information?
Download our flyer which provides more detailed information on PAFs, explains the steps involved in establishing and maintaining a PAF as well as explores some of the advantages and disadvantages of PAFs.
Establishing a PAF
The establishment and ongoing management of a PAF requires consideration of the following:
1. 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.
2. 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).
3. A trustee
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.
4. Investment strategy
The trustee of a PAF must develop and maintain a written investment strategy, which addresses the key objectives, potential risks and the investment methods which it will adopt. All subsequent investment decisions must then be made in accordance with this strategy.
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% 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.
The trustee of a PAF must develop and maintain a written distribution strategy. There are rules on distributions from a PAF, including with respect to how much it must distribute yearly. Failure to comply with these obligations can result in penalties.
7. 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 its trustee performs those relevant duties itself or outsources those tasks to paid third-parties. In this context, regard must also be had for the levels and types 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:
- Accounting and auditing requirements
- Governance and compliance functions
- Management of investments
- Grant-making support
- Distributing funds annually, and
- Independent asset valuations.
To find out more, contact your local Business Services Partner today.