An introduction to philanthropic giving

This guide introduces financial advisers to the financial planning considerations that arise when clients have philanthropic goals. 

Providing philanthropic advice may involve providing financial product advice and taxation (financial) advice, so financial advisers are well placed to meet their client’s philanthropic needs. 

Common triggers for clients to consider charitable giving

Those experienced in the field of philanthropy identify a number of common triggers that cause clients to consider charitable giving, including:

• a financial windfall (e.g. an inheritance)
• the sale of a significant asset (e.g. a business or real estate)
• writing or revising a will
• year-end tax planning
• a change in personal circumstances, which can cause a rethink of priorities
• a resolution to support a particular community or address a social issue. A client might be passionate about supporting a cause they personally resonate with, for example, if they or a loved one has been impacted by an issue or received support from a charity previously, or they may simply want to create a legacy.

Philanthropy in the financial planning process

Philanthropy will not be suitable for all clients. As a broad paradigm, a client’s financial goals may be prioritised as:

1. Financial independence / retirement planning: Achieve personal financial independence, especially in retirement – i.e. accumulate and protect wealth.
2. Estate planning: Financially support children and/or grandchildren or other dependants to a self-determined level, either during the client’s lifetime and/or upon death - i.e. the effective distribution of wealth to family and loved ones.
3. Charitable giving: Provide broader community financial support via philanthropic giving – i.e. the effective distribution of wealth to chosen causes.

Financial advisers can assist their clients to understand their potential to achieve these goals, both in terms of their current asset levels and the expected future accumulation of assets. Discussion of stage three above may be appropriate once a client understands they will satisfy stages one and two.

Note that charitable giving may involve more than financial support alone – contributing time and expertise to various causes is highly valued by charities and community groups, and may be a viable alternative for those unable financially to reach stage three.

Options for charitable giving

The broad alternatives for charitable giving include:

• Direct donations to charities
• Bequests and bequeathing (via a will)
• Indirect donations via a public ancillary fund (PuAF)
• Indirect donations via a private ancillary fund (PAF).

Table 1 describes some of the pros and cons of these alternatives.

Direct donations

Individuals, trusts, super funds, partnerships and companies may be eligible for a deduction in relation to gifts of money or property of two dollars or more made to deductible gift recipients (DGRs) – see Diagram 1 in Appendix 1.  DGRs are either specifically endorsed by the Australian Taxation Office (ATO) or listed by name in the income tax law. Importantly, this deduction is generally not available in relation to bequests, so donations made prior to death will generally be more tax effective.

The ‘ATO valuation’ mentioned in diagram 1 (see Appendix 1) is based on a Valuation Certificate issued by the Australian Valuation Office (which is part of the ATO).

A deduction cannot create or increase a tax loss, and so cannot lead to carry-forward tax losses.  However, a deduction relating to a gift of money or property (where the property is valued at more than $5,000) can be voluntarily spread over five income years, including the income year in which the gift is made. This may allow a client to consider making a larger gift in the current year than might otherwise be contemplated. An election to spread the deduction over more than one year must be made via an ATO approved form before the income tax return is completed for the year in which the donation is made. Variations can be made to future years provided the variation relates to a year in which a tax return has not been lodged.

Once the gift has been made, the DGR may use the funds immediately for any purpose consistent with the established objectives of the DGR. However, once the gift has been made, the donor generally has no legal recourse to recover the funds.

Gifts upon death - bequests and bequeathing

Generally direct donations to most DGRs from a deceased estate cannot be claimed as a tax deduction. 

There can however be a difference in outcome depending on whether the estate bequeaths an asset or sells an asset and bequeath the proceeds. 

Estate sells asset and bequeaths the cash

Where the estate disposes of the asset, any realised capital gain or loss is attributed to the estate. The subsequent donation to the DGR is not deductible.

Estate bequeaths the asset

Where the estate bequeaths the asset, any realised capital gain or loss is exempt. The donation is not deductible to the estate.

Testamentary gifting provides flexibility to the client.  As the gift is not effective until death, the client has the flexibility to change their mind and amend their will to alter the amount, type and beneficiary of the gift.  This may be important if the client’s financial capacity is severely impacted by unforeseen circumstances.

