Managing a Private Ancillary Fund (PAF) is a powerful way to structure philanthropy in Australia, but it also comes with significant responsibilities. PAF trustees must comply with both Australian Charities and Not-for-profits Commission (ACNC) requirements and Australian Taxation Office (ATO) regulations to maintain charitable status and tax concessions.
This practical guide outlines the ACNC & ATO rules every PAF trustee must know, with a focus on key reporting, governance, and compliance obligations for PAF trustees, as well as common examples and pitfalls to avoid.
What are the ACNC and ATO rules every PAF trustee must know?
PAFs operate within a dual-regulatory framework. Understanding how ACNC and ATO oversight works — and where responsibilities overlap — is essential for trustees.
1. ACNC registration and ongoing obligations
Every PAF must be registered with the ACNC as a charity. Once registered, trustees must ensure the fund:
- Operates exclusively for charitable purposes
- Continues to meet the charity definition under Australian law
- Complies with the ACNC Governance Standards, which cover:
- Acting in the best interests of the charity
- Managing conflicts of interest
- Responsible financial management
- Accountability and transparency
- Acting in the best interests of the charity
Trustees must also submit an Annual Information Statement (AIS) to the ACNC each year. Larger PAFs may also be required to lodge reviewed or audited financial statements.
Failure to meet ACNC obligations can result in investigations, enforceable undertakings, or loss of charitable registration.
2. ATO endorsement and tax compliance
In addition to ACNC registration, a PAF must be endorsed by the ATO as:
- A Deductible Gift Recipient (DGR)
- An income-tax-exempt charity
The ATO rules governing PAFs are detailed and prescriptive. Trustees must ensure the fund:
- Makes distributions only to eligible DGR Item 1 charities
- Meets the minimum annual distribution requirement (generally 5% of the fund’s net assets)
- Does not provide private benefit to donors, trustees, or related parties
- Maintains proper records for tax and audit purposes
The ATO has the authority to revoke endorsements if a PAF breaches these conditions, which can have serious financial and reputational consequences.
3. Trustee and governance requirements
PAFs must have a corporate trustee, and the majority of responsible persons involved must be independent. Trustees are expected to:
- Act with care, diligence, and good faith
- Ensure investment decisions align with the fund’s purpose
- Establish and follow a compliant investment strategy
- Document decisions through minutes and policies
Strong governance is not optional; it is central to satisfying both ACNC and ATO expectations.
4. Reporting and record-keeping
Key reporting, governance, and compliance obligations for PAF trustees include maintaining accurate and complete records of:
- Donations received
- Investment performance
- Grant distributions
- Trustee meetings and decisions
- Financial statements and audits
Records must be kept for at least five years and be readily available if regulators request them.
What are some common examples and pitfalls?
Even well-intentioned trustees can fall into compliance traps. Below are some of the most common examples and pitfalls faced by PAF trustees, and how to avoid them.
1. Missing or incorrect annual distributions
Example:
A PAF fails to distribute the full 5% minimum in a financial year due to poor cash-flow planning.
Pitfall:
The ATO may treat this as a breach of endorsement conditions.
How to avoid it:
Monitor asset values regularly and plan distributions early in the financial year.
2. Distributing to ineligible charities
Example:
A trustee makes a grant to a well-known organisation without confirming its DGR Item 1 status.
Pitfall:
Even reputable charities may not be eligible recipients under PAF rules.
How to avoid it:
Always verify DGR status through the ABN Lookup or ACNC register before distributing funds.
3. Poor conflict-of-interest management
Example:
A PAF donates to a charity where a trustee also sits on the board, without proper disclosure.
Pitfall:
This may be seen as providing a private benefit or breaching governance standards.
How to avoid it:
Maintain a formal conflict-of-interest policy and record disclosures and decisions in meeting minutes.
4. Inadequate documentation and record-keeping
Example:
Trustee decisions are made informally and not properly recorded.
Pitfall:
In the event of an ACNC or ATO review, lack of documentation can be treated as non-compliance.
How to avoid it:
Keep detailed minutes, financial records, and compliance checklists up to date.
5. Investment strategies that ignore compliance requirements
Example:
A PAF adopts a high-risk investment strategy without documenting how it aligns with charitable objectives.
Pitfall:
This may breach trustee duties and ACNC governance standards.
How to avoid it:
Ensure investment strategies are documented, reviewed regularly, and clearly linked to the fund’s long-term giving goals.
Final thoughts for PAF trustees
Understanding and complying with ACNC & ATO rules is fundamental to protecting your Private Ancillary Fund and maximising its long-term impact. Trustees who prioritise good governance, accurate reporting, and proactive compliance not only reduce regulatory risk but also strengthen the credibility and effectiveness of their philanthropy.
For many trustees, professional advice can play a valuable role in navigating the key reporting, governance, and compliance obligations for PAF trustees, particularly as regulations evolve and funds grow in complexity.
How The Giving Advisory Can Help
At The Giving Advisory, we understand that initiating and maintaining conversations about giving in the family can sometimes be challenging. Our services team is here to help guide your family through the process of family philanthropy, whether you’re starting a donor advised fund, planning your first charitable contribution, or seeking advice on how to align your giving with your family’s values.
If you want to learn more about how to engage your family in giving and create a lasting philanthropic legacy, contact us today. We’re here to help you reach your philanthropic goals and make a positive impact together.
Frequently Asked Questions
What are the key ACNC obligations for PAF trustees
PAF trustees must ensure the fund is registered as a charity, operates exclusively for charitable purposes, complies with ACNC Governance Standards, and lodges an Annual Information Statement each year. Larger PAFs may also need to submit audited or reviewed financial statements.
What happens if a PAF breaches ACNC or ATO rules
Breaches can lead to regulatory reviews, enforceable undertakings, penalties, loss of charitable registration, or revocation of tax concessions. Serious breaches can undermine the fund’s ability to operate.
Do PAF trustees need to be independent
Yes. PAFs must have a corporate trustee, and a majority of responsible persons involved must be independent. Independence supports good governance and reduces conflicts of interest.