Key Takeaways:
- On 5 December 2024, Hon Dr Andrew Leigh MP announced the Government’s intention to reform aspects of the law relating to philanthropic giving. This was in response to the recommendations made by the Productivity Commission in its philanthropy inquiry report, “Future foundations for giving” released to the public on 18 July 2024 (Report). Charities with DGR status receive more from philanthropic foundations and donors than regular charities;
- Currently, to be tax deductible, the value of a gift or contribution to a deductible gift recipient (DGR) must be $2 or more. The Government proposes to remove this $2 threshold. This was recommended by the Productivity Commission as a measure to incentivise giving.
- Changes to ancillary funds have also been proposed, including:
- renaming them “giving funds” (learn more in my giving fund article published in 2020);
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allowing distributions to be smoothed over three years, to accommodate large capital works.
- In addition, the Report recommends increasing the minimum distribution rate from 5% to 8% for private giving funds.
Why DGR reform is needed
High-net-worth philanthropy is on the rise, with almost all major philanthropists, apart from those established by deceased estates, using an ancillary fund established as a Foundation.
According to the Report:
- over $13 billion was donated to charities in Australia in 2021 and 6 million people volunteered in 2022;
- giving is expected to increase by $6.4 billion or 48% by 2030;
- the Report recommended that minimum distribution rates for ancillary funds should be set at between 5% and 8% of net assets (currently 4%-5%); and
- giving to ancillary funds has grown with an accumulated pool of net assets up from $4.6 billion in 2011-12 to $16.4 billion in 2020-21.
Further, as reported in the Australian Financial Review Magazine, dated 26 April 2024:
- “Australia's three biggest philanthropic foundations gave out $585 million last year, making up almost half of total spending by the top 50 givers.”; and
- “Overall spending [on philanthropy] by the country’s high-net-worth givers jumped 12% to a record $1.25 billion in the 12 months to June 30, outpacing spending [on philanthropy] by companies and the mass market.”.
As stated in the Report, philanthropy literally means ‘the love of humanity’. Each day, millions of Australians express this sentiment in practical ways, seeking to improve the wellbeing and resilience of their communities by contributing to causes they care about. Philanthropy can provide funding for activities that the community values and that would otherwise be underfunded or not funded at all due to constraints on governments.
What's in this Charity Alert?
This Alert will answer the following questions:
- What is a giving fund?
- What is the difference between a public and a private giving fund?
- Why would you establish a giving fund? and
- What are the main features of a giving fund?
What is a giving fund?
A charitable foundation, also known as an ancillary fund, is a structured vehicle for public and private philanthropy. It is a type of charitable trust designed to provide an investment structure for philanthropic giving purposes. Ancillary funds provide a link between people who want to give ('donors') and doing 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, it is used as a collection point or funnel to pool donations that are distributed to DGR charities as decided by the trustees.
An ancillary fund is registered as a DGR and this allows donors to receive a tax deduction for donations made to the foundation. Ancillary funds will usually be registered with the Australian Charities and Not-for-profits Commission (‘ACNC’) as a charity so the foundation can be endorsed as income tax exempt with the Australian Taxation Office (‘ATO’).
There are two types of ancillary funds:
- Private ancillary funds ('PAF' or 'PrAF') and
- Public ancillary funds ('PuAF').
What is the difference between a public and a private giving fund?
A PAF or PrAF (private) is used by family groups to undertake private philanthropy by pooling resources and distributing donations of income to chosen DGRs. Donors do not necessarily all need to be from the same family, however they usually share some form of common interest or close relationship. PAFs do not request nor receive donations from the general public but rather grow through private, family group investment in the foundation.
In contrast, a PuAF (public) is used for fundraising purposes to request and collect donations from the public. As a public foundation, PuAF’s are usually established by organisations or companies as their public philanthropy vehicle, providing tax deductible incentives to staff and employees to give to the foundation.
Why would you establish a giving fund?
A PAF (private), also known as a giving fund or foundation, may be suitable for you if:
- you wish to establish a foundation for philanthropic giving that will keep on giving after your death;
- you want a structured way to involve your children or family in your philanthrophy;
- 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 philanthropy into the future;
- you see yourself in a philanthropic, financial, supportive role rather than wanting to establish a doing organisation that provides charitable services or activities itself; or
- you want to establish a tax deductible structured giving vehicle for investing and accumulating assets for impact investing, philanthropic and charitable purposes; and
- you want to maintain full control in relation to the recipients of annual distributions of income from your foundation.
In addition, a PuAF (public), giving fund or foundation, may be suitable if you belong to an organisation or company that wants to establish a public foundation for more efficient fundraising from the public or a large employee group. A public foundation will allow giving to DGR entities connected to your organisation, pursuing the same causes or simply as chosen by the donor group with approval by the trustees.
A foundation 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 a giving fund (e.g., costs of audit or review of financial statements and the lodgement of an income tax return) so whether or not it’s worthwhile establishing a foundation usually depends on the amount being invested. It is usually recommend foundations start with at least $500,000-$1 million.
What are the main features of a giving fund?
Giving funds or foundations that are established as ancillary funds have the following additional features and requirements:
- The foundation must have an Australian Business Number (‘ABN’) and be established and operated from Australia.
- The foundation must comply with various rules and guidelines, have the required clauses in its trust deed and operate as a ‘not-for-profit’ entity.
- A public foundation must invite the public to make donations and the public must in fact contribute to the foundation.
- The foundation must meet the ‘minimum annual distribution’ requirements.
- The foundation 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 foundation must have a formal investment strategy.
- Generally, a public foundation 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 private foundation 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 foundation and is usually a trusted advisor, accountant or lawyer.
- For a public foundation, 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 public or private foundation, please contact a member of the Corporate and Commercial Advisory team and/or Dan Saunders, Senior Associate directly. We would be happy to provide more detailed advice tailored to your circumstances and objectives or to assist with the establishment of your foundation.
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