What is an Ancillary Fund?
An ‘Ancillary Fund’ is a special type of trust that can be used to collect and distribute donations for charitable purposes. The Fund can be set up through a trust deed while you are alive, or through your Will.
The Fund does not undertake charitable work itself, but can be used as a collection point to pool donations and then distribute them to charities and causes, as decided by the trustees.
An Ancillary Fund can be either public or private.
What is the difference between Public and Private Ancillary Funds?
A Private Ancillary Fund is commonly used by family groups to undertake private philanthropy by pooling resources and distributing donations to chosen causes and charities. Donors don’t necessarily all need to be from the same family, but they usually share some form of common interest or close relationship. Private Ancillary Funds can not solicit donations from the general public.
In contrast to a Private Ancillary Fund, a Public Ancillary Fund is used to collect donations from the public.
Why would you set up an Ancillary Fund?
An Ancillary Fund can be a useful way to use funds, property and investments to support charitable causes without actually providing services or undertaking charitable work yourself.
For example, you may wish to direct the investment returns from a particular property to a charitable cause, without actually donating that property to a pre-existing charity and therefore losing ultimate control of that property. As an alternative, the property could instead be donated to an Ancillary Fund over which you exercise some level of control (i.e. as trustee).
If the Fund is set up appropriately and endorsed by the Australian Taxation Office as a ‘deductible gift recipient’ (DGR), donations that you make to the Fund will be tax-deductible. Additionally, the investment returns are likely to be exempt from income tax, and you can have some flexibility in deciding the charitable causes that Fund supports from year to year.
What do you need to know before setting up an Ancillary Fund?
There are some fundamental rules that apply to all Ancillary Funds, whether they are public or private. These requirements are likely to influence your decision as to whether an Ancillary Fund is the appropriate structure for you.
- Purpose: The sole purpose of the Fund must be to provide money, property or benefits to charitable organisations that are endorsed as ‘deductible gift recipients’ (DGRs). A DGR is a special type of charity that has been approved by the ATO to receive tax-deductible donations. This means your Ancillary Fund will only be able to donate to other DGRs.
- Trustee: The Fund must have a corporate trustee. This can be a company or incorporated association. The Fund can have more than one trustee, but they must all be incorporated (i.e. individuals can not be trustees of the Fund).
- In Australia: The Fund must be established and only operate in Australia.
- ACNC Registration: Most Ancillary Funds will need to register with the ACNC to access charity tax concessions, but registration may not be required in all cases.
- Audit Requirements: Any Fund that has revenue or assets over $1 million in any financial year must have its financial statements audited by a registered company auditor. If both revenue and assets are under $1 million in a financial year, the Fund can instead opt to have its financial statements ‘reviewed’ by a registered company auditor. A review is usually a less rigorous process than an audit, (and less expensive).
- Investment Strategy: Every Fund must have a detailed written investment strategy that is regularly reviewed and approved by the trustees.
Special rules applying only to Private Ancillary Funds
Private Ancillary Funds must comply with the Private Ancillary Fund Guidelines 2019 to maintain their DGR status.
The main special rules that apply to Private Ancillary Funds are:
- Minimum Annual Distribution: The Fund must distribute at least 5% of the market value of the Fund’s assets each financial year. (Note: Unless otherwise required by the Fund’s Deed, this rule does not apply for the financial year that the Fund is established).
- Responsible Persons: At least one person in control of the Fund (i.e. a director of the Trustee) must have a ‘degree of responsibility to the Australian community as a whole’. This includes people that perform a public function (such as mayors, local councillors and members of parliament), professionals that belong to a professional body (such as accountants, lawyers, doctors) and others that hold a responsible position in the community (such as school principals and religious practitioners).
- Donations: Private Ancillary Funds can not solicit donations from the public.
Special rules applying only to Public Ancillary Funds
The Public Taxation Administration (Public Ancillary Fund) Guidelines 2022 apply to Public Ancillary Funds. The Guidelines are very similar to the Guidelines applying to Private Ancillary Funds, with some key differences.
- Minimum Annual Distribution: The Fund must distribute at least 4% of the market value of the Fund’s assets each financial year. (Note: Unless otherwise required by the Fund’s Deed, this rule does not apply for the financial year that the Fund is established or the following 4 financial years).
- Responsible Persons: The majority of people in control of the Fund must be ‘responsible persons’ (see above).
- Donations: A Public Ancillary Fund can, and must, solicit donations from the public to maintain DGR endorsement.
What steps are involved in setting up an Ancillary Fund?
Setting up an Ancillary Fund basically involves 5 main steps:
- Choosing whether to use a Public or Private Ancillary Fund;
- Identifying the individuals that will be ‘in control’ of the Fund. These individuals will most likely become the directors of the trustee company. You will need to be sure that the founding directors meet the applicable ‘responsible person’ requirements;
- Incorporating a trustee company with ASIC (or another form of incorporated trustee if preferred);
- Establishing the Ancillary Fund by preparing and signing a Trust Deed (this can be based on the relevant Model Trust Deed published by the Australian Taxation Office); and
- Applying to the ACNC for registration as a charity (or just to the ATO for DGR endorsement if you are not seeking charity tax concessions).