Todd Stanford

There are a range of planned giving structures including Private Ancillary Funds (PAFs). Today there are roughly 1,600 PAFs across the country, with 80-100 established annually and total net assets valued at over $7 billion. In the 2013/14 tax year, PAFs gave away $300M in planned giving.

In summary, a PAF is an efficient, satisfying and tax effective way to put a structure around philanthropy. It allows a donor to set aside capital to generate investment income for charitable purposes in perpetuity.

What is a PAF?

A PAF is a type of private charitable trust established and operated in Australia. It is maintained under a Will or an instrument of trust (e.g. trust deed) under State or Territory law.

How is a PAF structured and governed?

A PAF must have a company as the trustee and the company board is usually comprised of family members. It must contain at least one independent director (the ‘Responsible Person’).

PAFs are normally exempt from income tax and other federal taxes. They are also eligible to receive cash refunds of franking credits. Testamentary gifts made to a PAF also have Capital Gains Tax (CGT) exemption.

A PAF can be endorsed by the Australian Taxation Office (ATO) as a deductible gift recipient (DGR) Item 2 so can receive tax deductible gifts.

PAFs are governed by ATO Guidelines and have Australian Charities and Not-for-profits Commission (ACNC) compliance obligations.

When would a PAF be considered?

A PAF can suit individuals, families and companies that:

• Can make use of tax deductible donations
• Want control of investment and grant-making decisions
• Wish to leave a philanthropic legacy in their own lifetime
• Desire to foster in their children their own philanthropic values and sense of financial responsibility
• Wish to provide charitable causes with long term sustainable funding even when their personal financial situations change
• Have at least $500,000 for an initial donation

What must a PAF do each year?

A PAF must make a minimum annual distribution of at least 5% of the market value of the fund’s net assets as at the end of the previous financial year, (subject to a minimum of $11,000). A distribution also includes the provision of property or benefits at market value.

Distributions (also called grants) must be made to only DGR Item 1 charities (of which there are over 20,000), never another DGR Item 2 organisation such as another PAF.
There are also several annual administrative and compliance obligations including preparing audited financial statements, the ATO Ancillary Fund Return and lodgment of the Annual Information Statement with the ACNC.

Managing a PAF needn’t be difficult. Profile Financial Services recommends using a competent PAF administration service such as that offered by Australian Philanthropic Services, to handle all secretariat and compliance requirements.

Donations to a PAF

Donors receive a tax deduction for donations, which can be spread over five years – extending your giving out over a much longer period.

A PAF must be private in nature, so the founder (or related party) can make as many donations as they wish. However the PAF cannot solicit donations from the public.
It can however, in any financial year, accept donations from un-related entities (as defined) provided the amount is not more than 20% (in total) of the market value of the PAF assets as determined at the end of the previous financial year.

It is possible to give property, including cash and shares, to a PAF. Although a gift of property can attract CGT, the taxable gain is often offset by a tax deduction equal to the current value of the property as determined by the ATO.

How are PAFs established?

Expert tax, legal and financial advice is typically required to establish a PAF, however the process is not onerous. The ongoing timing and size of donations should also be subject to financial advice.

A PAF’s trust deed must contain specific provisions and be approved by the ATO. The approval process can take several months.

How portable is a PAF?

If there is insufficient capital initially to justify the costs of running a PAF, a sub-fund in a public ancillary fund can be opened, grow the balance over a few years, and then transfer the funds to a PAF.

A PAF can also be transferred into a sub-fund of a Public Foundation if the founders of the PAF no longer wish to operate their own structure.

By Todd Stanford, Senior Financial Planner

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