What do I need to do to ensure my Private Ancillary Fund remains compliant?

If you have recently set up a PAF or have been operating one for a while, you need to know about the long-term rules, obligations, and requirements of having a PAF.

The introduction of Private Ancillary Funds (PAFs) in 2001 by the Howard Government re-shaped the philanthropic landscape in Australia.  Twenty years later, over 1,800 PAFs have been established, giving businesses, families, and individuals greater flexibility to start philanthropic trusts and to properly structure their giving. We’re proud to say that we’ve been involved in setting up PAFs for several of our clients, who have enjoyed furthering their philanthropic goals whilst creating a family legacy around values and giving.

Those interested in establishing a PAF can feel overwhelmed by the regulatory environment in which a PAF operates.  A PAF must meet distribution requirements and have a written investment strategy.  It must develop and maintain a written distribution strategy.  It has borrowing and investment restrictions.  It requires annual financial statements and annual income tax returns.  A PAF must report to the Australian Tax Office or the Australian Charities and Not-For-Profits Commission (ACNC).

Phew! It sounds like a lot, but you can do it!  Your PAF is manageable with the right help.  Read on for more information, and if you have questions, contact us today for a no obligation chat: 1300 654 590

What is a Private Ancillary Fund?

There are lots of ways to ‘give to charity’, so why a Private Ancillary Fund (PAF)?

A PAF provides flexible, legacy-based gifting and serves to impact the community through sustainable funding opportunities.  Generally, a PAF is a fund that’s structured as a trust, where the trustee of that trust is a company.  The board of the company is usually comprised of family members.  However, one person must be an independent director, termed the ‘Responsible Person’.

The investment strategy is set by the directors, and earnings are income tax exempt, with reclaimable franking credits.  Testamentary gifts are also Capital Gains Tax exempt. Created for charitable purposes, it can get endorsed as a Deductible Gift Recipient.  This can be for the donations it receives, and the donations it distributes to others.

A PAF may be a good idea if:

  1. You wish to set up a system of giving that extends past your death and allows for controlled, flexible giving.
  2. You want a structure that involves your family or children in your giving.
  3. You wish to capitalize on the tax deduction opportunities available through a PAF.
  4. You would like to devote considerable amounts of time and or money to a charity into the future.
  5. You don’t want to start a charity or participate in services or activities personally. You primarily just want to provide financial support.
  6. You are an organisation that wants to establish a public foundation. You want to increase fundraising or give to others associated with your organisation.

What do I need to do to stay compliant?

Private Ancillary Funds must follow the Private Ancillary Fund Guidelines 2019.  Your PAF must have a company trustee to administer the running of the fund.  You will likely be a board member of this company, and thus also have director’s obligations to adhere to.

It sounds like a lot, but we have broken it down for you below. Still have questions after reading this?  We’re here to help: 1300 654 590

Rules and obligations

  1. Private Ancillary Funds must be non-for-profit funds established and operated from Australia. Any surplus generated must be directed towards the functioning purpose of the PAF.
  2. Trustee obligations:
    1. The company trustee (sometimes called a Corporate Trustee) of a PAF must develop and maintain a written distribution strategy. This must detail the total of the expected distributions and their recipients.
    2. The company trustee of a PAF must develop and maintain a written investment strategy1 addressing:
        1. Key objectives;
        2. Potential risks; and
        3. Investment methods.
    3. The assets of a PAF (other than real property) must get valued before lodgement of the income tax returns.
    4. Real property held by the PAF must be valued at least once every 3 years. This should be through a certified and independent valuer.
  3. Minimum Annual Distribution: In a financial year a PAF must distribute:
    1. 5% of the market value of its assets at the end of the prior financial year, or
    2. $11,000, if fund expenses have been paid from the PAF’s income and assets (or the remained of the fund if it is less than $11,000)2.
  4. Responsible Persons: One director of the company trustee must meet the ATO’s ‘responsible person test’. This includes that the person has a ‘degree of responsibility to the Australian community as a whole’.  They cannot be a founder of the fund or their relative.  They also cannot have contributed more than $10,000 to the fund or to an associate of the fund. Often this will be a trusted advisor, such as a solicitor or accountant.
  5. Gift Receipts: the fund must issue a receipt for every gift it receives, including:
    1. the name and ABN of the PAF;
    2. the name of the donor; and
    3. a statement that the receipt is for a gift received by the PAF.
  6. Annually a PAF must prepare:
    1. Financial statements submitted to the ATO; and
    2. An Income Tax Return for the relevant financial year3.
  7. Changes: certain changes to a PAF require notification to the ACNC.

What Not to Do and The Risky Bits…

In general, a PAF must not:

  • Ask for donations from the public.
  • Accept donations in any financial year which totals more than 20% of the market value of its assets. Donations from its founder, associates, employees, relatives, or deceased estate of the founder are exempt from this.
  • Carry on a business.
  • The PAF’s company trustee is also prohibited from:
    • borrowing money or maintaining an existing borrowing of money;
    • making investments on a non-arm’s length basis; and
    • providing security over or in relation to assets of the fund.

What to watch for – when penalties can occur:

  • If the PAF doesn’t make a distribution or makes an inadequate distribution.
  • Not implementing an investment strategy or disregarding the PAF Guidelines when developing a strategy.
  • Failing to follow the annual financial reporting requirements.
  • Additionally, a trustee of a PAF (or its employees, officers or agents) will be personally liable for loss or liabilities incurred by the PAF if those losses or liabilities are due to dishonesty, gross negligence or a wilful act or omission.

We’ve got your back

You have established your Private Ancillary Fund and you’re looking forward to the feel-good high that comes after making donations to charitable organisations with values and missions that you want to support and further. You’ve engaged your family or business in the process, and you’re keen for the control, flexibility, and sustainability a PAF will bring.  You have made decisions about your giving and have an idea of how making donations to the PAF will positively benefit your tax returns.

Now comes the management of your PAF. It might seem like a lot, but we’ve got you covered.  We are an experienced, full-service law firm that can get you the answers and help you need in a straightforward manner.

Call us today for a chat, and we’ll find you the right lawyer for you: 1300 654 590

1Any further investment decisions must adhere to this strategy.

2The giving of property or benefits can meet this distribution requirement. The market value determines the value of these distributions. Also note you may apply to the ATO to have this minimum distribution amount reduced for a single financial year.

3All financial statements must be prepared in accordance with Accounting Standards and reviewed and audited by a registered company auditor.

The information contained in this post is current at the date of publishing – 20 January 2022

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