We are on the verge of the largest intergenerational wealth transfer in Australian history. Over the next 20 years, an estimated $3.5 trillion is expected to transfer to the next generation as the Baby Boomers pass on their wealth.1 This presents enormous opportunities for philanthropy in the modern era and for those donors to make a lasting impact.
Throughout history, private charitable giving has undergone cycles of boom and bust. In each, the stimulus has most always been wealth creation and business innovation by private individuals, both of which were then turned towards solving the social problems of the day.
Charitable giving is now being rediscovered by a new generation of philanthropists. Over the last decade there has been considerable growth in giving from the wealthiest Australians2, and as a high-income earner, you might be one of the growing force who feel a sense of responsibility to redistribute your wealth. While you might give directly to charities throughout the year, you may not realise there are efficient and tax-effective ways to give which can provide long term funding to the causes you choose to support.
There are three main options, all of which provide a structure that allows funds to be invested and managed, with income generated available for distribution to charitable entities. These structures include: private ancillary funds; public ancillary funds; and testamentary trusts. Each has different requirements and benefits, but all provide a structure that facilities a long-term philanthropic legacy.
A Private Ancillary Fund (PAF) is a type of charitable trust that allows an individual, family or organisation to put aside a portion of money for charitable purposes in perpetuity. An individual donates capital into the PAF (generally starting with upwards of $500,000) and receives a tax deduction for the donation.
The capital is then invested long-term, and a minimum of 5% of the value of the PAF assets must be distributed as grants to charities each year. To be eligible, a charity must have Deductible Gift Recipient (DGR) Item 1 status, and plenty do – there are well over 20,000 charities to choose from. The PAF is controlled by a trustee who determines its philanthropic objectives and oversees investment and grant making strategies.
PAFs offer a number of benefits not available with other philanthropic options, including a high degree of control over the investment strategy and the ability to decide which charities will benefit. Generous tax deductions are also available for donations made to the fund - any income earned in the fund is usually tax exempt. A foundation also provides a focal point to keep succeeding generations aware of, and in touch with, the values you wish to impart.
However, the Australian Taxation Office (ATO) is responsible for regulating PAFs and has the power to impose penalties on trustees who don’t comply with guidelines. Certain investment restrictions also apply to PAFs and the fund’s assets must be valued at least annually (or at least every three years in the case of land).
A Public Ancillary Fund (PuAF) has the same tax advantages as a PAF but is a communal structure. Unlike a PAF, there is no requirement to establish a new trust or trustee company, so a named sub-fund can be established immediately, and initial amounts are usually smaller with entry points from $20,000. A minimum of 4% of the PuAF assets much be given away each year, slightly lower than with a PAF, and the same range of charities can be supported. The investment strategy is usually a single strategy selected and managed by the provider (ie. unlike non-philanthropic publicly available managed investments such as super and unit trusts, there is not a choice of investment strategies).
New research released by Swinburne University shows that more than $123 million of donations flowed into these structures last financial year, with assets held in sub-funds totalling over $1 billion.3 In fact, there are now more PuAFs than PAFs in Australia, demonstrating that while PAFs and big philanthropy may be more publicised, the accessible and convenient sub-fund is becoming more popular.
While the sub-fund market in Australia is yet to realise the boom experienced in the US with their equivalent, the Donor Advised Fund (assets held in Donor Advised Funds surpassed US$100 billion in 2017)4, the flexibly of sub-funds are making it easier for people to give. For those of you who have a reasonable amount of capital to donate, but not hundreds of thousands of dollars, and who wish to be involved in granting during your lifetime, a PuAF could be the best approach.
Structured giving in this way is an especially attractive strategy for donors who need a tax deduction now, and the flexibility to distribute the funds to charity over time. For example, pre-retirees in a higher tax bracket than might be expected in the future can bring forward multiple years of charitable giving and make a lump sum contribution to a fund. It gives the donor the tax deduction needed while they are still earning assessable income but allows them to continue a regular flow of charitable giving throughout retirement.
There is also the option of a testamentary trust. These trusts are the oldest form of foundations in Australia with some, including the Wyatt Benevolent Institution and the Felton Bequest, now in their second century. These are established by the will of the benefactor and do not come into operation until after their death. The structures can attain income tax exempt status as a tax concession charity from the Australian Charities and Not-for-profits Commission (ACNC) but donations to them are not tax deductible.
They also must fund the charitable purposes specified in the will. However, the beneficiaries of the testamentary charitable trust do not necessarily need to be registered as Deductible Gift Recipients with the ATO. This gives the trustees greater flexibility in carrying out the benefactors wishes in the administration of the trust.
If you want the confidence and peace of mind that comes from establishing a structured philanthropic program that you can contribute to during your lifetime, you may want to consider a PAF or a PuAF. The ultimate choice will, however, depend on a range of factors, including your goals, the degree of control you want and the amount you’d like to donate.
To find out the best approach (and ensure the chosen arrangement is properly implemented) you should speak to your financial adviser who can provide you with specialist support and advice from philanthropic experts. Regardless of which structure you choose, all provide the benefit of allowing family members across multiple generations to become involved in the causes that are most important to you.
1 McCrindle, 2016, Wealth Transfer Report, A Report for No More Practice, September.
2 JBWere, 2018, The Support Report: The changing shape of giving and the significant implications for recipients, June.
3 Swinburne University, 2019, Snapshot of sub-funds in Australia.
4 National Philanthropic Trust, 2018, The 2018 DAF Report.
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.