Establishment of a Private Ancillary Fund (PAF)

Background to PAFs

A PAF is a vehicle for tax effective private philanthropy.

A PAF must be a trust.  It can be funded and managed by an individual, family or corporation for the sole purpose of making gifts to other entities that the ATO has approved as being deductible gift recipients (DGRs). DGR status means that a donor to the PAF can claim a tax deduction for the value of their gift.

PAFs themselves are eligible for income tax concessions which mean they will not pay tax on their income, and donations made to a PAF are tax deductible because the PAF can itself be endorsed as a PAF.

Structural requirements

Like all trusts, a PAF must have a trustee. This must be a company registered with the Australian Securities and Investment Commission. It may be a regular proprietary limited company or a company limited by guarantee.

To ensure a PAF is properly managed, one of the directors of the trustee company must be a ‘Responsible Person’. This is a person who has a responsible position in the community and (with very limited exceptions) who is a member of a professional association or governing body with a code of conduct: examples include a lawyer, accountant or religious minister. The responsible person must be independent of the founders of the PAF.

Funding a PAF

A PAF must be primarily funded by the individual or family that has set it up. Unlike public charities, a PAF cannot appeal to and accept donations from the wider public. Funding can be provided as a single lump sum or through periodic donations.

Importantly, the founders of a PAF can build up a capital base in the PAF over a period of time. This capital base can be invested and derive a financial return (which will not be taxed). Some of this return can be retained by the PAF to preserve the capital base (i.e. to counter the effects of inflation) with the rest being donated by the PAF to other DGRs.

By building up and preserving a capital base, the PAF can continue making donations for a longer period of time. However, the PAF cannot accumulate wealth indefinitely and for a purpose other than distributing it to DGRs.

A percentage of the money going into the PAF must go out to eligible DGRs every year. The PAF guidelines prescribe a minimum of 5% of money coming into the PAF to be distributed. However we recommend that this figure be increased to a minimum of 7%, as relying on 5% only can sometimes be problematic and strict penalties apply for failing to distribute this amount.

Donations from a PAF

As mentioned, a PAF can only donate to other entities that have been endorsed as DGRs. The PAF itself cannot perform philanthropic activities directly e.g. build a medical facility or grant scholarships to needful students.

Depending on the activities and requirements of the relevant DGR, the trustees may have some input into or be able to direct how the PAF’s donation is applied.

Investment strategy

Under the PAF guidelines, the trustee must prepare and maintain a current investment strategy for the fund. This strategy must reflect the purpose of the fund and have particular regard to (among other things) risks associated with the investments, the diversity of the fund as a whole, the liquidity of the investments and the ability of the fund to discharge its existing and prospective liabilities.

The investment plan must be current and must be in a readable format which can be delivered to the Commissioner upon request. Penalties are imposed for failure to have a plan and/or keep the plan in a readable format.

Link to the Federal Register of Legislation