Private ancillary funds allow you to retain control and still get a tax deduction for the money you earmark for donations.
Private Ancillary Funds
Imagine you had more money than you could ever spend. What would you do with it? You probably use some to go travelling, upgrade your home and car and then put a fair chunk aside for your children and future grandchildren.
But after that? What do you do with the rest? Think of the causes that are the closest to your heart. That you feel the most strongly about.
And now let’s say you have the millions to really make a difference. How would you do it?
Yes, you could just wire 10 million across to your charity of choice. “Here is the money – do as you think is best. “
But what if you want to influence how the money is spent? Not drown the charity of your choice with one big money dump but pay as needed? And as important avoid losing a fair chunk to tax?
One possible option is a private ancillary fund. And what a private ancillary fund looks like and how it works, that is what Simone Daniells of Andreyev Lawyers in Sydney will discuss with you in this episode.
Here is what we learned but please listen in since Simone explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Private Ancillary Funds
Private ancillary funds – lovingly called PAFs – are like normal discretionary trusts with a few extra strings attached. They are like a family trust but with the sole purpose of making donations to charities.
Retain Control
Private ancillary funds allow you to retain control, meaning you get the tax deduction straight away when you move assets into the fund, but then you decide each year how much you pay to which charities.
So let’s say you make a ‘normal’ donation of $10m to a charity. The money is gone. You have no control over how this money is spent. There might be promises, but whether these are honoured or not is out of your hands.
But if you put the $10m into a PAF, you can fund specific projects and decide each year where the money goes.
Lose Control
But you also lose control by moving funds into a PAF.
1 – You now have to comply with the PAF Guidelines – officially called the Private Ancillary Fund Guidelines 2019.
2 – You need to donate at least 5% of current asset values each year (based on asset values at the start of the financial year on 1 July).
3 – You can only donate to Term 1 DGR charities, so charities that are registered as deductible gift recipients (DGR).
4 – You need at least one ‘responsible person’ on the board of your PAF, so a lawyer, accountant, teacher or similar.
5 – You need to report certain information each year that tells the ATO and ACNC how your PAF is going.
6 – You can’t reclaim the transferred funds. The money is gone. It can’t come back to you if you change your mind or your fortunes change.
7 – And if you don’t comply, your PAF loses its status as a PAF and DGR.
Set up
Setting up a PAF is similar to setting up a normal discretionary trust. You need a settlor, an original settlement sum and a deed. The difference to other trusts sits in this deed.
A PAF deed needs to meet additional requirements re beneficiaries, board members and decision making around the distribution of funds.
You also need an ABN, registration as a DGR and a board that meets the PAF guidelines.
Summary
But after that you are all set. When you now move assets into your private ancillary fund, you get a tax deduction for every cent you move across even if the money doesn’t go to charities just yet.
But a PAF also means that the money is gone. Upon vesting, the fund assets have to go to a Term 1 DGR and can’t go back to your family.
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