The most recent Australian Tax Office statistics for the 2013-14 financial year revealed gift deductions totalled $2.6 billion, a 14% increase from the previous year. Many people assume that charitable giving only benefits the recipient, however when planned property, philantrhopy can be an effective tool in your wealth management strategy.
Why do Australians give?
Philanthropic activity is not limited to the gifting of money, but can include the bequest of time, information, skills, goods and services. Research confirms 87% of Australians are givers – whether it is sponsoring friends and colleagues for Movember or CEO Sleep out, donating to door-knockers such as the Red Shield Appeal or Surf Lifesaving Australia, or seasonal one-off donations to charities such as the Smith Family Christmas Appeal or the Royal Children’s Hospital Ball.
Research by Giving Australia asserts Australians donate for a number of reasons, including their identification with the cause and the people it assists, desire to reciprocate previous assistance they received, respect for non-profit organisations, desire to make their community a better place, and affiliative ties with the organisation. There is no doubt, Australians are willing to give, however this ad-hoc approach might not be achieving the desired results.
The benefits of structured giving
Structured giving is defined as planning when, where and how you give to achieve maximum community impact. It’s not simply whipping out your cheque book and donating a one-off payment, it means setting up a plan to achieve a particular goal and providing a consistent income stream for your chosen charities.
A structured approach will allow you to be more targeted, you can involve family and friends on an on-going basis, and make a greater impact over a longer period of time. The positives for charitable organisations is clear, those who plan their gift-giving behaviour give approximately four times more than spontaneous or reactive givers. This allows organisations to achieve a positive and consistent inflow of funds which means they can plan better to achieve long-term goals.
The Australian Government made a number of changes in 1999 to taxation law to encourage gift giving, such as the ability to deduct for donating property and claim back costs associated when you attend events – such as fundraisers. When giving gifts, you could qualify for a charitable income deduction given it meets four criteria: the gift is given to a qualifying deductible gift recipient, is a financial asset (ie. property, stock, money), was voluntarily transferred and does not provide the donator with material benefit or advantage, and complies with the relevant gift conditions. The amount a donator can claim through a tax return will vary based on the type of gift given, and the deductions can be claimed in the respective income year or, in certain circumstances, may be spread over five income years.
The right structure of philanthropic giving will allow you to meet your goals – such as your desired level of involvement, and ability to give in the future. The structures that can be considered include:
Sub-fund in a Public Ancillary Fund: If you don’t require a high level of involvement, you could establish a sub-fund within a larger charitable trust. You can usually recommend the organisations you wish to support, and a trustee will manage the administrative duties including the distribution of charitable donations. A minimum tax deductible investment of $20,000 is usually recommended.
Private Ancillary Fund: If you require a high level of control, a private ancillary fund allows family members and one independent trustee to make tax deductible donations to eligible organisations (DGR item 1 by Australian Taxation Office). Due to the administrative costs, it is recommended a $500,000 initial investment is made.
Testamentary or Will trust: This type of trust comes into force once the donor has died and allows the benefactor to fund charitable causes as specified by the will. Donations to the trust are not deductible, however they can attain income tax exempt status.
Private Charitable Trust: This trust is established by a donor to fulfil charitable purposes as stated in the deed. Donations to the trust are not deductable, however they can attain income tax exempt status.
Gift Fund: If you want to collect donations to finance a single organisation you should establish a gift fund.
New paths to giving
In addition to traditional fundraising methods and philanthropic structures, new investor-friendly charitable mediums are currently being brought to market. Social impact investing is a new approach to raising charitable funds in Australia. The OECD defines social impact investing as “the provision of finance to organisations addressing social needs with the explicit expectation of a measurable social, as well as financial, return.” Social impact investment has become increasingly relevant in today’s economic setting as social challenges have mounted while public funds are under pressure.
Typically, social impact investment entails the use of debt or equity instruments to deliver a social or environmental “return” as well as a financial return. Social impact investment can potentially provide new ways to more efficiently and effectively allocate public and private capital to address social and economic challenges at the global, national and local levels. While these innovative new approaches will not replace the core role of the public sector or the need for philanthropy, they can provide models for leveraging existing capital using market-based approaches with potential to have greater impact.
Most Australian impact investments tend to be focused domestically and take a portfolio approach to balance risk and return. Typically, they use a loan or quasi-equity finance approach for blended risk-adjusted financial and social returns. This type of debt security is helpful to non-profit organisations because they cannot obtain equity capital – capital raised from owners. Because the loan returns are indexed based on organisational performance, and security holders do not have an ownership stake, the loan terms and conditions are usually formulated to provide incentive to managers to operate the organisation efficiently. This allows the donors and the organisation to share the risk and returns. Donors can opt to allocate a percentage of returns from the loan back to the organisation, to ensure a high level of control of their money whilst being alive, and could decide to bequeath all or a percentage of capital to the charity upon their death.
A Social Impact Fund provides a vehicle for:
- Donors to donate now and have capital in the future
- Donors to retain ultimate control of their money; avoiding the concern “how much money will I need in the future?”
- Provide both donors and the charity with a regular revenue stream
- Allow the charity to establish a relationship with donors more aligned to a partnership, than a gift without any obligations
- Align fund raising activities with multi-year funding commitments
- Allow donors to live on distributions throughout their lifetime and bequeath the remaining capital upon their death, or death of their spouse.
So how do I choose a good charity?
Reflect on your motivations for giving. Are you interested in a particular cause? Have you or someone you know benefited from the work of a charity? Or perhaps you already have an affiliation. Even if you have a charity in mind, it is worth considering other charities undertaking similar work. This will allow you to evaluate and compare the effectiveness of charities and determine where to invest.
You can find registered charities, and check their credentials, at the online charity register run by the Australian Charities and Not-for-profit Commission (ACNC), or search by category for featured charities on the Australian Charity Guide website. Be sure to consider small-to-medium sized charities as they may be just as effective at meeting the needs of their beneficiaries as larger organisations. As long as the charity has the infrastructure to support a significant investment, your donation may have the greatest impact in a smaller organisation.
Once you are aware of the charities working in your area of interest, create a short list and investigate their annual reports. Consider the charities’ growth, how much they invest in their programs and their savings. Evaluate how effectively a charity meets the needs of their beneficiaries and compare their performance with similar charities. Select two or three of your top performing charities and visit their websites. Look for invitations to give or projects requiring funding. How could your investment help?
Once you have chosen your charity, consider the impact you would like your gift to have and how involved you wish to be. This will guide you to select a fund or trust with your desired level of involvement and a suitable amount to invest.
Your charity checklist:
Think local: Your mind may go to those abroad when thinking about the less fortunate, however with 1 in 10 Australians living in poverty – your dollars can go to good use here.
Check the charity’s credentials: The charity should be registered in its respective state, check its standing by visiting the Philanthropy Australia website. If giving donating to an overseas organisation, do your research and check the domestic list of charities in the country it operates within.
Visit the physical site/Check their annual report: Get insight into activity on-the ground and the organisations cost effectiveness by visiting the physical site. Go into detail, and view their annual report and budget – check their revenue vs fundraising costs, and if in doubt ask the charity to explain their figures.
Ask questions: If in doubt remover to ask questions and get feedback from anyone that has had previous experience with the organisation.