Understanding what constitutes reasonable expenses is vital to ensure your Private Ancillary Fund (PAF) remains compliant with Australian Charities and Not-for-profits Commission (ACNC) regulations and the Australian Taxation Office (ATO) guidelines. Managing a PAF involves responsible stewardship of funds, maintaining transparency, and supporting charitable purpose activities within a clear legal framework.
Expenses Must Relate Directly to the Operation of the PAF
All expenses paid by a PAF must relate directly to the operation and furtherance of its charitable purpose. The Australian Treasury’s Guidelines 2019 emphasise that expenses must be reasonable, necessary, and incurred at arm’s length. Typical allowable expenses include accounting and audit fees, preparation of financial statements, investment management fees in line with the PAF’s investment strategy, trustee insurance, and general administrative costs associated with running the fund.
The corporate trustee or individual trustees must ensure that any payment is strictly for PAF activities and not for private benefit. All transactions should be properly documented and justified through careful record-keeping, helping to avoid issues during compliance reviews.
Expenses Should Be Appropriate to the Size of the PAF
The size of a PAF significantly influences what level of expenses can be considered reasonable. Larger PAFs, managing more complex investments and making substantial annual distributions, may naturally incur higher operational costs. Conversely, smaller funds are expected to maintain lower expenses relative to their asset base.
Excessive or disproportionate expenses can affect the PAF’s capacity to meet the minimum distribution requirements and may raise concerns during audits. Trustees should review expenses annually to ensure alignment with the scale of operations, the fund’s financial resources, and its commitment to maximising grants towards charitable activities by 30 June each financial year.
The Importance of Preserving Community Funds
PAFs exist to benefit the community. It is crucial that administrative expenses do not unduly reduce the funds available for charitable distributions. Trustees are custodians of community funds and must carefully balance necessary administrative spending with the primary goal of advancing the PAF’s charitable purpose.
Financial statements should transparently reflect how resources are allocated between administrative costs and charitable distributions. Following the Guidelines 2019, trustees must ensure that the fund’s core activity remains providing financial support to eligible charities and Deductible Gift Recipients (DGRs), thereby upholding public trust and protecting valuable income tax concessions.
Key Considerations for Managing PAF Expenses
When managing reasonable expenses, trustees should always consider:
- Whether the expense supports the fund’s investment strategy and charitable purpose.
- Whether the cost is incurred at arm’s length rates and terms.
- Whether the expenditure is necessary for meeting regulatory obligations such as preparing audited financial statements.
- Whether the costs are proportionate to the size and financial capacity of the PAF.
- Whether the expenses align with preserving community funds for annual distributions.
Documenting decisions and obtaining independent advice where necessary can further strengthen a trustee’s ability to demonstrate compliance.
How Giving Advisory Can Help
Partner with Giving Advisory to expertly manage your Private Ancillary Fund (PAF). We provide full support across governance, compliance, and strategy, helping you achieve your philanthropic goals while ensuring your fund remains fully compliant and purpose-driven.