A Private Ancillary Fund (PAF) is a popular and effective vehicle for charitable giving. It is a type of charitable trust that can be created by trust deed or by will and managed in private hands.
A PAF can operate indefinitely, thereby allowing you to establish a tradition of sustained charitable giving, beyond the lifetime of a single individual. A PAF also allows the philanthropic activities and ambitions of a particular family or corporate group to be channelled through one easily managed and controlled trust entity. PAFs are simply conduits for providing funds to other charities. Unlike the organisations to which a PAF may distribute, PAFs are not permitted to undertake any direct charitable activities.
A PAF can choose how to invest inbound contributions and which charities will benefit from donations made by the PAF. You can determine the timing, level and source of contributions and also your level of involvement in managing the PAF.
Unlike direct personal donations to charity, the funds you contribute to the PAF need not necessarily be disbursed immediately. The income tax law requires that 5% (as a minimum) of the closing balance of the market value of the net assets of a PAF in any given financial year must be distributed to charities in the subsequent financial year.
Apart from this requirement, there are no restrictions on a PAF’s ability to accumulate funds, distribute income or reach a certain target capital base. The provision of further distributions to charities is at the ultimate discretion of the PAF.
There is no requirement to lock in any one or more charities as a beneficiary. While organisations may change, a PAF can be established with the flexibility to decide from year to year which organisations will be the recipients of the PAF’s benefaction.
It is generally more effective to establish a PAF to commence during your lifetime rather than leave a gift by will, as this allows you to participate in the development of the PAF and is generally more tax effective for you.
Powerful tax advantages are available to a PAF, including deductible gift recipient (DGR) status and income tax exemption.
DGR status means that all contributions made to a PAF, whether in the form of cash or other assets, and whether made by you or any other person, will be tax deductible, provided that the gifting rules are satisfied. It is also possible in many cases for donors to spread deductions over a period of up to five years.
Income tax exemption allows PAFs to accumulate income and capital gains at a generally much faster rate than where funds are instead invested in the donor’s own name. PAFs with income tax exemption that own and receive franked dividends from Australian shares will also be eligible for a refund of imputation credits on those dividends. Such tax savings allow more to be given to charity with less impact on your hip pocket.
A PAF can accept donations from a range of donors, although in practice the major donors are usually limited to close family members (and associated entities) of the “Founder” of the PAF. Unlike public charitable trusts, PAFs cannot seek donations from the general public.
These features combine to make the PAF an ideal vehicle for sustainable charitable giving and an excellent alternative to making direct personal donations.