A proposal to mandate a donation rate could threaten the future of the philanthropic vehicles used by wealthy donors, writes Simon Mumme.
Philanthropy Australia, the national peak body for philanthropy, is concerned that a new law proposed by the Federal Government could wipe out a steadily expanding population of donors to the community sector – prescribed private funds (PPFs).
The organisation and its members, which rep resent more than 100 of the 769 PPFs in Australia, are urging the Government to drop its proposal to force the vehicles to distribute 15 per cent of their total capital each year.
The proposal was outlined in a discussion paper released by the Treasury in late 2008.
If it comes to pass, Philanthropy Australia believes wealthy individuals and families will stop setting up PPFs, and existing funds will be forced to spend down the endowed capital upon which they were founded, to comply with the new law.
If PPFs are forced to distribute such high per centages of capital annually, many will not exist in a decade or more, the organisation adds.
This could also constrain or deter many new comers to philanthropy, who seek greater engage ment in projects by committing long-term funding to them through PPFs.
This potential outcome has led Philanthropy Australia to claim the Treasury paper does not truly understand the role that the vehicles play in “building a culture of philanthropy”.
PPFs are tax-effective vehicles used by indi viduals, families and corporations to establish a foundation whose sole purpose is to provide money, property or benefits to eligible charities that are classified as deductible gift recipients (DGRs).
The Centre for Philanthropy and Non-profit Studies at Queensland University of Technol ogy (QUT) says there is more than $1.5 billion in PPF funds in Australia, and that $471 million was donated to the vehicles in the year to June 30, 2007. The vehicles capture wealth for the long-term benefit of the community and help create a culture of giving, says Gina Anderson, the organisation’s chief executive, because the people who set them up often become involved in projects.
This is “more than money”, she says. “Anybody can write a cheque and give it to an organisation and get a tax deduction.”
Since their inception in 2000, the vehicles have helped bring individuals from the private sector – with their wealth and skills – to the community.
“As a result, we’re seeing greater profession alisation of the sector. These people are asking non-profits to demonstrate how they’re making a difference and are excited about innovation,” Anderson says.
“The purpose of a PPF is about planned giv ing – it allows someone to commit to giving over a three- to five-year project. It’s also about effective giving – taking the time to find out new ideas, re search, and to take risks with new projects. It allows people who come into a lot of money at once to put money aside for the community forever.”
Moreover, since most giving has traditionally been through wills and bequests, “it gets these people involved in the community while they’re living”.
Donors using PPFs typically become more involved with projects manifested in increased transparency, outcomes and evaluations.
But Philanthropy Australia is not totally op posed to the concept of a mandated distribution rate. A 5 per cent rate, like that in the US, would be effective and would not endanger PPFs, the organisation says.
The rationale behind the Government’s willing ness to set a rate is that it believes PPFs should neither be “prolonged accumulators” nor “sparse dis tributors” of funds, and their distributions “should be of a regularity and quantity such that the fund is characterised as philanthropic”.
It says that PPFs should benefit charities more than if the tax deductions donors receive – by allocating funds to charity – were given directly to the community.
It says the majority of PPF trustees are private individuals on the highest marginal tax rate of 45 per cent. Since this rate does not apply to PPF assets, the Government expects this “subsidy” to be given to charity in a short period of time.
It would also like to expand its policing power over PPF trustees. Some have breached guidelines by being involved in business, making offshore loans to associates of the founder or to major donors.
The actions the Tax Office can take against those breaching guidelines are constrained by an “all or nothing” approach.
The Government proposes that the Tax Office be able to “respond proportionately to misuse of PPFs” by being given access to a wider range of penalties.
Philanthropy Australia supports the idea of a flexible approach to regulating PPFs.
Some trustees fall foul of authorities when they commit minor breaches, like giving to a charity that does not have DGR status.
“The complexity means that some PPFs might not have acted appropriately and given donations to the wrong organisation in ignorance,” Anderson says.