Australians have a strong donating ethic. Many donations are in times of crisis, but people are increasingly interested in something more structured. There are 2 main ways to establish legacies that are also tax‑effective for the donor.  

Donating regularly is not a new concept. Well-known motivational speakers Anthony Robbins and Mark Victor Hansen both write about habitual donations as an essential ingredient in creating wealth. 

Whether or not you hold that belief, most people who donate do so because of an affinity with the cause, or wanting to “make a difference”.

In a report released in September by the Charities Aid Foundation, Australia  tops the list of the most generous nations (with New Zealand coming in second); while State Trustees’ statistics have 87% of the adult Australian population donating each year.

Making it tax effective

ATO figures for 2007-08 collated $2.3 billion in tax-deductible donations. So it makes sense that if you’re going to set up a charitable trust or foundation, that you do so tax effectively; this optimises your legacy for those you want to help.

There are 2 options for such structured giving:

• Private Ancillary Fund, best suited for $500,000+
• Charitable Endowment Fund, best suited for $20,000+

1. Private Ancillary Fund (PAF)

A PAF is an individually managed trust that can be set up by individuals, families or businesses. It allows strong control over both the investment strategy and choosing benefiting charities. PAFs are best suited to people wanting to invest large amounts, whether that’s over several years or as a lump sum upfront.

In Australia, the 800 approved PAFs (as of June last year) had received $1.35 billion in donations, and donated $300 million to registered charities. Enforceable guidelines, regulated by the ATO, for minimum PAF standards came into effect on 1 October 2009.

 a) Key requirements

• The fund must be set up and run in Australia (only) as a not-for-profit.
• It cannot solicit general public donations.
• It must always have a corporate trustee.
• At least one decision maker must have “a degree of responsibility to the Australian community as a whole” (e.g.: school principal, judge, religious practitioner, solicitor, doctor, mayor, councillor, MP or other such professional). However, they can’t be the founder, a donor contributing more than $10,000, or an associate of either.
• The PAF must make contributions every financial year (except the first) of at least 5% of the net market value of its assets as of the previous financial year.
• It must have an “appropriate” investment strategy (including the fund’s objectives, any risks and cash-flow needs).
• Its assets have to be valued every year (however, this can be 3 years for land).
• It must prepare financial statements annually, and have them audited.

b) Investment restrictions

• Short-term borrowings are restricted to fund distributions or settling transactions.
• Investments have to be arm’s length.
• Parties related to the PAF can’t give it assets.
• The fund can’t financially help parties related to it.

c) Tax implications

• Monies invested in a PAF are tax deductible, but they can’t create a loss.
• You can spread out your total deduction over 5 years (this has some rules attached).
• The PAF can be endorsed under the Tax Act as income tax exempt.
• Any franking credits received from Australian company dividends are refundable.
• You cannot withdraw a donation once it’s made.

2. Charitable Endowment Fund (CEF)

A CEF, which sits in a managed fund environment, is set up and run by investment and trustee companies.

They’re similar to PAFs, but are more cost-effective for those with $20,000-plus to donate. Here are the key differences: 

• CEFs are easier to establish.
• Set-up fees are nil.
• Donations are pooled into a managed fund.
• The donor can name their particular account in the fund.
• The trustee company determines the investment strategy.
• The trustee company also handles all record keeping.
• You can recommend which DGR you want the fund to support each year, but its trustees have the final say (similar to non-binding death nominations in superannuation funds).

Which suits you?

Choosing whether a PAF or CEF is better suited to your circumstances really depends on:

• your goals
• how much control you want
• how much you’d like to donate

Rather than making this decision in isolation, seek specialist advice. That way you can determine the best approach for you and what you want to achieve. It will also ensure the entity is properly set up and implemented. As with any investment decision that can affect your family, it’s also wise to talk over your goals with them. Your adult children will probably be supportive of your plans if you tell them your goals.

If you would like to discuss setting up a PAF or CEF, please contact Summerhill Financial Services. PAFs were known as Prescribed Private Funds (PPFs) until 1 October 2009, and transitional rules apply to funds that were formerly PPFs as of 30 September ’09. If you have any questions about your PAF, please contact us.

Tags: charitable donations, donations, gifting