Private Ancillary Funds (PAFs) have become an essential tool for individuals and families looking to make a lasting impact through structured philanthropy. This comprehensive guide will cover all aspects of PAFs, from their purpose and setup to compliance and ongoing management. If you’re interested in making a difference while ensuring your donations are managed effectively, understanding PAFs is a crucial step.
What is a Private Ancillary Fund?
A Private Ancillary Fund (PAF) is a type of charitable trust that allows individuals, families, or businesses to engage in structured giving. It is established to provide grants or donations to organisations that have Deductible Gift Recipient (DGR) status, ensuring that the funds are used for charitable purposes.
Unlike Public Ancillary Funds (PuAFs), which collect donations from the general public, PAFs are privately controlled and typically funded by a single source or a small group. PAFs are regulated by the Australian Taxation Office (ATO) and the Australian Charities and Not-for-profits Commission (ACNC), ensuring they operate in compliance with Australian laws and regulations.
| Aspect | Public Ancillary Funds (PuAFs) | Private Ancillary Funds (PAFs) |
|---|---|---|
| Purpose | Established to pool public donations for distribution to eligible charities. | Established by individuals, families, or businesses for private charitable giving. |
| Funding Source | Open to contributions from the general public. | Funded exclusively by the founder(s) or a specific group (e.g., family or business). |
| Control and Oversight | Managed by a corporate trustee with a public governance model. | Managed by a corporate trustee but under the control of the founder(s). |
| Beneficiaries | Typically supports a wide range of eligible charities. | Supports charities chosen by the founder(s), allowing for personalised giving. |
| Compliance | Subject to specific Australian Taxation Office (ATO) rules and must maintain public accountability. | Subject to ATO compliance rules but operates privately without public accountability. |
| Reporting | May require public transparency and reporting. | Reporting is private, with details only provided to regulatory authorities. |
| Flexibility | Less flexible in terms of grant-making decisions due to broader public accountability. | Offers greater flexibility for targeted and strategic philanthropy. |
| Examples | Community foundations, workplace giving programs. | Family foundations or corporate charitable trusts. |
PuAFs must ask for donations from the public. PAFs are restricted in their ability to receive donations from people other than their founders or relatives, associates and employees of the founders—source: Distribution guidelines for ancillary funds available on treasury.gov.au
Key Features of PAFs
- DGR Status: PAFs can only make donations to organisations with DGR status, providing tax advantages for the donor.
- Tax Deductible Donations: Contributions to a PAF are tax-deductible, allowing donors to reduce their taxable income.
- Trust Structure: PAFs are structured as trusts, governed by a trust deed outlining the objectives and rules.
- Flexibility in Grantmaking: PAFs offer flexibility, allowing donors to decide how and when to distribute funds to chosen charities.
How to Set Up a Private Ancillary Fund
Setting up a PAF requires careful planning and an understanding of the regulatory framework. Here’s a step-by-step guide to help you navigate the process:
1. Define Your Philanthropic Goals
Before establishing a PAF, consider your philanthropic objectives. What causes do you want to support? Do you want to make a long-term impact in a particular sector? Having a clear vision will help guide your decisions throughout the setup process.
2. Establish a Trust Deed
A trust deed is a legal document that sets out the purpose, structure, and rules of the PAF. It must comply with the Charities Act and include clauses about:
- Granting only to DGR organisations.
- Meeting annual minimum distribution requirements (usually 5% of the fund’s net assets).
- Following governance standards set by the ACNC.
3. Register with the ACNC
Once the trust deed is in place, the PAF must be registered with the Australian Charities and Not-for-profits Commission (ACNC). The registration process involves providing details about the PAF, its objectives, and compliance with the Governance Standards and External Conduct Standards.
4. Apply for Tax Concessions
PAFs can apply for tax exemptions, such as Income Tax Exempt Funds (ITEFs) status, through the ATO. These concessions ensure that the income generated by the PAF’s investments is tax-free, maximising the funds available for charitable activities.
5. Develop an Investment Strategy
A key element of a successful PAF is a well-defined investment strategy. The strategy should align with the PAF’s philanthropic goals and be designed to preserve and grow the fund’s assets over time. Considerations include:
- Risk tolerance and asset allocation.
