11 Common Pitfalls That Can Catch You Out If You Don’t Follow PAF Guidelines
Private Ancillary Funds (PAFs) offer a structured way to contribute to charitable causes with significant tax benefits. However, their strict regulatory requirements can make them more complex than other trusts. Understanding what not to do when managing a PAF is crucial to ensuring compliance and maximising the effectiveness of your philanthropic efforts.
1. Getting your Timing Right:
- What to Avoid: Failing to allocate sufficient time for the setup of the fund and ensuring that tax-deductible donations are made by the 30 June deadline.
- Impact: Rushing the setup process can lead to errors and oversight, potentially compromising the fund’s structure and your tax benefits. Proper planning ensures all legal and compliance measures are met in time for fiscal year tax deductions.
2. Distribution Errors:
- What to Avoid: Distributing funds to non-compliant organisations. PAFs must distribute to type 1 DGRs exclusively, despite the broader range of DGRs available.
- Impact: Incorrect distributions can lead to penalties and jeopardise the PAF’s compliant status.
3. Investment Strategy Shortcomings:
- What to Avoid: Operating without a robust, actively managed Investment strategy that ensures that the investments are aligned to your giving goals.
- Impact: Poorly managed assets can limit the fund’s ability to support charitable activities effectively and attract regulatory concern.
4. Lodging your Franking Credits Return:
- What to Avoid: Delaying the submission of your refund of franking credits application.
- Impact: Franking credit refunds are paid as cash and are investment returns. Postponing this process can delay refunds, affecting the liquidity and financial efficiency of your fund, potentially limiting immediate charitable distributions.
5. Documentation and Record-Keeping:
- What to Avoid: Neglecting to maintain thorough records of all decisions and trustee meetings.
- Impact: Inadequate documentation can complicate audits, lead to governance issues, and increase the risk of disputes or non-compliance fines.
6. Managing reasonable expenses:
- What to avoid: Incurring disproportionate or unjustified expenses, particular in payments made to directors and related expenses
- Impact: Excessive or non-transparent expenses can draw regulatory scrutiny and undermine trust among stakeholders. It’s vital to align expenses with industry standards to support the fund’s charitable objectives without compromising its reputation or operational status.
7. Timely Reporting:
- What to Avoid: Missing the deadline for the annual information returns. If required, align these submissions with the ACNC’s annual information statement dates. For more details, visit the ACNC website.
- Impact: Late submissions can result in fines and increased attention from the ACNC, ATO and other regulatory bodies.
8. Compliance Audits:
- What to Avoid: Neglecting the requirement for an audit of compliance with the PAF Guidelines.
- Impact: Failure to demonstrate compliance can attract scrutiny from regulatory bodies and potential legal challenges.
9. Legal Don’ts:
- What to Avoid: Soliciting public donations, accepting excessive contributions, carrying on a business, or engaging in non-arm’s length transactions.
- Impact: Violations of these restrictions can lead to severe penalties, including the revocation of the PAF’s status.
10. Operation and Meetings
- What to Avoid: Failing to appoint the correct responsible person to chair and oversee regular meetings.
- Impact: This role is crucial for ensuring adherence to the PAF Guidelines and making informed, compliant decisions.
11. Succession Planning:
- What to Avoid: Failing to plan for the future management and control of the PAF.
- Impact: Lack of succession planning can lead to operational disruptions and challenges in maintaining the fund’s goals.
While managing a Private Ancillary Fund comes with its challenges, being aware of what not to do can help trustees avoid common pitfalls and ensure that their philanthropic goals are achieved effectively and compliantly.
Need Assistance? If you’re considering establishing a PAF or require guidance on managing an existing fund, contact our team for expert advice that ensures compliance and enhances your philanthropic impact.