Learn more about Private Ancillary Fund's (PAF), a type of charitable trust designed to provide an investment structure for philanthropic purposes.
What are they?
A Private Ancillary Fund (PAF) is a type of charitable trust designed to provide individuals, families or associations with an investment structure for philanthropic purposes.
In its simplest form the workings of a PAF can be summarised as follows:
- gifts are made by associated parties to the PAF
- gifts are invested within the PAF and are managed by the trustee (generally a corporate trustee)
- gifts are generally tax deductible to the donor at the time the gift is made
- the PAF trustee decides on the timing and amount of the distribution (subject to minimums). Trust distributions must be made to other deductible gift recipients (DGRs), excluding other PAFs and Public Ancillary Funds (explained below).
Why use a Private Ancillary Fund?
A PAF may be suitable for someone where:
- they wish to keep on giving after their death
- they want a structured way to involve their children or family in giving
- they have recently disposed of an asset and wish to obtain a tax deduction in the year of sale (note: keep in mind that once a gift is made to the trust it cannot be revoked), or
- they wish to devote a considerable amount of time to philanthropy into the future.
Some PAFs are also exempt from tax on income earned. To be exempt the PAF must be registered with the Australian Charities and Not-for-profits Commission (ACNC) as a charity and endorsed by the ATO to receive charity tax concessions. Endorsement from the ATO can be obtained at the same time as registering the fund with the ACNC. This exemption may make using a PAF an attractive vehicle for accumulating assets for philanthropic purposes. More information is available on the ACNC website and the ATO website.
A PAF or other structure may not be necessary where the individual prefers to donate in response to requests or needs, or doesn’t have the time available to devote to philanthropic activities.
There are costs in establishing and maintaining a PAF (e.g. costs relating to the preparation and audit of financial statements and the lodgment of an income tax return), so whether or not it is worthwhile establishing one of these funds can depend on the amount invested.
Guidelines for Private Ancillary Funds
All PAFs are regulated by the ACNC and must adhere to the Taxation Administration (Private Ancillary Fund) Guidelines 2019 (Guidelines). In addition, PAFs need to apply for endorsement as a tax concession charity from the ATO and are subject to the relevant income tax laws and requirements of the relevant State trustee legislation.
The Guidelines cover a broad range of matters ranging from the purpose of the trust to the administration requirements.
The Guidelines include:
- a PAF must be set up and run from Australia solely to benefit other deductible gift recipients (e.g. charities)
- a PAF must be a not-for-profit entity. Any surplus made by a PAF must be directed towards carrying out the entity’s purposes
- the trustee has an obligation to exercise appropriate care and skill in managing the PAF
- a PAF must generally distribute a minimum of five per cent of the PAF’s assets (as valued at the previous 30 June) to deductible gift recipients each year. If any of the PAF’s expenses are met from PAF assets, the distribution must be the greater of $11,000 (or the remainder of the fund) and five per cent of assets.1 In limited circumstances a PAF may apply to the ATO to have the minimum amount reduced for a financial year
- the trustee must prepare an investment strategy in relation to the fund’s assets
- investment restrictions apply. For example, PAFs are generally prohibited from borrowing and investing in collectibles, investments must be at arm’s length and the trustee cannot give a security over an asset of the fund. In addition, a PAF cannot run a business
- a PAF cannot seek donations from the public and cannot accept donations totalling more than 20 per cent of the value of the fund at the previous 30 June from people other than the founder, relatives, associates or employees of the founder, as well as their estates.
The responsible person
The corporate trustee2 of each PAF must have at least one independent director who is a responsible person. This person must be actively involved in the decision-making of the fund. They cannot be:
- a founder
- a donor who has contributed more than $10,000
- a relative3 or other associate4 of a founder or such a donor, or
- an employer or agent of a founder or donor, unless written consent is provided by the ATO.
Individuals with a degree of responsibility to the community as a whole are generally known as ‘responsible persons.’ They would generally include those who are well known to a broad section of the community as a result of their employment or belong to a professional body. Examples include school principals, solicitors, doctors, members of parliament and accountants.
Where a PAF does not have a responsible person, it cannot make any decisions until such a person is appointed.
Transitional rules for former Prescribed Private Funds
PAFs that were Prescribed Private Funds (PPFs) at the end of 30 September 2009 must now comply with the PAF guidelines.
Transitional arrangements apply to allow individual trustees of a former PPF to continue to act in that capacity. Former PPFs are also able to maintain borrowings that were held at 30 September 2009, provided the terms of the borrowing are not altered without the ATO’s approval.
For more information on the transitional rules refer to the Guidelines.
Public Ancillary Funds - a possible alternative
PAFs generally take considerable time and expertise to operate and require a substantial investment amount to be cost effective.
For those unwilling or unable to operate a PAF, but who want to take a more involved and structured approach to giving, a possible alternative is to use a Public Ancillary Fund (PuAF).
A PuAF is similar to a PAF in that it is a trust established for charitable purposes, however the legal, administrative and investment responsibilities are provided by a third party trustee.
When giving to a PuAF, a sub-fund may be established, with the donor providing recommendations to the PuAF on how the funds are to be distributed. However, the trustee is not obliged to follow these recommendations.
More information on PuAFs can be found on the ATO's website.