Advisers should know the full range of giving options available – and how they match specific philanthropic aims – before their clients decide to donate, writes Simon Mumme.
The growth of private ancillary funds (PAFs) – formerly named prescribed private funds (PPFs) – shows that a new culture of giving in Australia is catching on. PAFs – a form of ancillary trust fund – have grown at an annual rate of 60 per cent since they came into existence in 2001, have accrued $1.3 billion and distributed more than $300 million in grants. In the 2007-08 financial year, they sent $300 million into the community.
Without a doubt, this progress is impressive. But financial advisers to clients with an interest in philanthropy must be fully aware of the commitment required to successfully run a PAF, and that the trusts cannot meet everybody’s philanthropic aims and capabilities. New compliance guidelines for the management of PAFs, effective since October 2009, provide clarity about the administrative necessities for compliance, but they also show the large commitments required to run these funds.
To know if a PAF will suit a client’s philanthropic aims, advisers should ask: Why do you want to give? Which type of projects do you aim to support? How extensive is your knowledge of the legal requirements applying to PAFs? Will the size of the grants you distribute make the costs of establishing a PAF worthwhile?
According to Philanthropy Australia, PAFs suit committed donors who want to set up a formal structure enabling them to receive a tax deduction on contributions, and give them control over investment and grant-making decisions.
For these donors, the trusts bring many advantages: they can be used by individuals, families and companies; the Tax Office provides donors with management guidelines and a model trust deed; they require only one responsible person to comprise a board; and PAFs are also deductible gift recipients (DGRs), meaning those making a donation to the trusts qualify for a tax deduction. But PAFs are not suitable for everyone. Because their sole purpose is to distribute grants, they can’t perform activities, such as running literacy or medical programs. Their grants are restricted to certain types of DGRs and tax-concession charities.
They can’t give funds directly to individuals or to specific types of foundations, such as other PAFs or ancillary funds, which can include community foundations and the fundraising arms of hospitals (despite many of these bodies having DGR status). Trustees of PAFs must develop formal, audited investment plans that distribute, as a minimum, 5 per cent of their fund’s net assets each year, or $11,000 – whichever sum is greater. Before choosing a giving vehicle or method, clients need to decide why they want to give, and who or what they want to give to – be they individuals, overseas organisations, hospitals or other government entities, community foundations or other grant-making entities – because some giving structures are more appropriate for specific funding aims.
The adviser should then guide them through suitable philanthropic structures. Donors may simply want to become a “charitable cheque-writer” and give a large, one-off sum to a foundation, project or philanthropist they want to support, or leave a bequest.
If they like the longlasting nature of PAFs but are unwilling to commit to the administrative workload, they can set up a sub-fund with a trustee company, community foundation or wealth management company, and relinquish control of all investment and grantmaking decisions.
For donors running PAFs, and those aiming to set one up, a free handbook for trustees is available online from Philanthropy Australia, helping them to comply with the new regulatory regime. It provides an annual compliance checklist and activity planner for trustees, plus a table listing all the potential penalties for non-compliance.
While the guidelines “provide a more comprehensive framework for the Government to deal with deliberate breaches” of trust law, the handbook aims to provide “information and guidance to PAF trustees, directors, staff and advisers to avoid the unintentional breaches”, said David Ward, author of the handbook, at its launch in November.
He singles out the common mistake of confusing item 1 DGRs (informally known as “doing” DGRs) and item 2 DGRs (informally known as “giving” DGRs).
The subtle difference between them is largely “incomprehensible to trustees”, and the guide to this distinction – a table in section 30.15 of the Income Tax Amendment Act 1997 – is “not the most user-friendly document in existence”.
“When I explain that item 2 DGRs are all philanthropic funds, and if one fund gave to another this year, and that the second fund could give back next year – there could be a nice merry-go-round and simply no community benefit… the principle of excluding item 2 DGRs from distributions is fully accepted.”
But understanding this principle is not as easy as identifying item 2 DGRs. However, now that item specification of DGRs is provided on the ABN Lookup website, compliance should improve, he says.