Philanthropic giving – Private Ancillary Fund (PAF)

“To give away money is an easy matter and in any man’s power. But to decide to whom to give it and how large and when, and for what purpose and how, is neither in every man’s power nor an easy matter.” (Aristotle c. 384 B.C. to 322 B.C.)

This article on planned giving structures covers the most rewarding part of philanthropy – giving the money away! (Otherwise known as grant making). This covers grant making as it applies to a Private Ancillary Fund (PAF).

There is no single right way to grant. Grants can be for general purposes or to support specific projects or programs.

How much to give?

During each financial year, a PAF must make a minimum distribution of at least 5% of the market value of the Fund’s net assets as at 30 June of the previous financial year.

If any of a Fund’s running expenses are paid out of the Fund’s assets or income, its minimum distribution for that tax year must be $11,000 or 5% as calculated above, whichever is greater.

No distribution is required during the financial year in which the Fund is established.

A PAF can apply to the Commissioner of Taxation to lower the minimum distribution rate for a financial year (but not to zero).

What makes up the 5%?

A distribution includes the provision of money (capital or income), property or benefits in kind.

If the Fund provides property or other benefits, the market value of the property or benefit provided is to be used in determining if the 5% minimum distribution has been met.

An example of benefit in kind is if a PAF leases office space to a grant recipient at a discount to the market price. The fund is providing a benefit whose market value is equal to the discount.

It is typically more administratively difficult to give property or benefits in kind as the ATO market valuation rules must be adhered to.

Distributions do not include expenses of the PAF.

To whom can a PAF give?

PAFs exist to support eligible Deductible Gift Recipients (DGRs) as defined in their Trust Deed. Eligible DGRs are charitable organisations endorsed as DGR Item 1 by the Australian Taxation Office (ATO).

You can check an organisation’s tax status by searching by name on the Australian Business Register using the ABN Lookup website: www.abn.business.gov.au, the ACNC Register www.acnc.gov.au or request the charity provide their ATO DGR Endorsement Notice.

In no circumstances can PAFs distribute to other PAFs or Public Ancillary Funds. They must distribute to “doing” DGR Item 1 entities (because a tax deduction is already allowed for donations made into the PAF).

Philanthropy Australia provide the following broad range of grant recipients:

• organisations providing immediate relief to those afflicted by poverty, sickness or disadvantage,
• organisations advancing education or the fine arts, and
• organisations and research projects to identify new ways to solve long term medical, social or environmental problems.

Timing

The minimum distribution must be made by 30 June each year. Rather than wait until year end Directors are encouraged to give as much lead time as possible and start thinking about what cause they will support and whether it is for the long- or short-term.

Grant making support

It can be a daunting exercise in researching and selecting which charity to support while also ensuring the grant money is being used wisely.

Rather than ‘going alone’ the PAF can engage the services of a specialist. We recommend Australian Philanthropic Services. Their grant- making service has templates and tools to facilitate and assist in this process including a Giving Compass, Make a Difference workshop for children 7 – 17 and design/documentation of a Giving Strategy Roadmap. Further details are at http://australianphilanthropicservices.com.au/our- grantmaking-and-evaluation-service-2

Tips on Giving

1. Involve the family – get the next generation to help out by ‘pitching’ to the Directors on charities they are passionate about. Carve out part of the distribution for this
2. Do your research: 75 percent of donors in the USA don’t do any research. Take the time to research the charity’s mission, programme and finances.
3. Don’t be faked out by a name: Many charities have similar-sounding names. That doesn’t mean they perform equally well. Again, do your research.
4. Get specifics: If a charity is helping the homeless, for example, find out how and where the organization is concentrating its efforts.
5. Verify status: Not everyone asking for donations represents a tax-exempt
6. Concentrate your giving: If you find a well-run charity that is doing good work for a cause you care about, consider putting all of your charitable eggs in one basket. If you spread the wealth, you risk making less of an impact.

Sources: The Chronicle of Philanthropy, Giving USA, Corporation for National & Community Service

Keep in mind

Remember receipts need to be obtained from grant recipients as evidence of the distribution and for the PAF’s auditor.

Avoid a shortfall in the annual distribution. Any shortfall must be rectified and penalties may be imposed by the ATO.

Directors of a PAF are encouraged to apply a similar degree of diligence, skill and care to grant making as they do to investment matters.