For families with significant wealth who want to create a lasting impact and legacy through structured charitable giving, Private Ancillary Funds (PAFs) can be an attractive solution.
A PAF is a private charitable entity that allow families to manage their donations thoughtfully and strategically. While there is no minimum initial setup, generally speaking, most are established with an asset base of $500,000 or more and generally exceed $1 million or have the capacity to be built towards that base over time. In many respects, they are similar to a self managed super fund but with a charitable and not retirement income objective.
As of last year, there were over 2,000 registered PAFs.
Let’s look at how they work and why they might be a valuable tool for your family’s charitable goals.
What is a Private Ancillary Fund (PAF)?
A PAF is a private trust designed to allow families to support charitable causes over the long term. Established under Australian law, PAFs enable individuals, families, or companies to make tax-deductible contributions into a trust, which then distributes funds to eligible charities.
By creating a PAF, families can ensure that their charitable goals are met with consistency, providing support to chosen causes over years or even generations. Many families also see it as a unique opportunity to engage younger generations in philanthropy, financial management, and investment strategy. In addition it offers tax advantages.
Tax Advantages of a PAF
One of the key benefits of a PAF is its favourable tax treatment, which offers families several incentives to donate:
Tax deduction on contributions:
- Donations to a PAF are tax deductible in the financial year they are made, subject to specific limits. This can provide an immediate tax saving for families or companies establishing a fund. This can be particularly useful if there is a sale of an asset or business that has a large capital gains tax liability.
Tax free growth on earning inside the PAF:
- Investments held within the PAF grow free of income tax and capital gains tax. This allows the fund to preserve more of its earnings, maximising the pool of assets available for charitable purposes.
How PAFs work: Key Requirements and Structure
Setting up a PAF involves several requirements and costs, and it’s important to work with trusted advisers to manage these effectively.
Initial Funding:
- Typically, a PAF is established with an initial contribution to ensure sustainability and cover associated costs.
- Funds are held in trust, invested, and grown over time, with annual distributions made to charitable organisations.
Ongoing Requirements:
- Minimum Distribution: Each year, a PAF must distribute at least 5% of the market value of the asset base or a minimum of $11,000, whichever is greater, to eligible charities. This ensures regular contributions to philanthropic causes and helps cover fund expenses and yet still provides an opportunity for the PAF to grow its asset base even if there are no annual contributions.
- Administration and Compliance: PAFs require regular reporting and must comply with Australian Charities and Not-for-profits Commission (ACNC) standards. Accounting and in some cases auditing fees and financial advice (if needed) fees should be factored into the fund’s running costs.
- Trustee Duties: Trustees manage the fund’s assets and investment strategy, often with input from financial advisers who help design a portfolio that aligns with the family’s values and financial goals.
3. Investment Strategy:
- A successful PAF balances growth and stability. Advisers typically help structure the portfolio to ensure liquidity to meet the minimum distribution, preserve capital, and diversify investments.
- This strategy can incorporate a mix of shares, fixed-income assets, and other vehicles to achieve a balance of growth, income, and risk management.
Benefits of a PAF: More than just charitable giving
Beyond fulfilling a family’s charitable goals, a PAF can serve as an educational tool for younger generations. It allows family members to gain hands on experience with concepts like portfolio construction, market diversification and liquidity.
Involving children in managing a PAF can be a rewarding way to pass on values around both financial stewardship and philanthropy. By working with an adviser, family members can learn to:
- Understand asset allocation and the importance of diversified portfolios.
- Make informed decisions in share and debt markets.
- Appreciate the responsibilities and impact of structured charitable giving.
Is a PAF right for your family?
While there is no minimum asset value, the establishment and ongoing costs as well as the time commitment involved generally means this is more suitable for families that have the ability to make fairly large contributions, or have the ability to make reasonable contributions over time. They are therefore not appropriate for the majority of people. However, if your family has a strong commitment to philanthropy and can meet the financial requirements, a PAF could be an ideal solution. It provides a flexible, structured and tax-effective way to support causes you care about and serves as an investment in your family’s financial literacy and philanthropic legacy.
If you’d like to know more about PAFs, please reach out to discuss how this entity could work for your family’s goals.
