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Feeling charitable? 6 things to know about planned giving

Planned giving, charity

It’s nearly the season of giving and with around 1,600 private ancillary funds designed to facilitate planned donating, there’s a multitude of “satisfying” and tax-effective ways to donate in perpetuity.

Senior financial planner at Profile Financial Services, Todd Stanford said this week that between 80 and 100 new private ancillary funds (PAFs) are established annually, and hold net assets valued at more than $7 billion.

He explained that a PAF is a form of private charitable trust that is established and managed in Australia. The PAF is maintained either under a will, or can be an instrument of a trust.

Continuing, he said: “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.”


So, how does a PAF work?

Mr Stanford said a PAF needs to have a company as the trustee and the board is “usually comprised of family members”.

Additionally, the board needs to have at least one independent director, known as the responsible person.

“PAFs are normally exempt from income tax and other federal taxes,” he added.

“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.”

Governed by ATO Guidelines, PAFs also need to comply with Australian Charities and Not-for-profits Commission (ACNC) obligations.

How are PAFs built?

“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,” Mr Stanford said.

The PAF’s trust deed must be ATO-approved and this process “can take several months”, he advised.

Who are PAFs particularly useful for?

According to Mr Stanford, PAFs can suit people, families or companies that want to have control of their investment and grant-making choices, and who can also make use of tax-deductible donations.

The structure would also appeal to those who “wish to leave a philanthropic legacy in their own lifetime” and who “desire to foster in their children their own philanthropic values and sense of financial responsibility”.

A PAF can also meet a desire to provide charitable causes with “long-term sustainable funding”, even in the event of a change of personal financial situation.

He added that PAFs suit those that possess “at least $500,000 for an initial donation”.

That’s the figure Australian Philanthropic Services recommends is required to get started.

Are there yearly requirements?

“A PAF must make a minimum annual distribution of at least 5 per cent 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,” Mr Stanford explained.

“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,” he continued.

He added that there are “several” yearly compliance obligations like preparing audited financial statements that trustees need to be aware of.

However, he said: “Managing a PAF needn’t be difficult” and advised the use of a “competent PAF administration service” like the one offered by Australian Philanthropic Services to handle the administrative and compliance obligations.

How do the donations work?

Mr Stanford said donors receive a tax deduction on the donations which can be spread over a five-year period, “extending your giving out over a much longer period”.

As a PAF is, by virtue of its nature, required to be private, the founder is able to make as many donations as they wish but cannot receive donations from the public.

“It can however, in any financial year, accept donations from unrelated entities (as defined) provided the amount is not more than 20 per cent (in total) of the market value of the PAF assets as determined at the end of the previous financial year.”

Additionally, Mr Stanford said PAFs can receive property, cash and shares.

“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,” he noted.

Is a PAF portable?

“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,” Mr Stanford commented.

Further, if the founders of the PAF decide they don’t want to operate their own structure, a PAF can be moved into a sub-fund of a public foundation.

Feeling charitable? 6 things to know about planned giving
Planned giving, charity
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