Private Ancillary Funds as we know them, may soon be a thing of the past. The Australian government has released a consultation paper with recommendations to reform the operation of both Public and Private Ancillary Funds. The new recommendations embrace a suite of changes which aim to improve support provided to charities. One of the most notable proposals is a rebranding of these structures as "Giving Funds", to better reflect their core purpose which is giving to Deductible Gift Recipients (ie charities which have their own deductible gift recipient status).
Key Recommendations
The Productivity Commission has recommended the following reforms which are canvassed in the consultation paper:
- Aligning and increasing the minimum annual distribution rate for both public and private funds;
- Introducing distribution smoothing, allowing funds to average their annual distribution requirement over a three-year period; and
- Renaming ancillary funds in tax law to "Giving Funds" to reflect their philanthropic function.
Principles for Setting the Distribution Rate
To guide the determination of an appropriate minimum annual distribution rate, the Productivity Commission outlined three key principles:
- Charitable Purpose First
Giving funds should prioritise delivering benefits to charities, not just preserving or growing their investments. - Perpetuity Is Not Guaranteed
While long-term sustainability is important, funds should not expect to exist indefinitely without further contributions. At the same time, distribution rates must not be so high that they force trustees into risky investment strategies. - Meeting the Funding Needs of DGRs
Distribution rates should align with both the immediate and future needs of DGRs.
The current position is that Public Ancillary Funds are required to distribute 4% of their net assets each year whilst Private Ancillary Funds are required to distribute 5% of their net assets. Although no final rate has been set, the Productivity Commission has suggested a range of 5% to 8% per annum. The government broadly supports this range as this undoubtedly benefits the DGRs, however there is a risk that a higher rate could discourage the establishment of new funds. Further there are concerns that those who are discouraged from creating a giving fund will not follow through with making an equivalent donation to a DGR.
To balance these competing considerations, the government has confirmed that the increase to the minimum distribution rate will be subject to a five year transition period from the date of commencement. This delay is intended to give existing funds sufficient time to adjust their investment strategies accordingly.
The proposed shift from Ancillary Funds to Giving Funds is more than a simple rebrand, it represents a fundamental realignment in how philanthropic structures are regulated and assessed. The aim is to ensure that tax-advantaged giving goes beyond a minimum compliance mindset and instead promotes generous, impactful, and timely support for Australian charities.
The consultation period has closed, however we will keep clients appraised of further implementation by the Treasury of the proposed reforms. If you would like to learn more about PAFs, please refer to our previous article titled "Private Ancillary Funds" [HERE].
If you require any assistance in relation to the establishment of Private Ancillary Funds, Public Ancillary Funds or other not-for-profit entities then please feel free to contact Anthony Pointon, Michael Bishop or Andrew Pointon of our office
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