- Ethical investment choices that align with the donor’s values.
- Regular reviews and adjustments to the strategy.
Compliance and Governance
PAFs are subject to stringent compliance requirements to ensure transparency and accountability. Here are some of the key obligations:
Annual Distribution Requirement
PAFs are required to distribute at least 5% of their net assets annually to eligible DGRs. This minimum distribution rule ensures that the funds are actively contributing to charitable causes.
Lodging the Annual Information Statement
PAFs must submit an Annual Information Statement to the ACNC, providing details on their activities, governance, and financial performance. The statement is publicly available, allowing donors and the public to assess the PAF’s effectiveness.
Audit and Reporting
An annual audit is required to ensure the PAF’s financial records are accurate and compliant with regulations. The auditor will review the trust’s financial statements, investment performance, and adherence to the trust deed’s requirements.
Governance and Compliance Standards
PAFs must adhere to Governance Standards set by the ACNC, which include:
- Acting with integrity and accountability.
- Managing financial affairs responsibly.
- Ensuring that the PAF is not used for personal benefit.
Additionally, PAFs operating overseas must comply with External Conduct Standards, which focus on transparency and accountability in international activities.
Benefits of Setting Up a Private Ancillary Fund
Establishing a PAF can offer numerous advantages for donors who want to engage in structured giving:
1. Control and Flexibility
PAFs allow donors to have complete control over how the funds are managed and distributed. This flexibility makes it easier to align the PAF’s activities with personal or family philanthropic goals.
2. Tax Efficiency
Contributions to a PAF are tax-deductible, reducing the donor’s taxable income. Additionally, the income earned by the PAF is generally tax-exempt, allowing the fund to grow more effectively.
3. Long-Term Impact
A PAF can be structured to provide grants over many years, ensuring a lasting impact on chosen causes. It also enables families to create a philanthropic legacy that can be passed down through generations.
4. Professional Management
With professional management and oversight, PAFs can make informed investment decisions and maintain compliance with complex regulatory requirements.
Common Challenges in Managing a PAF
While PAFs offer significant benefits, they also come with certain challenges:
1. Compliance Risks
Failure to meet the annual distribution requirements or lodge the necessary reports can result in penalties or deregistration. Engaging a professional service like The Giving Advisory can help manage these risks effectively.
2. Investment Management
PAFs must balance the need to generate income with the risk of investment losses. Developing a clear investment strategy and reviewing it regularly is essential for the fund’s sustainability.
3. Administrative Burden
Managing a PAF involves significant administrative tasks, including record-keeping, compliance reporting, and audits. This can be time-consuming, especially for individuals or families unfamiliar with trust regulation.
Why Choose The Giving Advisory for Your Private Ancillary Fund?
At The Giving Advisory, we understand the complexities involved in setting up and managing a PAF. We offer a full suite of services designed to simplify the process, including:
- Setup and Strategy Design: We establish your PAF’s structure and align it with your philanthropic vision.
- Administration and Compliance: Our team handles all regulatory requirements, ensuring your PAF remains compliant with ATO and ACNC standards.
- Investment Management: We oversee the fund’s investments, focusing on sustainable growth aligned with your values.
- Online Reporting and Transparency: Access real-time updates on your fund’s performance with our online reporting tools.
- Annual Audit and Reporting: We coordinate annual audits, providing peace of mind that your PAF is managed with integrity.
By partnering with The Giving Advisory, you can focus on making a meaningful impact without worrying about the complexities of compliance and administration.
Final Thoughts
Setting up a Private Ancillary Fund is an excellent way to engage in structured giving, offering tax benefits, control, and the potential for long-term impact. However, managing a PAF requires expertise and a deep understanding of regulatory requirements. With the right guidance and support, you can maximise the benefits of your PAF and contribute to the causes you care about most.
Ready to Start Your Philanthropic Journey?
Let The Giving Advisory be your trusted partner in establishing and managing your Private Ancillary Fund. Contact us today to learn how we can help you turn your philanthropic vision into reality.