So you want to be a philanthropist? The very word often conjures up a vision of multi-million dollar bank accounts, high net worth individuals and mega corporations. However, this doesn’t have to be the case. Many smaller organisations want to make a difference and engage with the community and there are sound financial benefits in doing so.
For individuals, businesses or families who want, and have the means, to establish a vehicle for giving that has a life of its own, rather than a one off gift, there are also ways to do this. This often happens after a significant event such as a sale, or other major transaction which results in additional funds that can be distributed to third parties.
The key to getting it right is careful planning; following your head as well as your heart. Many companies or individuals have favourite charities but it often pays to align with a charity that fits in with your business or personal interests.
Individuals, businesses or families can set up a Private Ancillary Fund or PAF, as a vehicle for distributing monies for philanthropic purposes.
- PAFS are trust funds designed to encourage private philanthropy by providing businesses, families and individuals with greater flexibility to start their own foundation.
- They are essentially a private ‘ancillary’ (or conduit’) fund, that allow the Fund to make gifts to other DGRs.
- Their income is exempt from tax and donations to this ‘conduit’ fund are deductible too.
- They do take some time to set up, so it is usually recommended that the process is commenced well before year end if you want a tax benefit in that financial year
- Expert tax, legal and financial advice is typically required for the establishment and ongoing management, including lodging reports, and distributing minimum funds each year.
- However, once PAFs are approved, monies can be placed there, topped up, and tax deductions immediately claimed in respect of gifts made to the PAF. All gifts to a PAF are tax deductible. Income and realised capital gains received by a PAF are also tax exempt, whilst still getting cash refunds of franking credits.
- The benefit is that contributions can be made over time, creating sustainable, long-term annual earnings. That kind of regular income is invaluable for many charities that are DGRs.
- For a family business, such structures have obvious advantages. Taxpayers with a substantial taxable income can use a part of their profits against a contribution to an ancillary fund controlled by the family.
- PAFS allow people to establish a philanthropic legacy in their lifetime, one where they can see the benefits.
- Most PAFS are set up to survive into perpetuity and continue from one generation to the next.
- Donors can also make their PAF a beneficiary of their estate, allowing their vision to continue through their children and grand-children. This fosters pride, a great sense of responsibility and commitment to helping others in subsequent generations.
More than the sense of contributing to the wellbeing of others, there are financial advantages to philanthropy and everyone benefits in the process.
[Article from KPMG Newsroom on 26 June 2018, by Kaylene Hubbard; Tax Month – July 2018]
FJM 12.8.18
Comprehension questions (answers given)
- Must an ‘ancillary fund’ have donations from the public?
- Do Ancillary Funds, themselves, make donations to other DGRs?
- Could such a fund absorb some or all of a taxable capital gain?
- Does such a fund create a life of its own and leave a philanthropic legacy, for the founding family (lasting much longer than a single donation)?