However, from the recipient’s viewpoint (i.e. the charity), a testamentary gift means they will not receive any benefit until after the death of the client, which may be years, or decades, away. In addition, there is a risk that a successful family maintenance or other challenge to the client’s will frustrates the client’s charitable intention.

Donations to a public ancillary funds (PuAF)

A PuAF (colloquially pronounced ‘puff’) that meets certain regulatory requirements may be endorsed by the ATO as a DGR, so a gift to a PuAF may be tax deductible in a similar manner as a direct donation.

A PuAF is a not-for-profit entity which is established by trust deed or via a will, is philanthropic in character and is open, transparent and accountable to the public (via ATO reporting). Its sole purpose must be to provide money, property or benefits to certain other DGRs (referred to in tax law as item 1 DGRs).

PuAFs are required to solicit funds from the general public, so they usually have a large number of unrelated donors.  Hence the administration and management costs are shared by a large number of donors, which will generally create cost efficiency per donor depending on the overall charging structure of the PuAF.  In practice PuAFs have a lower minimum donation threshold than is considered effective for a PAF.  Some PuAFs accept initial donations of as little as $20,000, whereas $500,000 is typically recommended for the cost-effective establishment and ongoing operation of a PAF.

The trustee of a PuAF is generally at arm’s length to the donors and is required to comprise a majority of Responsible Persons. As the trustee is responsible for the administration, investment and governance activities of the fund, all that’s left for the donors to consider is which charities they would like to support, assuming the PuAF allows that choice.

Gifting via a PuAF, rather than directly to charities, removes the pressure to choose a charity in the current income year.  As at February 2023 there were close to 25,000 charities in Australia which can accept tax deductible donations[1], so choosing a charity can be challenging.  As a PuAF is in effect a feeder-fund, a large tax deductible gift can be made to the PuAF in one year, with the distribution of grants from the PuAF to charities occurring over several subsequent years.  This means that the donor may have an ongoing involvement beyond making the initial donation.

As a minimum of only four percent of the fund balance must be granted out to charities each year, a PuAF can accumulate donations in a sub-fund until enough funds exist to justify the establishment of a PAF.  With the Commissioner’s approval, all the net assets of a PuAF sub-fund may be transferred to a PAF.

Private ancillary funds (PAFs)

Gifts to PAFs (colloquially pronounced ‘paffs’) may be tax deductible also.  A PAF, in contrast to a PuAF, is largely privately managed.  The administration, investment and governance activities of the fund are the responsibility of its corporate trustees, the directors of which will typically involve donors and their family, but must include at least one Responsible Person who is not a founder, a major donor, or an associate of the founder or a major donor.

A key distinguishing point between PAFs and PuAFs is the level of funds ($500,000 is typically quoted) needed to justify the establishment and administration costs of a PAF.  But other differences exist also.

As a PAF cannot solicit donations from the general public, and although parties not related to the PAF can make donations, generally donations come from family members related to the PAF founder.

Broadly a PAF is required to annually distribute at least five per cent of the fund’s net assets, compared to broadly four per cent for PuAFs. This distribution requirement demands the ongoing engagement of those involved in the PAF, which may include the founder’s children.

These features mean that a PAF is often suitable as an intergenerational philanthropic vehicle for wealthy families.  A PAF allows large donations to be made immediately, or whenever is suitable to the donors.  However, subject to the minimum distribution requirements, grants to allowable DGRs (item 1 DGRs) can be made over an extended period of time if desired, and independently of the initial donations to the PAF.  This provides a family with long term control and engagement with their philanthropic activities.

Establishing and running a PAF requires specialist knowledge as there are many legislative compliance activities that must be met. Failure to meet these requirements can result in financial penalties. These penalties are imposed on the corporate trustee and can be recovered from the directors if they cannot be recovered from the corporate trustee alone.

PAFs are similar in many aspects to SMSFs - Table 2 in Appendix 2 provides a comparison of the key features of PuAFs, PAFs and SMSFs.

Useful resources:

• Macquarie, Private Ancillary Funds Fact sheet
• Philanthropy Australia
• Australian Philanthropic Services
• Australian Taxation Office, Private Ancillary Funds
• Australian Taxation Office, Public Ancillary Funds