Todd Stanford

There are a lot of considerations about buying property as an investment and the complexities increase when the purchaser is an SMSF. Importantly with an SMSF, there are a number of protocols and structures to consider in the purchase process.

This article will look at different funding strategies for SMSFs to consider, pros and cons of direct ownership and the mechanics of an SMSF buying the property.

1. Different funding strategies for an SMSF buying a property

There are different funding strategies for an SMSF buying a property, including:

• Straight out with cash (pooled, rolled in, contributed)
• Co-own ‘tenants in common’ with a member (does not need to be 50/50)
• Part cash, part debt (SMSF borrows 65%–70% of the property)
• Purchase units in an ungeared unit trust (that in turn holds the property)
  • Insufficient funds alone in super
  • Looking to acquire land to develop or subdivide
  • Allows the transfer of units (ownership) across to the SMSF over time (rules apply)
• Indirectly – via managed fund, or listed property ETF (Jerome)
• Property Development in SMSF? – It is possible but there are rules!

Investors need to discuss all of the options available when considering property investment with a qualified and experienced planner not just rely on the opinion of so-called property ‘experts’.

2. There are pros and cons of direct property ownership

Here are some of the key points:

PROs

• Super helps as source of funding for a deposit
• It can be tax effective
  • 15% max on net rent
  • 10% on capital gains if sold >12 months
  • 0% on both in pension phase (if <$1.6M)
• Pay-off loan with pre-tax dollars (up to $25,000 p.a.)
• Business real property works well if a business owner (secure your premises, contribution caps don’t apply for market rent, free up borrowing facilities to use elsewhere for expanding the business)

CONs

• Super law restrictions – sole purpose test (no personal or related party use), hard to renovate if little cash (unable to use borrowed funds) etc
• Total Super Balance Caps – $1.6M
• Not optimal for negative gearing
• Higher set-up & ongoing costs
• Forced sale of asset (to meet minimum mandatory pension, member leaves etc)
• Tenancy risk an issue if need cash
• Borrowing in SMSF is complex & high margin for error

3. How does an SMSF buy a property?

In conclusion, the SMSF structure does complicate the property purchase process compared to traditional property acquisition. However, if the investment proves worthy, then it could add significantly to the retirement assets available to the members of the SMSF.

By Todd Stanford, Senior Financial Planner

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Todd Stanford

Australia ranks third in the world for giving, with 73% of Australians making a charitable donation.

Todd Stanford assists his private clients at Profile Financial Services with advice and strategies surrounding their philanthropic endeavours. Todd outlines the options for structured charitable giving in Australia.

Charitable Foundations available

1. Private Ancillary Funds (PAFs)
2. Public Ancillary Fund or Charitable Trusts
3. Community Foundations – sub-funds, giving circles

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.

A private charitable trust or ‘PAF’ provides the most control over grant making decisions – and is very ‘hands on’. It can be ‘seen as a personal statement, even if only visible among a close-knit group’. ^[1]

To justify the ongoing administration costs, a private trust or PAF is recommended to have capital of at least $500,000.

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 is 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.

For smaller donations from $50,000, donating to a Public Ancillary Fund (PuAF) or a community sub-fund may be more effective.

What is a Public Ancillary Fund (PuAF)?

A PuAF is a communal tax exempt philanthropic trust that enables a number of donors to establish and name a ‘sub fund’ under the broader PuAF structure. With a sub fund, the donor does not need to worry about the trustee obligations and responsibilities associated with a Private Ancillary Funds (PAF) and can put their energy into choosing charities they would like to support.

Benefits of a Public Ancillary Fund

• Less money to establish – the PuAF acts as an aggregator to provide access to a deductible charitable foundation without the funds required for a PAF.
• Simple & less time consuming– as the trustee already exists and handles the administration, investment and compliance matters, the donor can focus on the granting.
• Quick to set-up – A sub-fund can be established immediately, as there is no requirement to set-up a new trust or trustee company. A donor simply opens a new ‘sub fund’. There is no cost to do this.
• Tailored – a donor can name the sub-fund and grants made to charities will refer to this name. Anonymous grants are also possible.
• Taxation benefits – the money donated to your sub-fund is usually tax deductible in the year of the donation (or can be spread over a period of up to 5 tax years). It is a tax-exempt structure, so the philanthropic dollar goes further.
• Portability – In certain circumstances, it’s possible to transfer assets from a PuAF into your own PAF down the track. It requires the approval of the Trustee and Australian Taxation Office (ATO).

Who can donate to a PuAF?

Anyone can donate to a donor ‘sub-fund’ and its purpose is to collect donations from the public. There are no limits on the amount that can be donated. This is contrasted to a PAF where a PAF must not solicit funds from the public and is limited in any one year from accepting donations exceeding 20% of the PAF value from non-associates of the founder.

There are many other ways to also give

There are many ways to contribute including making donations via Community foundations such as the Salvation Army which funds many community activities.

