Thinking | 21 May 2020

Mobilising Private and Public Ancillary Fund philanthropic capital during COVID-19: Distribution ‘boost’ for FY20 and 21

By Frank Hinoporos, Todd Bromwich and Bradley White

COVID-19 has put Australian charities between a rock and a hard place.  Times are tough and, coming off the back of the recent bushfires, philanthropic dollars are stretched.  At the same time, demand for the essential services and support many charities provide has increased.  In a recent article COVID-19 and charities – impacts and government relief, we made the point that now is a good time for Private and Public Ancillary Funds to mobilise their philanthropic capital and support charities when they most need it.

The proposed changes

The Assistant Minister for Finance, Charities and Electoral Matters, Senator Zed Seselja, recently announced measures to incentivise Private and Public Ancillary Funds to make higher distributions in the 2020 and 2021 income years.

This announcement was followed by the issuing of the Taxation Administration (Coronavirus Economic Response Package—Ancillary Funds) Amendment Guidelines 2020 (Amending Guidelines) on 10 June 2020.

The Amending Guidelines amend the Public and Private Ancillary Fund Guidelines so that, where an ancillary fund’s total distributions for the 2020 and 2021 income years are at least 4% above the minimum distributions it is required to make in those years, the fund will receive a credit equal to half the surplus distributions (in percentage rather than dollar terms).

This credit may be used in future years to reduce the minimum distribution required to be made by the fund by up to one percent per year, until all the credits are exhausted.

How will this work?

An example is the best way to illustrate how this proposal will work.

The Bromwich Family Foundation was endowed by noted philanthropist Theodore Charles Bromwich II from the millions he earned selling his highly profitable hummus manufacturing business.

The Bromwich Family Foundation, as a Private Ancillary Fund, is required to make minimum annual distributions equal to 5% of the market value of its net assets as at the end of the previous year of income, in accordance with the Private Ancillary Fund Guidelines.

The Bromwich Family Foundation makes the following distributions in the 2020 and 2021 income years:

YearAnnual distributions
FY202010% (5% above the required minimum)
FY20217% (2% above the required minimum)
Total excess distributions7%

By making the above distributions, the fund will have exceeded its minimum annual distribution threshold by 7% and so can access the concessional measures.

Under the enacted measures, these credits will be applied to reduce the Bromwich Family Foundation’s minimum distribution threshold to 4% for future income years.  For each two credits attained by the Foundation, their minimum annual distribution threshold will be reduced to 4% for one subsequent income year.

As a result, the Foundation’s minimum annual distributions will be:

YearMinimum annual distribution
FY20205%
FY20215%
FY20224% (credits are reduced from 7 to 5)
FY20234% (credits are reduced from 5 to 3)
FY20224% (credits are reduced from 3 to 1)
FY20235% (as the Foundation only has 1 remaining credit, its minimum annual distribution threshold will not be reduced)

Our thoughts

We support the proposed measures.

It makes sense for the credit approach to operate on an elective basis and to apply for two years.  This gives Private and Public Ancillary Fund trustees the time to consider their giving strategy carefully and focus on making effective and impactful gifts.

We know from our clients with Private Ancillary Funds that many have already locked in their distribution strategy for the 2020 income year.  In most cases, these clients were always going to be donating well above the 5% minimum mandated by the Private Ancillary Fund guidelines.  The proposed measures will not affect these plans significantly.

The greatest impact of the proposed measures will be for those Private and Public Ancillary Funds who stick to the minimum annual distribution, usually because they have a long-term accumulation strategy, or which are newly established, noting there is no minimum distribution required in the first year a Private Ancillary Fund is established.

COVID-19 disaster relief funds

The Senator has also declared that the COVID-19 pandemic is a ‘disaster’ for the purpose of establishing an Australian disaster relief fund as a Deductible Gift Recipient (DGR).

Importantly, to obtain DGR status a fund must still abide by the usual application processes.  The fund must be a registered charity (or operated by a registered charity) and must apply to the ATO for formal DGR endorsement.  This is a substantial and lengthy undertaking.

This article was originally published prior to Taxation Administration (Coronavirus Economic Response Package—Ancillary Funds) Amendment Guidelines 2020 being issued.  It has been edited to reflect the final form of the amendments.

Contact

Frank Hinoporos

Frank Hinoporos the Hall & Wilcox Tax team. He advises on direct taxes, international structuring and taxation disputes.

Todd Bromwich

Todd is a taxation lawyer with experience in charity law, general commercial matters, trust law and estate planning.

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