Private ancillary foundations (PAFs), a structure that allows individuals, families and companies to contribute effectively to charitable causes, are available. In addition to their flexibility and tax benefits, they are heavily regulated. This ensures transparency, accountability, and that the philanthropic intention is in line with the legal requirements. Understanding compliance requirements is crucial for anyone establishing or managing a PAF.
What Are Private Annuity Funds?
Private ancillary funding is a type of charitable trust created to provide grants for eligible deductible gift recipients. They cannot carry out any charitable activities of their own; they only exist to help other organisations on the ground. PAFs may be able to access substantial tax concessions. They must, however, adhere to strict rules established by the Australian Taxation Office and Australian Charities and Not-for-profits Commission.
Key Regulatory Body
There are two main authorities in Australia that oversee the private ancillary funds:
- Australian Taxation Office ATO: This office ensures that PAF adheres to its tax obligations.
- Australian Charities and Not-for-Profit Commission: Oversees accountability, reporting and governance standards for registered charities.
Both organisations are governed by specific reporting guidelines, and trustees who fail to meet them can be penalised, lose their charity status, and/or lose tax concessions.
Setting Up The Fund: Initial Compliance
Before launching a fund for private ancillary purposes, the entity that founded the fund must:
- Create Trust Deed: Document must meet requirements as outlined in the Private Ancillary Fund Guidelines for 2009. The fund must declare that it will only make payments to DGRs that are endorsed in accordance with item 1 of the Income Tax Assessment Act.
- Appoint a corporate trustee: In order to maintain good governance in a PAF, the corporate trustee must be a business (not a single person).
- Register as a charity with the ACNC: Once a trust deed or charitable fund is created, it must be registered.
- Achieve ATO endorsement: ATO endorsement can include endorsements as a DGR and exemption from income tax.
These foundational steps must be taken. If one of them is missed or not done correctly, a fund may be ineligible for tax advantages and could have operational restrictions.
Compliance Obligations For Lifetime
In order to maintain the charitable status of private ancillary accounts and receive tax breaks, they must continue to comply with certain ongoing requirements.
1. Minimum Annual Distribution
PAFs are required by law to distribute no less than 5% of their net assets in each fiscal year. This rule ensures that the funds raised for charity are being actively used and not just stored indefinitely.
2. Annual Reporting
You must submit the following annual reports:
- ACNC Annual Information Statement: This report includes basic financial data, as well as an overview of the fund.
- Financial Report: The fund must comply with Australian accounting principles if it meets the reporting requirement.
- ATO Reporting: ATO may require a fund to submit an ATO form, depending on income and structure.
3. Auditing Requirements
A fund’s financial statements are audited if its annual revenue exceeds a specific threshold. This allows for external validation of financial integrity.
4. Investment and Risk Management
PAFs have to develop a formalised investment strategy, as well as a risk-management plan. These strategies are reviewed annually to determine if they align with charitable objectives and the financial capacity of the fund.
5. Governance Guidelines
Private ancillary funds must conform to the ACNC’s governance standard as registered charities. This includes
- Taking reasonable care and diligence
- Assuring that the fund’s finances are managed responsibly
- Acting for the benefit of the fund
Trustees also must avoid conflicts of interest and cannot use fund assets for personal gain.
Common Compliance Pitfalls
Even well-meaning trustees can fall out due to:
- Reporting is late or missed
- Failure to meet the 5% minimum distribution
- Inadequate investment documentation
- Poor record-keeping
- Conflict of Interest Not Being Declared or Managed
Most of the time, it is best to engage legal and/or financial advisors who have experience with charitable Trusts.
Conclusion
Private ancillary funding is a powerful means of philanthropic donation, but it comes with some responsibility. Trustees are required to meet all compliance obligations – from setup through operations. For private ancillary funding to remain effective and maintain its integrity, the trustees must adhere to strict governance standards, conduct regular reviews and provide timely reports.
By being proactive and staying informed, fund managers are able to focus their efforts on what’s really important: creating lasting positive change for the community.