——

[1] Foundations for giving: Why and how Australians structure their Philanthropy’, QUT Business School – The Australian Centre for Philanthropy and Non-profit studies

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Todd Stanford

“To give away money is an easy matter and in any man’s power. But to decide to whom to give it and how large and when, and for what purpose and how, is neither in every man’s power nor an easy matter.” (Aristotle c. 384 B.C. to 322 B.C.)

This article on planned giving structures covers the most rewarding part of philanthropy – giving the money away! (Otherwise known as grant making). This covers grant making as it applies to a Private Ancillary Fund (PAF).

There is no single right way to grant. Grants can be for general purposes or to support specific projects or programs.

How much to give?

During each financial year, a PAF must make a minimum distribution of at least 5% of the market value of the Fund’s net assets as at 30 June of the previous financial year.
If any of a Fund’s running expenses are paid out of the Fund’s assets or income, its minimum distribution for that tax year must be $11,000 or 5% as calculated above, whichever is greater.

No distribution is required during the financial year in which the Fund is established.

A PAF can apply to the Commissioner of Taxation to lower the minimum distribution rate for a financial year (but not to zero).

What makes up the 5%?

A distribution includes the provision of money (capital or income), property or benefits in kind.

If the Fund provides property or other benefits, the market value of the property or benefit provided is to be used in determining if the 5% minimum distribution has been met.

An example of benefit in kind is if a PAF leases office space to a grant recipient at a discount to the market price. The fund is providing a benefit whose market value is equal to the discount.

It is typically more administratively difficult to give property or benefits in kind as the ATO market valuation rules must be adhered to.

Distributions do not include expenses of the PAF.

To whom can a PAF give?

PAFs exist to support eligible Deductible Gift Recipients (DGRs) as defined in their Trust Deed. Eligible DGRs are charitable organisations endorsed as DGR Item 1 by the Australian Taxation Office (ATO).

You can check an organisation’s tax status by searching by name on the Australian Business Register using the ABN Lookup website: www.abn.business.gov.au, the ACNC

Register www.acnc.gov.au or request the charity provide their ATO DGR Endorsement Notice.

In no circumstances can PAFs distribute to other PAFs or Public Ancillary Funds. They must distribute to “doing” DGR Item 1 entities (because a tax deduction is already allowed for donations made into the PAF).

Philanthropy Australia provide the following broad range of grant recipients:

• organisations providing immediate relief to those afflicted by poverty, sickness or disadvantage,
• organisations advancing education or the fine arts, and
• organisations and research projects to identify new ways to solve long term medical, social or environmental problems.

Timing

The minimum distribution must be made by 30 June each year. Rather than wait until year end Directors are encouraged to give as much lead time as possible and start thinking about what cause they will support and whether it is for the long- or short-term.

Grant making support

It can be a daunting exercise in researching and selecting which charity to support while also ensuring the grant money is being used wisely.

Rather than ‘going alone’ the PAF can engage the services of a specialist. We recommend Australian Philanthropic Services. Their grant- making service has templates and tools to facilitate and assist in this process including a Giving Compass, Make a Difference workshop for children 7 – 17 and design/documentation of a Giving Strategy Roadmap. Further details here.

Tips on Giving

1. Involve the family – get the next generation to help out by ‘pitching’ to the Directors on charities they are passionate about. Carve out part of the distribution for this
2. Do your research: 75 percent of donors in the USA don’t do any research. Take the time to research the charity’s mission, programme and finances.
3. Don’t be faked out by a name: Many charities have similar-sounding names. That doesn’t mean they perform equally well. Again, do your research.
4. Get specifics: If a charity is helping the homeless, for example, find out how and where the organization is concentrating its efforts.
5. Verify status: Not everyone asking for donations represents a tax-exempt
6. Concentrate your giving: If you find a well-run charity that is doing good work for a cause you care about, consider putting all of your charitable eggs in one basket. If you spread the wealth, you risk making less of an impact.

Keep in mind

Remember receipts need to be obtained from grant recipients as evidence of the distribution and for the PAF’s auditor.

Avoid a shortfall in the annual distribution. Any shortfall must be rectified and penalties may be imposed by the ATO.

Directors of a PAF are encouraged to apply a similar degree of diligence, skill and care to grant making as they do to investment matters.

By Todd Stanford, Senior Financial Planner

Sources: The Chronicle of Philanthropy, Giving USA, Corporation for National & Community Service

The post Philanthropic giving – Private Ancillary Fund (PAF) appeared first on AdviserVoice.

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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Todd Stanford

You don’t have to be wealthy to be philanthropic. Many people give little or no money but rather volunteer their time and expertise in their local community or to a charity.

What is Philanthropy? According to Philanthropy Australia, it is ‘the planned or structured giving of money, time, goods and services or other to improve the wellbeing of humanity and the community’.

Often, it is an evolutionary process that whilst structured in nature has an exploratory side to it before an individual finally gravitates towards a core charitable preference. In Australia there is still often discomfort in talking about giving and there is very little everyday discussion or press on the topic, except for the odd article on major donations (such as Andrew Forrest’s recent $400m donation).

As such Australia’s philanthropic sector is still very much in its infancy.

