A charity giving fund, also known as an ancillary fund, is a vehicle for public and private philanthropy. It is a type of charitable trust designed to provide an investment structure for philanthropic giving purposes. Simple and quick to set up, it offers tax deductions to donors and tax exemptions for income earned by the fund.
In this article we answer the following questions:
- What is an ancillary fund?
- What is the difference between a public and a private ancillary fund?
- Why would you establish an ancillary fund? and
- What are the main features of an ancillary fund?
What is an ancillary fund?
Ancillary funds are philanthropic ‘giving’ funds that provide a link between people who want to give ('donors') and organisations (other than ancillary funds) that can receive tax deductible donations as deductible gift recipients (‘DGRs’).
An ancillary fund does not undertake charitable work itself, but can be used as a collection point or funnel to pool donations to then be distributed to other DGR charities as decided by the trustees.
An ancillary fund is itself registered as a DGR and so donors can receive a tax deduction for donations made to the fund. Ancillary funds will usually be registered with the Australian Charities and Not-for-profits Commission (‘ACNC’) as a charity so the fund can be endorsed as income tax exempt with the Australian Taxation Office (‘ATO’).
There are two types of ancillary funds:
- private ancillary funds (‘PAF’), and
- public ancillary funds (‘PuAF’).
What is the difference between a public and a private ancillary fund?
In a basic sense, a PAF is used by family groups to undertake private philanthropy by pooling resources and distributing donations to chosen DGRs. Donors don’t necessarily all need to be from the same family, but usually share some form of common interest or close relationship. PAFs cannot solicit donations from the general public.
In contrast, a PuAF is used for fundraising purposes to collect donations from the public.
There are other differences in establishment, administration and the required minimum annual distributions, which we will set out below.
Why would you establish an ancillary fund?
A PAF may be suitable for you if:
- you wish to establish a charity foundation that will keep on giving after your death,
- you want a structured way to involve your children or family in giving,
- you have recently disposed of an asset and wish to obtain a tax deduction in the year of sale (however, once a gift is made to the trust it cannot be revoked),
- you wish to devote a considerable amount of time and money to charity and philanthropy into the future,
- you see yourself in a philanthropic, financial, supportive role rather than wanting to establish an organisation that provides charitable services or activities itself,
- you want to establish a tax deductible vehicle for investing and accumulating assets for philanthropic and charitable purposes.
In addition, a PuAF may be suitable if you are an organisation that wants to establish a public foundation for more efficient fundraising and to give to DGR entities connected to your organisation or pursuing the same cause.
A PAF isn’t necessary where you’re happy to give to charity on an ad hoc basis in response to requests or needs. There are costs in establishing and maintaining an ancillary fund (e.g. costs of audit or review of financial statements and the lodgment of an income tax return) so whether or not it’s worthwhile establishing a fund usually depends on the amount being invested. We usually recommend PAFs start with around
What are the main features of an ancillary fund?
Ancillary funds have the following additional features and requirements:
- The fund must have an Australian Business Number (‘ABN’) and be established and operated from Australia.
- The fund must comply with various rules and guidelines, have the required clauses in its trust deed and operate as a ‘not-for-profit’ entity.
- A PuAF must invite the public to make donations and the public must in fact contribute to the fund.
- The fund must meet the ‘minimum annual distribution’ requirements. Special distribution rules have been approved by the Federal Government for use during the COVID-19 pandemic.
- The fund must have its financial statements audited or reviewed each year (an audit is not required if revenue and assets are less than $1 million).
- The fund must have a formal investment strategy.
- Generally, PuAF cannot borrow money, must maintain investments on an arm’s-length basis, and must not provide assistance to related parties or acquire assets from them (other than by way of gift).
- A PAF must have a corporate trustee, with at least one director meeting the ATO’s ‘responsible person’ test. This person cannot also be the founder or a major donor to the PAF. For a PuAF, a majority of directors of the corporate trustee must meet the ‘responsible person’ test.
Need more information?
If you’d like to explore the establishment of a PAF or PuAF, please contact the Sharrock Pitman Legal not-for-profit team on 1300 205 506. We would be happy to provide more detailed advice tailored to your circumstances and objectives or to assist with the establishment of a PAF or PuAF.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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For further information contact
Dan is a Legal Practitioner at Sharrock Pitman Legal.
He deals with areas of Charities & Not for Profit Law and Commercial Law. For further information, contact Dan on his direct line (03) 8561 3325.