The stage three income tax rate cuts that kick in from 1 July 2024 give advisers a unique opportunity to talk to high-net-worth clients about bringing forward future years of contributions for charitable giving.
That’s the view of Kate Bowditch, partnerships and development lead at Australian Philanthropic Services, a not-for-profit philanthropic services organisation.
Rather than making ongoing one-off annual donations, Bowditch believes that clients could consider making a lump sum donation before the end of this financial year to benefit from the changes in tax thresholds for FY25 onwards.
They can then place that lump sum in an ancillary fund for the future benefit of the charities they support.
“They will secure a larger tax deduction now while their marginal tax rates are higher, but then they also have the flexibility to distribute the balance to charities over time,” Bowditch tells Professional Planner.
Funds in an ancillary fund are tax-exempt and franking credits are refunded, helping the philanthropic dollar to go much further. Donations can be claimed in full or spread up to five years. With good investment management and the benefits of compounding, the funds can continue to grow.
“Clients can even support their charities beyond their lifetimes because these structures can exist perpetually,” Bowditch says.
“Rather than getting to the 11th hour of the financial year and trying to identify organisations they want to support, ancillary funds give clients more time to make more considered decisions.”
According to Bowditch, two types of ancillary funds exist, private ancillary funds and public ancillary funds.
Public ancillary funds must ask for donations from the public. In contrast, private ancillary funds are restricted in their ability to receive donations from people other than their founders or relatives, associates and employees of the founders.
Bowditch says a private ancillary fund is where clients set up their own family foundation.
“It’s a bit like setting up a self-managed super fund,” she says.
“It’s a new structure and you appoint your own investment adviser. Financial statements must be prepared and there are obligations around your giving. There’s also a lot of flexibility around how you invest your money.”
The amount of money required to get started is also different.
The APS Foundation, for example, which is a public ancillary fund, can be set up with $40,000, Bowditch says. “But if you want to have your own family foundation, we’d recommend looking at $1 million to $1.5 million as a starting point,” she adds.
“With public ancillary funds, you still have that ability to grow and continue to support the programs that you care about. But these funds are more streamlined, simpler and more cost-effective for those with smaller balances.”
Bowditch says the tax positions of private and public ancillary funds are the same.
“Where they differ is that a private ancillary fund would require an investment adviser or an individual who has the skill to run their own investment portfolio,” Bowditch says.
“In contrast, a public ancillary fund, like the APS Foundation, would have all its investments pooled. It’s a bit like having a self-managed super fund versus, perhaps, your corporate superannuation offering.”
Bowditch says both types of funds can invest in the same universe of eligible charities.
She adds establishing a private ancillary fund takes six to eight weeks. So, clients looking to set one up before 30 June need to move quickly.
“Ancillary funds are such a powerful tool for financial advisers because they not only often have the opportunity to manage the investments, but it also enables them to connect with other generations of a family,” Bowditch says.
