Giving Back: How to Use Private Ancillary Funds

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PERHAPS THIS is might appear to you as something out of “left field” … but more and more investors are using PAFs to manage their charitable donations.

The Benefits of Private Ancillary Funds

Private Ancillary Funds (PAFs) are a way for families or individuals to exercise greater control over their charitable giving. PAFs provide a structure to strategically manage both tax and the quantum of philanthropic gifts in any given year.

They were created in 2001 under the name Private Prescribed Funds (or PPFs). And now make up more than $2 billion in philanthropic funds.

A Private Ancillary Fund is akin to a private foundation, where a family contributes funds into a trust controlled by the family.

PAFs can be used for ongoing funding for charitable organisations. The structure suits families wishing to take a ‘hands-on’ approach to their charitable giving.

PAFs can also be used to establish a charitable legacy for the perpetual memory of a family or individual.

Corporations may also establish Private Ancillary Funds as a mechanism to fund and manage their philanthropic gifts.

PAF Taxation

The amount contributed to a PAF is tax deductible in the year of contribution, rather than when philanthropic gifts are distributed. This allows for the strategic management of both charitable gifts and tax planning.

For instance, a family could place a lump sum into a PAF during a year where significant tax liabilities may arise. And claim a deduction for the full amount contributed to the PAF. This sum could then be gifted to charitable causes over a period of years.

Conversely, a family may make regular contributions to a PAF over a period of years and then gift a large sum as a single charitable gift.

The ATO requires 5% of the value held in the fund to be gifted each year and there are other regulations to understand prior to the establishment of a PAF.

Private Ancillary Funds are structured as a trust with a trustee who controls the fund, much like a self-managed super fund.

Like a SMSF, capital gains and income are tax exempt and franking credits can be claimed from the ATO.

BOTTOM LINE: The most important features and benefits of the PAF structure are:

  • The cash flows into and out of the fund
  • Protecting the corpus for perpetuity or the intended lifespan of the PAF
  • Generation of income to fund ongoing gifts and growth of capital over time
  • Utilisation of the tax advantages of the PAF structure including franking credit rebates and capital gains tax exemption.

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