Philanthropy today

The latest Charities Aid Foundation 2016 World Giving Index ranks Australia third in the World, with 73% of Australians making a charitable donation. By five-year average Australia ranks fifth in the orld behind Myanmar, USA, NZ and Canada. So on a per capita basis we are actually a pretty generous nation.

However, levels of structured giving here are still below those in other countries such as the United States and the UK. Many Australians share the view that they pay their taxes to the Government so it is firstly the government’s role to look after those in need. So ‘we just don’t have that psyche or culture in Australia where the individual feels they’re personally responsible’.

The statistics also show the higher your taxable income the more likely you are to give. For example, 58% of those earning over $500,000 in taxable income claimed a donation. The ATO statistics also show that of the people who could make donations via a structured workplace giving arrangement, just under 5% did so (however this has been on the rise in the last few years).

Motivators for giving are very personal and everyone has different motivators, moulded by their personal journeys in life. Often reaching a turning point such as selling a business, receiving a large inheritance or the kids leaving home were the trigger.

Another motivator for giving in a structured manner is that it provides a platform to pass on family values from one generation to the next. It can enhance and cement family values, to be carried into the future. The Warren Buffet notion that ‘leaving children enough money so they feel they can do anything, but no so much that they could do nothing’ was a widespread value shared by respondents in the study undertaken by Queensland University of Technology. (QUT).

For some people, a sense of guilt about their level of wealth can be a motivator, as can gratitude for having been given opportunities and encouragement to succeed that are denied to many. Ways to give can be un-planned (i.e. personal donations) or planned (through a philanthropic structure). Planned giving is also called ‘structured giving’. Taking the leap to structured giving can appear daunting but there are good sources of advice available.

Structured giving via corporate entities

Examples of planned giving structures include:

• Charitable Foundation – Private Ancillary Funds (PAFs) Public Ancillary Fund or Charitable Trusts
• Community Foundations – sub-funds, giving circles; and
• Corporate Foundations – company (via board) drives decisions and staff can donate.

A private charitable trust or ‘PAF’ provides the most control over grant making decisions – and is very ‘hands on’. It can be ‘seen as a personal statement, even if only visible among a close-knit group’ ^[1]

To justify the ongoing administration costs, a private trust or PAF is recommended to have capital of at least $500,000. Otherwise, donating to a Public Ancillary Fund or a community sub-fund may be more effective. There are many options within Australia’s philanthropic landscape to generally meet most people’s needs and preferences. A study by the Queensland University of Technology in March 2012 concluded that in Australia structured giving is ‘a kaleidoscope – the sheer variety of structures, approaches and activities is significant’.

By Todd Stanford, Senior Financial Planner

[1] ‘Foundations for giving: Why and how Australians structure their Philanthropy’ , QUT Business School – The Australian Centre for Philanthropy and Non-profit studies

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Jerome Bodisco

Todd Stanford

Financial advisory and wealth management firm, Profile Financial Services, has made two senior appointments to support its recent strong growth.

Jerome Bodisco has become Head of Investments. He has extensive experience across a broad range of asset classes and managers, and has long had an interest in goals-based investing. Mr Bodisco was previously a Senior Investment Consultant with NAB Asset Management.

“Goals-based investing is an area of growing focus in our industry. I was drawn to the Profile model because it is often difficult for very large institutions to make the changes required to implement such philosophies at an individual client level.

“This is essential when you are assisting people to retire and also seeking to make a meaningful pension structure that will last the length of time now required for clients,” said Jerome Bodisco.

Jerome’s qualifications include CIMA certification, Bachelor of Mathematics and Finance, and Master of Business in finance. He has over 25 years of experience in financial services and investment practice.

Profile has also hired Todd Stanford as a Senior Financial Planner.

“Todd is an extremely capable and experienced planner, with over 15 years in our industry. Our team has grown to the point where we needed more senior expertise to round out our service offering,” said Sarah Abood, Profile’s CEO.

According to Todd Stanford, “I have reached a stage in my career when I am ready to take on more leadership responsibilities. After extensive research I decided that Profile had the right balance. I felt they offered me the opportunity to be in control of my own destiny and they are also the right size: big enough but not too big!”

Todd had worked at William Buck for nine years (three years as Principal) and was previously with BW Capital, Arthur Andersen and KPMG. He is a Chartered Accountant with SMSF specialist designation, as well as CFP status and a BA in accounting and finance.

“There is a lot of talk in the industry about goals-based right now, but the challenges of implementing this approach efficiently for retail clients still demands a lot of focus and resources. We’re delighted to welcome Todd and Jerome to Profile,” said Ms Abood.

CEO Sarah Abood comments on recent growth at Profile: “We are seeing a lot of interest, both directly from individuals looking for advice, and from advisers keen to partner with Profile because we are self-licensed, privately owned and experienced in building goals-based portfolios.

“For advisers in particular, the opportunity to have a greater say in their own destiny and to have real impact/engagement at a strategic level is very attractive. Profile has also made several acquisitions from planners looking to retire,” said Ms Abood.

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