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Setting up a Private Ancillary Fund: Rewards and Benefits

Developing philanthropic goals together can have a positive impact on any family. A Private Ancillary Fund (PAF) can help bring different generations together and embed family values, while having a positive impact on the community.

A PAF is a great way to engage family members in your giving and can bring a different type of conversation to the dinner table. The engagement around grant making decisions can often change family dynamics - encouraging children to develop their own priorities for supporting charities can promote family cohesion, inspire future generations, and help to build a family legacy that everyone can share.

There are some fundamental rules that apply to PAFs and these kinds of foundations require management by a corporate trustee. However, with the right support, a PAF can provide a range of benefits to you, your family and, most importantly, the community.

Who can be a trustee of a PAF?

A PAF is a charitable trust controlled by a company as Trustee. Most of the directors of the Trustee company can be family members or business associates provided that at least one of the directors is an independent person who is a 'responsible person' who is not the founder or a donor who has contributed more than $10,000 to the fund.

"The directors of the Trustee have the ultimate responsibility for the governance of the PAF," says David Ward, Technical Director of the Australian Philanthropic Services.

"This is usually family members (parents and grown up kids) with the obligatory independent responsible person (often the family lawyer or accountant). It is also worth considering appointing a specialist administrator, who can ensure compliance with the technical aspects of running a PAF," explains Ward.

The Australian Philanthropic Services is a not-for-profit organisation that inspires effective philanthropy, and provides education and practical support for individuals and advisers. The organisation often helps set up private ancillary funds for individuals, families and businesses across Australia.

"A PAF is a tax-effective, family controlled giving structure which can bring a family together in their support of the community and help those less fortunate than themselves," continues Ward. "It is a trust that can be established in perpetuity, but the directors are also human so establishing a succession plan for children (or grandchildren, or nieces and nephews) to take over as directors and run the PAF is an important consideration."

"If there is not anyone to assume the reins to ensure the long-term running of the PAF however, a PAF can be rolled over (or ported) into a public ancillary fund, and a letter of donor intentions lodged with the trustee to guide perpetual giving," says Ward.

Designing an investment strategy

Philanthropy can be hugely personal, and making decisions about long-term grantmaking can be difficult. Andrew Carnegie, widely regarded as the father of modern US philanthropy, reportedly said it was "easier to make money than it was to give it away." Having a PAF enables a family to make those decisions together.

You will need to design an investment strategy that will provide long-term capital growth and a regular flow of income to meet your foundation’s objectives in perpetuity.

State trust law requires that the trustees of all foundations, including PAFs, have regard to several matters, including the benefits of diversification and the need to consider mission, risks, costs and tax when investing trust funds. The PAF Guidelines (2009) also set further specific restrictions. All of these need to be incorporated in the investment strategy and considered as part of the annual investment review.

There are a number of favourable tax advantages relating to a PAF that generally allow them to generate better long-term returns than an equivalent investment outside a PAF.

For example, subject to the terms of your will, a donation to an existing Deductible Gift Recipient (DGR) status approved PAF through your will removes capital gains tax on the assets donated. This increases the value of your foundation, allowing it to provide more support for your chosen charities.

"PAFs can register as a charity," says Ward, "and thereby attain income tax exemption, and the ability to reclaim from the ATO in cash any franking credits attached to dividends received form Australian companies."

"One of the key benefits of putting a structure, like a PAF, around your giving includes the ability to give money away whilst also growing your philanthropic capital in a tax-free environment," explains Ward. "Good returns can see the amount you have to give away grow over time."

It is important that you speak to your financial adviser who can assist you with an investment strategy for your PAF that maximises these benefits. You should also consider obtaining legal and tax advice before establishing your foundation, as every donation you make to your PAF is irreversible.

Make a lasting impact

1 Australian Financial Review Philanthropy 50 List 2019, May 2019.

Important information and disclaimer

This article has been prepared by Godfrey Pembroke Limited ABN 23 002 336 254 AFSL 230690. Any advice provided is of a general nature only. It does not take into account your objectives, financial situation or needs. Please seek personal advice before making a decision about a financial product. Information in this article is current as at 19/11/2019. While care has been taken in the preparation of this article, no liability is accepted by Godfrey Pembroke Limited or its related entities, agents or employees for any loss arising from reliance on this article. Any opinions expressed constitute our views at the time of issue and are subject to change. Any tax information provided in this article is intended as a guide only. It is not intended to be a substitute for specialised tax advice. We recommend that you consult with a registered tax agent.