A Private Ancillary Fund (PAF) is a form of charitable trust introduced by the Federal Government in 2001 to encourage greater personal and corporate philanthropy in Australia (see A Brief History of PAFs).
A PAF is a simple and flexible structure for long-term giving that allows you to fulfil your philanthropic goals, engage deeply with the organisations you support, and leave an enduring legacy.
PAFs enjoy Deductible Gift Recipient (DGR) status, which means that donations made by individuals and companies to a PAF are tax deductible. Donations may be in the form of cash, listed and unlisted investments, or real property, and are irrevocable once made.
PAFs can also apply for endorsement as a tax concession charity (TCC), so any income they earn is not taxed, and they may also apply for refunds of imputation credits on franked dividends.
PAFs cannot seek or receive contributions from the public (a public ancillary fund may be more appropriate if donations from the public are required). They must have a corporate trustee (with a ‘responsible person’), invest prudently in accordance with a written investment policy, and distribute at least five per cent (or $11,000, whichever is greater) of the value of the trust each year to nonprofit organisations who themselves have DGR (Item 1) and TCC status.
Benefits of a Private Ancillary Fund
Full tax deductibility of donations
A PAF allows individuals, families and businesses to establish their own charitable trust and enjoy full tax deductibility for donations into the PAF.
Splitting the timing of your donations and distributions
A PAF allows you to make a bigger donation in the years where you have significant cash flow and tax liabilities, extending your giving out over a much longer period of time.
Efficient accumulation of assets in a tax effective environment
Within a PAF, you can grow the assets in a tax effective environment. By paying zero income and capital gains tax, and receiving a refund of franking credits, the PAF can grow its assets at a faster rate than in a taxed environment, distributing more to your chosen causes over the medium to long term (assuming your investment returns are greater than distributions and costs). This means that over the long term you may be able to give significantly more to your chosen causes than the sum of your donations to the PAF.
The ability to experience the impact of your giving
Giving can be one-off or for longer-term, multi-year programs – giving you the capacity to deeply engage with and understand the needs of your chosen organisation/s, as well to assess the performance and impact of your grant making.
The ability to involve your family in philanthropic giving
Having control over grant making allows you to more directly build and share the tradition of philanthropy with your family and future generations.
Flexibility in giving
By identifying certain areas and causes of interest rather than restricting themselves to specific organisations, the trustees of a PAF have the discretion and flexibility to provide funding where it is needed at a certain point in time.
For example, due to medical advancement, there are many areas of research requiring funding today that were not even imaginable 50 years ago. Discretion allows the trustees to adapt to the changing interests and societal needs.
Estate planning opportunities
Having an established PAF gives you an existing structure to efficiently and tax-effectively give via your estate, in addition to giving during your life. You not only have a structure that allows you to give what you can afford while you are alive, but one which you can fund through your will, to ensure your preferred causes are supported in the future.
Bonus PAF Points
- As at the end of the 2015 financial year (last released ATO records) there were 1,315 Private Ancillary Funds in Australia, with a total value of approximately $6 billion.
- We estimate that there are now more than 1,550 PAFs, with a total value of over $10 billion driven by additional donations into PAFs, the establishment of the $3 billion Ramsay Foundation and strong financial markets.
- If historical precedents are maintained (where 8 per cent of the value is distributed compared to the minimum required distribution of 5 per cent), these PAFs could distribute approximately $800 million in the coming year!
More on PAFs
Shamal Dass is Head of Philanthropic Services at JBWere.
JBWere is the leading provider of investment management and philanthropic services to ‘for-purpose’ organisations, and individuals and families with philanthropic goals. JBWere partners with clients to ensure they receive not only exceptional investment management, but access to strategic insight, governance advice and education and capacity building opportunities that will help them achieve their mission.