Consider a Private Ancillary Fund for private philanthropy this Christmas

Kym Bailey, Technical Services Manager at JBWere, discusses how Private Ancillary Funds provide a structure for private philanthropy and are income tax exempt entities. 

Kym Bailey

With the Christmas and New Year traditional holiday season upon us, it’s likely that some form of ad hoc charitable giving will ensue from many households. The motivation for giving during the festive season is a general feeling of goodwill; however, the charity is largely a private event.

Australians are very reserved about their charitable giving and are often dismissive of the effervescence of the US style demonstration of philanthropy. What we do however know, is that Australians quietly donate over $12 billion every year[1]. There’s clearly a lot going on in this space that doesn’t hit the headlines.

Annual donation activity statistics also capture a large proportion of testamentary giving whereby the testator makes a bequest via their Will. This sentiment derives from people feeling that at the end of their life, they want to “give back” something from their estate and is possibly the best understood planned philanthropic activity.

However, the dimensions are broader than just the estate plan.

How does inter vivos giving work?

Most people have a good understanding that if you make a donation to a “deductible gift recipient (DGR)”[2] you are entitled to a tax deduction in accordance with section 30-15 ITAA97. The tax deduction can even be spread over five years if taxable income is less than the donation – as per subdivision 30-DB ITAA97.

This is a very generous tax concession at a point in time where tax concessions are almost on the critically endangered list.

Where there is less understanding is the ability to establish a private foundation to formalise charitable giving, and still receive these great tax concessions.

What is a Private Foundation

Private Ancillary Funds (PAF) were introduced in 2001 to provide a structure for private philanthropy. Since then around 1,500 PAFs have been established with over 100 new ones being established each year. Around $8.3b is invested in PAFs which has been privately sourced. [3]

PAFs are income tax exempt entities that are also entitled to a refund of franking credits received from investment in Australian shares, which helps to drive returns from the invested capital.

PAFs are grant making entities and therefore do not accept public donations, or manage charitable organisations. Simply put, they are an investment vehicle designed to provide sustainable donations to registered charities and DGR’s.

Why would you establish a PAF

Tax is a major headache and can be exacerbated when it comes to pivotal points in clients lives such as the sale of a professional practice, business, investment property or other major capital gain event, or the receipt of lumpy taxable income.

A sound tax strategy is to offset some or all of the taxable capital gain via making a tax deductible donation to a DGR. The issue however may be the quantum involved is more than the potential donor prefers to give in any one year and they would prefer more control over the distribution.

Rather than making a direct donation to a DGR at the point of a lumpy taxable income receipt, a donation to a PAF still entitles the donor to the tax deduction, however, the destination of the charitable giving is in now in their hands.

Take the example of the sale of an investment property that yielded a $200k taxable gain for an individual taxpayer. This automatically invokes the top marginal tax rate for this investor and, if they otherwise have $180k or more in taxable income, $94k in tax is payable on the property sale (assume 47% tax, inc Medicare levy).

Assuming all other tax strategies have been exhausted, the taxpayer has the choice of paying the tax and letting the government decide on how best to deploy it or, they could take wealth transfer into their own hands and donate the $200k (or some portion of it) to their PAF. This strategy will neutralise the excess tax and provide them with the opportunity to make grants to their preferred DGIs, in a measured manner.

In the first year of operation, the PAF can ‘rest’ and not make a donation. Thereafter, the trustee must distribute either 5% of the balance of the PAF or, $11,000, whichever is greater.

If the underlying investment strategy of the PAF is sound, it may never have to revert to the corpus and simply distribute income each year. In this way, the PAF can continue on indefinitely and even be intergenerational, providing a formalised family charitable structure in perpetuity.

Take the above example and, assuming at least 6% per annum is earned from the investment strategy, the seed capital of $200k will not be reduced and may even grow from capital appreciation of the underlying investments.

The PAF cannot take donations from the public however, it can receive donations from family members and therefore the tax concessions are more widely available across the family group.

Ultimately, the overwhelming reason for establishing a PAF is the joy in deciding the object for your annual giving and, for some people, having the whole family involved in the process. The tax advantages are just the cream on the cake.

Nuts & Bolts

A PAF is a special trust that receives generous tax concessions and therefore is governed by complex rules and regulations which include annual reporting and other accountability measures. For this reason, advice is generally required in the establishment and ongoing operation of a PAF and Practitioners can provide this supportive role to clients as they pursue their formalised charitable giving objectives.

PAF’s are fundamentally a trust established by a trust deed and a settled sum. The Trustee is required to be a corporation and include at least one director, operating as a “Responsible Person”. A responsible person is defined as an ‘individual with a degree of responsibility to the Australian community – who performs a public function, or belongs to a professional body which has a professional code of ethics.’

The PAF must have a trust deed, an investment strategy; prepare annual accounts that are audited and furnish an annual report with the Tax Office (who are the Regulators of PAFs). Donations to a PAF must be private in nature and in addition, no more than 20% can be contributed by entities other than the Founder, its associates, or its estate. Donations must be lodged in a “Gift Fund”.

By and large, all the requirements can be found in the PAF Guidelines 2009 (a legislative instrument).[4]

How does a PAF fit into Estate Planning?

The establishment of a PAF may result in the designated capital for charitable giving being finalised before death however; estate planning should include consideration of the PAF and make the critical succession appointments. This can be done either within the Trust Deed of the PAF or via officeholder’s Wills. Just as the succession of personal structures such as trusts and private companies should be considered in Estate Planning, a PAF should not be overlooked.

If the testator wishes to make testamentary gifts to the PAF, these instructions need to be incorporated in their Will. A donation made via a will is not tax deductible to the estate however, a transfer of assets will be CGT exempt. This is an important distinction as a sale of CGT assets prior to distribution could result in an overall reduced corpus if CGT is applicable whereas a direct transfer to the PAF is tax neutral. The PAF, being income tax exempt, can subsequently sell down any distributed assets, tax free.

The Trustee of the PAF can, at any stage, decide to wind-up the PAF or convert it to a Public Ancillary Fund PuAF. Whenever this is done, the assets of the PAF must only be donated to another ancillary fund in accordance with Item 2 in the table in Section 30-15 ITAA 1997.

Philanthropy – so much more than just estate planning

Tax considerations should be overlayed on all aspects of client advice and importantly, highlighted to clients as appropriate. Charitable giving is a legitimate tax deduction, and ideologically sits well with people that consider they are better placed to make public spending decisions than many of our governments. The use of a private ancillary fund is a strategic way to manage not only the destination of charitable giving, but the extent of the targeted capital designated for this purpose as well as how it is managed.

Ad hoc giving can never be as rewarding as a planned, targeted, giving strategy that provides beneficiary organisations with meaningful gifts that can be incorporate into their budget and facilitate longer term funding decisions as well as providing the donor with a sense that they have been able to make a measured difference.

Wishing all a very Happy Festive Season that is filled with the joy of giving.

As the JBWere Technical Services Manager, Kym Baileyprovides support to JBWere Strategic Advisers across Australia. Her role includes analysing and developing technical solutions for client-facing Advisors, as well as providing technical capability training and development to the Adviser Teams, along with the curation of the client document library that is used by Advisors. Often acting as a coach and a sounding-board to Advisors, Kym enjoys distilling the complex into practical, sensible and appropriate solution for clients. Contact Kym at You can also connect with JBWere via LinkedIn 

[2] DGRs are organisations endorsed by the ATO or, listed by name in tax law. DGR organisations can be searched via

[3] ATO Taxation Statistics, JBWere Philanthropic Services [The Support Report June 2018]

[4] Schedule 1 TAA 1953 – s426-110