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Philanthropy and Private Ancillary Funds

Philanthropy and Private Ancillary Funds

Chris Morcom
Partner/Private Client Adviser
14 Oct 2013

Many Australians are familiar with the concept of giving a bit back to their community, whether it be donating their time, labour and expertise, or via financial donations.

When it comes to money, there are three main ways an individual or family can donate to charity:

  1. Donate directly to the chosen charity
  2. Donate to a Public Ancillary Fund
  3. Establish a Private Ancillary Fund

Donating directly is the way many of us are used to interacting with the charitable sector.

A Public Ancillary Fund (or PuAF) is an established foundation to which you can direct your donation.  As the donor, you receive a tax deduction for your contribution to the foundation, and then the foundation directs your donation to charitable organisations.  Most PuAF’s offer the option to choose the areas and charities you wish to benefit.  This option can be attractive for those not wanting to exert much control over their gift giving arrangements.

A Private Ancillary Fund (PAF) is a private foundation to which an individual or family contributes a significant sum to then use for donations.  The foundation must give the greater of $11,000 per annum or 4% of its capital measured at the start of the financial year, annually.  Donors receive a tax deduction for the amount contributed to the PAF, and the PAF cannot solicit donations from the wider public. 

A PAF has similar investment and governance rules to a Self Managed Superannuation Fund, and must have at least one trustee who holds a recognised professional position in the community.

One of the great advantages of a PAF is that it can provide a family with a formal gift giving strategy that will have a life in perpetuity. 

For those faced with a very large taxable income in a single year, establishing a PAF and contributing funds can be a way to formalise a gift giving program for the longer term, while at the same time deriving a substantial tax advantage.

Consider the instance where the sale of a business, with the owner receiving proceeds of $15 million, of which results in a taxable capital gain of say $7 million.  Doing nothing, and presuming the top marginal tax rate, the tax bill would be around $3.25 million.

Alternatively, if that same business owner wanted to use $5 million of their sale proceeds towards a long term philanthropic program, they could establish a PAF and donate the $5 million in the same year they make the capital gain.  Such a financial resource could provide a minimum gift of $200,000 per annum, still leaving the capital intact to growth resulting in larger future gifts.

The tax deductible donation provides the now former business owner with a lower taxable income… the tax saving in this example being around $2.32 million.  In addition, they and their family remain in control of their philanthropic activity.  Involving the next generations in the foundation operations can be an effective way to pass on knowledge and control of the family philanthropic ethos. 

Generally we suggest the minimum starting balance for a PAF should be around $500,000.  This ensures costs do not eat away too much of the earnings of the fund. However, individual circumstances can vary and you should seek appropriate advice.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.