Private Ancillary Funds

From

Louise Meijer

Last week, Canva’s co-founders Melanie Perkins, Cliff Obrecht and Cameron Adams pledged to donate 30% (approx. $16.4b) of their business’s equity into the Canva Foundation. This is a very generous donation and is an example of long-term planned philanthropy in action.

An ideal way for a family to conduct sustained philanthropic activities, like the Canva co-founders plan to do, is through a Private Ancillary Fund (PAF). A PAF is a trust structure that operates on a not-for-profit basis that can be established by individuals, families, or associates to invest in charitable efforts.

Characteristics of the fund include having a responsible person, the subjection to have an annual audit and 5% of its assets must be distributed each year (valued at the previous 30 June). It is to be noted that a PAF can only distribute to Australian registered DGRs.

Additionally, to be cost effective there is a general industry consensus that a PAF must have at least $1 million of assets to justify its establishment and ongoing costs. This can be built up over several years.

The advantages of a PAF

A Private Ancillary Fund is a cost-effective way to manage a pool of funds to support charitable causes over time. It holds the ability to engage families in philanthropic opportunities and objectives and allows for the creation of an enduring legacy.

Many families form this type of fund to connect and teach the next generation about their family’s wealth and how to manage it alongside trusted professional advisors such as accountants, lawyers, and investment professionals.

As PAFs are a registered Deductible Gift Recipient (DGR), all donations made to it are tax deductible to the donor, in the year of the donation. This is advantageous if there is a significant income in a particularly year as donations can be made over a long period of time and in a more considered manner to “ultimate” DGRs, rather than one lump sum donation having to be made.

There is also the ability to donate specific assets to the fund and offset the tax consequences of doing so, such as capital gains tax. This is beneficial if a family would like to retain certain assets or if the assets are difficult to liquidate but they would still like to apply them towards charitable purposes.

The fund is not subject to income tax or capital gains tax on earnings, with any franking credits received being refundable to the PAF. This results in a higher overall return on investment due to the tax-free environment afforded to a PAF and can assist with the preservation (or even increase) of capital, depending on the PAFs donation strategy.

Who can be a responsible person?

A PAF must have a minimum of two directors, one of whom must be a responsible person.

A responsible person is an individual with a responsibility and duty of care to the community because of employment or belonging to a professional body. This can include, but is not limited to, accountants, financial planners, doctors, lawyers, or members of other professional bodies.

A responsible person cannot be a founder, a major donor to the fund (contributing more than $10,000) or a relative or other associate of the founder/major donor.

The establishment process

It takes approximately eight weeks to establish a PAF due to the various ATO and ACNC endorsements required. If a PAF is to be established prior to 30 June, then it is best to commence the registration process in early March.

Structure establishment

To be recognised as a PAF it must have the following characteristics, as stated by the ATO[1]:

  • It is a fund, established and maintained under an instrument of trust
  • It operates on a not-for-profit basis
  • It is established solely for the purpose of providing money, property, or benefits to DGRs
  • The trustee is a constitutional corporation

To incorporate the trustee company and trust deed, the name, details of board directors and their details must be established. The drafting of the deed will require a lawyer (a model deed can be viewed on the ATO website[2]).

Once the legal documentation has been completed, the above is to be executed. The appropriate documentation must be submitted to the ATO and ACNC for endorsement as a DGR for the issuing of an ABN and TFN.

Board activities

The fund is required to maintain a written investment strategy and board of directors who are required to meet annually, at a minimum. The board are required to keep up-to-date with annual audit requirements and adhere to obligatory ATO and ACNC reporting.

An annual timetable should be established to ensure these requirements are met, including how often the board of directors will meet and the responsibilities of individual directors.

The investment strategy outlines how the capital of the PAF will be invested. The drafting of this strategy is financial advice and if professional assistance is required to prepare this document then an investment professional is required to be involved.

Ongoing administrative considerations

Once an initial donation has been contributed, all funds are to be invested in-line with the investment strategy.

There is a requirement that a minimum of 5% of the opening market value of assets must be distributed each financial year to DGRs. This requirement does not apply in the year of inception. The directors are required to review this on a regular basis to ensure the minimum distribution requirements are met.

Post year-end the annual financial statements, audit and various reporting requirements will need to be completed.

It is encouraged that those wanting to travel down the philanthropist path consider the costs associated with their generosity. Private ancillary funds are a way for good deeds to be performed, all while managing funds in a tax efficient manner.

By Louise Meijer, Partner

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[1] https://www.ato.gov.au/non-profit/getting-started/in-detail/types-of-dgrs/private-ancillary-funds/?anchor=fall_within_DGR_category#fall_within_DGR_category
[2] https://www.ato.gov.au/Forms/Private-ancillary-fund-model-trust-deed/

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