Date posted: September 12, 2016

Increasingly, Australian families are establishing foundations for their private wealth from which to provide financial support to the charitable community sector. But what is the best structure?

There are a number of reasons why private family foundations are established:

  • To facilitate planned giving, i.e. structured giving over a period of time rather than donating spontaneously, to support worthy causes and/or ones that the family care deeply about
  • To create a family legacy, honour family members and bring the family together over a common cause. It is an effective way of encouraging family members to participate in strategic giving, as well as educating the children about those less privileged
  • The taxation benefits – a family foundation can allow the family to achieve their philanthropic goals in a tax effective manner

There are two structures commonly used to facilitate philanthropic giving: a private ancillary fund (PAF) and a private charitable trust.

Introduced in 2001, PAFs are a type of charitable trust used to make distributions to charities with deductible gift recipient (DGR) 1 status. A DGR 1 is essentially an active charity providing community services. Donations to a DGR are tax deductible. A PAF may also apply for a DGR endorsement, and with this status, a donation to a PAF is deductible up-front and provides flexibility to choose which DGR 1 charities receive distributions over the life of the PAF. There are no restrictions on additional contributions, however all contributions to PAFs are irrevocable.

A PAF is subject to robust governance arrangements. For starters, it is controlled by a corporate trustee, where the board is typically comprised of family members and an independent ‘responsible person’. In addition, it is subject to regulations and reporting requirements – each year a PAF must at a minimum distribute the higher of $11,000 or 5% of the market value of the fund’s net assets. There are significant penalties for breaching the PAF regulations.

One of the challenges with operating a PAF is the requirement to donate funds to DGR 1 funds only. Often the family may want to support a cause or charity that does not have DGR 1 status. If so, the PAF cannot make the donation as it will be in breach of the PAF rules.

In this situation, it may be preferable for the family to create a private charitable trust. A private charitable trust promotes charitable purposes, such as distributing funds or directly providing services.

Often the charitable trust will not obtain DGR status as it is difficult to obtain, unless its activities specifically fit within the operation of the law. However the trust will be exempt from paying income tax if it is registered with the Australian Charities and Not for Profits Commission (ACNC) as a charity. To register as a charity it must satisfy certain rules, including that it be ‘not for profit’ and be for the benefit of the public.

Charitable trusts may receive tax free distributions from a family entity, which effectively achieves the same outcome as a tax deductible donation. If these distributions were not made to the trust but rather a family member, it would be taxed – so essentially distributions to the charitable trust may reduce that member’s taxable income. Through the trust, the donation can then be distributed to charitable causes that are in accordance with the purposes and objectives of the charitable trust.

These structures both have their benefits and the one best suited to your family’s philanthropic activities will be determined by the cause or charity you have your heart set on supporting.

This article has been provided by Deloitte and the advice is designed to be general in nature.