The philanthropic sector has ramped up its fight against a proposed mandated distribution rate for prescribed private funds (PPFs), as Simon Mumme reports.
The philanthropic sector fears that a high compulsory donation rate could threaten the viability of prescribed private funds (PPFs), and is asking Treasury to enforce a level of giving consistent with the nature of the vehicles, and of structured, long-term grantmaking.
The philanthropists’ argument was forcefully put by Robert Maple-Brown, chairman of Austra lian equities boutique fund manager Maple-Brown Abbott and trustee of his family’s PPF: an annual 15 per cent mandatory distribution rate “would destroy the fund within a relatively short period” and be contrary to the objectives of running it.
Maple-Brown’s view corresponds with submis sions by philanthropic service providers including Perpetual Investments, Goldman Sachs JBWere (GSJBW), Macquarie Private Bank and UBS. Many backed the submission from Philanthropy Australia, the national peak body of philanthropy. Chris Cuffe of Social Ventures Australia and the Financial Planning Association of Australia also expressed this view.
Gina Anderson, the chief executive officer of Philanthropy Australia (PA), writes that any minimum distribution rate should not substantially erode the real value of foundations over economic cycles.
She says too high a distribution rate would “not be consistent with the objectives of structured phi lanthropy, long-term community engagement and a viable and vibrant philanthropic sector”.
PPFs often operate where government and the free market cannot, should not or will not step in. A 15 per cent distribution rate would make it dif ficult or impossible for the vehicles to fund charities over the long–term, or fund projects that will not be funded by other donors, since it would wipe out their endowed capital.
PA’s view, reached in consultation with its members and other philanthropists, is that a 5 per cent compulsory minimum distribution rate would be consistent with these aims.
Like many others who wrote submissions, it agrees that a mandatory rate based on an annual valuation of a PPF can reduce the administra tive complexity surrounding accumulation plans, which includes distinguishing between capital and income, revising capital accumulation plans, calculating expected distribution levels and making adjustments for inflation.
To date, PPFs have generated an historical aver age distribution rate of approximately 15 per cent, Anderson writes. But this includes distributions from a considerable number of ‘pass-through’ foun dations that give away all of their capital each year, such as corporate PPFs whose incomes are sourced from practices such as workplace giving.
This average also includes the 10 per cent of new donations that are part of existing accumula tion plans. And it reflects the large capital gains that have been reaped by individuals in the past decade of strong economic growth.
In his submission, Christopher Thorn, execu tive director of philanthropic services at GSJBW and a council member of Philanthropy Australia, compares the cumulative distributions and longev ity of two identical PPFs subjected to 5 per cent and 15 per cent annual distribution rates.
Thorn assumes that the PPFs, based on an initial $1 million donation, generate a 10 per cent annual total return, and absorb 1 per cent of their capital each year in costs.
After 30 years of distributing in accordance with an annual rate of 5 per cent, the PPF would have grown to approximately $3.1 million while giving about $2.8 million in cumulative donations. At a 15 per cent rate, $2.1 million would be spun off in cumulative grants and the fund would be whittled down to about $200,000.
“At the 24th year, both payout rates [will] have provided the same total distribution – just under $2 million,” Thorn writes. “However, the 5 per cent payout PPF still retains a corpus of $2.5 million, and paid out $123,236 in that year, while the 15 per cent payout PPF had a corpus of only $226,500 and paid out $36,144.”
The 15 per cent rate PPF would fall in value to between $400,000 and $500,000, regarded as “sub-economic”, after 13 years. Meanwhile the 5 per cent fund would grow and, in its 30th year make an annual distribution of $155, 933, marginally less than the remaining capital of the 15 per cent PPF.
Chris Cuffe, a high-profile former funds man agement executive turned philanthropist, writes that simplifying the administration of PPFs by set ting a compulsory distribution rate could encourage more high-net-worth people to set them up in the future. And, in doing this, a 5 per cent rate would be about right.
It would provide “the right balance between in vestment income earned – being dividends, interest, rent, realised and unrealised capital gains – and the desire of most PPF founders to create a vehicle that will exist for generations to come,” Cuffe writes.
“The hefty fall in equity and property values over the past year, together with the increasingly low interest rates being paid on deposits, shows that 5 per cent will actually appear a high figure over many periods.
“Furthermore, a known distribution rate would assist in the establishment of long-term asset al location goals within investment portfolios.”
A rate higher than 5 per cent would also force many PPF trustees to invest large amounts of their funds in cash and fixed income securities to meet the liquidity demands of large annual payouts, rul ing out opportunities for them to make long-term investments in illiquid assets.
