A Private Ancillary Fund (PAF) is more than just a giving structure—it’s a long-term philanthropic tool that allows donors to strategically support Australian charities while benefiting from generous tax concessions. One of the most critical elements of managing a PAF effectively is implementing a sound investment strategy. The approach taken to investing the fund’s capital can significantly influence the income generated, the fund’s sustainability, and ultimately, the positive impact made over time.
Why Investment Strategy Matters in a PAF
Once you establish a PAF, you’re required by law to distribute at least 5% of the fund’s net assets each year to Deductible Gift Recipients (DGRs). While the initial contribution is tax deductible, maintaining and growing the fund requires careful management. Because a PAF allows donors to make distributions annually while retaining the majority of the capital, the assets must be invested with discipline and long-term intent.
An effective investment strategy ensures that the fund not only meets its annual distribution requirements but also retains the capacity to support charitable giving well into the future. As such, PAFs are typically managed with a long term view, balancing income generation with capital preservation and growth.
Key Principles of PAF Investment
1. Aligning Investments with Purpose
A PAF should be managed in a way that reflects the donor’s values. Many family foundations adopt ethical or socially responsible investment frameworks that align with their philanthropic goals. This might mean screening out certain industries or actively supporting companies with strong environmental, social, and governance (ESG) practices.
2. Working with the Right Professionals
A PAF requires oversight by a corporate trustee or a board of responsible persons, and it’s common for these trustees to work closely with licensed investment advisers. These professionals help craft and manage a tailored portfolio that complies with the fund’s objectives and risk tolerance.
If you’re unsure who can assist in establishing and managing your PAF, this guide explains who can help and how to get started.
3. Diversification and Risk Management
The income generated from a PAF’s portfolio must be sufficient to meet annual obligations without unduly depleting capital. Diversifying across asset classes—such as equities, fixed income, property, and alternatives—can help smooth returns and reduce exposure to market volatility.
4. Reviewing Performance and Compliance
PAFs must report annually to the Australian Charities and Not-for-profits Commission (ACNC)—sometimes referred to as the profits commission ACNC—and remain compliant with income tax laws and ACNC governance standards. This makes regular performance reviews and compliance checks vital.
Investment Differences: PAFs vs. Public Ancillary Funds
While both PAFs and public ancillary funds exist to support charitable causes, their investment approach differs. Public ancillary funds pool contributions from the public, often requiring broader governance and offering less control to individual donors. In contrast, setting up a private fund provides greater flexibility, allowing donors to personalise investment decisions and grant-making strategies.
Tax Benefits and Financial Considerations
One of the main incentives to establish a PAF is the immediate tax deductible benefit on contributions. Moreover, the fund’s income is typically tax free, provided it complies with all regulations. This tax-effective environment means a PAF can grow faster and distribute more over time compared to traditional giving.
However, these benefits come with responsibilities. Trustees must ensure prudent financial management, compliance with distribution requirements, and proper documentation of all financial activities. Working with trusted advisers ensures the PAF remains both compliant and impactful.
Final Thoughts
A well-managed investment strategy is essential to the long-term success of a Private Ancillary Fund (PAF). With proper planning, the fund’s capital can generate sustainable income, meet annual obligations, and deliver significant benefit to Deductible Gift Recipients (DGRs). Whether you’re managing a family foundation or acting as a corporate trustee, it’s crucial to adopt a structured, purpose-driven investment approach.
If you’re considering setting up a private fund or want to optimise your existing PAF, The Giving Advisory can assist. Our team of experts helps donors structure and manage their funds with clarity, compliance, and long-term impact in mind.