Establishment

You will need to engage a suitable philanthropic legal service (or we can do this on your behalf) to draft a legal deed that broadly governs the charitable actions of your private ancillary fund (PAF). A private ancillary fund is the specific not-for-profit vehicle that can house philanthropic proceeds in a tax free manner. You will also need to establish a corporate trustee which is responsible for controlling and managing the PAF. You and other family/related parties can be directors of this company, but you are required to nominate an independent director of suitable standing to act as a responsible entity. This independent director cannot be a related party or family member and generally needs to be someone of good standing within the community.

Investment policy statement

You will need to begin formulating a robust investment policy statement that provides clear guidelines on governance, roles and responsibilities with clear articulation on investment expectations, reporting obligations, allowable distributions, allowable investments and investment selection process (among much more). This is critically important, especially when significant assets are to be managed or the philanthropic vehicle is of public significance.

This can be done in conjunction with an experienced asset manager or financial adviser. A draft example of what this document covers is available here (credit: The CFA Institute).

Implement investment structures

Prior to receipt of any proceeds, the investment policy statement will guide the establishment of cash management account and investment administration service structures required to administer charitable capital. Typically, you would expect a clearing account (like a cash management account) to act as the central point for reconciling all investment sales, contributions, distributions and new donations.

Founding donation

A donation to a PAF is not revocable. Once contributed, the only way for capital to exit the PAF is via a charitable donation to a suitably aligned philanthropic endevour. All contributions to a PAF are tax deductible donations. This provides significant scope to time future contributions with significant capital gains tax events. A donation offsetting an assessable capital gain essentially doubles the capital base available for philanthropic pursuits for most natural persons running PAFs in Australia. The tax deductibility of your donation can be carried forward over the following five years.

Ongoing investment returns from asset management within the PAF are tax exempt.

Ongoing reporting

There are two primary ongoing reporting obligations;

• Lodgement of returns to the ATO (although no tax is payable), tax refunds will be payable on tax paid income like franking credits. The philanthropic vehicle will receive a payment from the ATO on any tax-paid income.
• Maintaining compliance with the Australian Charities and Not-For-Profits Commission (ACNC) governance requirements.

Director and community education

It is important to regularly report investment management, charitable activity and community impact back to director's, donor's and the community broadly. Depending on the stakeholders involved this may be an opportunity to engage with external consultants to convey financial data in a meaningful way or further educate potential recipients on best practice activites to make your charitable activities more meaningful.