Setting up a Private Ancillary Fund

The general definition of a private ancillary fund is a specific type of charitable trust designed solely to provide associations, individuals, or families with an investment structure for philanthropic purposes. In some cases, a private ancillary fund may be endorsed as a Deductible Gift Recipient — this allows the private ancillary fund to make donations to specific other types of Deductible Gift Recipients with donations received.

Additionally, a private ancillary fund endorsed as a Deductible Gift Recipient allows donors to claim tax deductions on the donations they make to it, within the range of $2 to $5,000. It’s important to note that while the operation of a private ancillary fund is similar in nature to a public charitable fund, it’s not possible for the private ancillary fund to invite the public to make donations to it.

There are scenarios in which a private ancillary fund may receive donations from the public, but these scenarios are limited and largely restricted. The basic operation and purpose of a private ancillary fund is as follows:

● Gifts are made to the private ancillary fund by associated parties

● These gifts are invested by the private ancillary fund, and are managed by a trustee — in most cases, a corporate trustee

● Gifts made to the private ancillary fund are, in most cases, tax deductible to the donor at the time the gift is made

● The trustee managing the private ancillary fund determines the amount and timing of distributions. Distributions from the trust be made to other Deductible Gift Recipients

There are a variety of costs associated with the establishment, management, and maintenance of a private ancillary fund. These costs can include the preparation or audit of financial statements, or the lodgement of income tax returns.

Private ancillary funds that are exempt from tax on income earned must be registered with the Australian Charities and Not-for-profits Commission (ACNC) as a charity, and must also be endorsed by the Australian Taxation Office in order to receive charity tax concessions. The potential benefits of this tax exemption make private ancillary funds an efficient vehicle for accumulating assets specifically for philanthropic purposes.

The core purpose of a private ancillary fund is to benefit communities, the environment, advance social causes, or fulfil other philanthropic objectives, but they have the additional benefit of providing founders and contributors with a variety of advantages that can include the following:

● Private ancillary funds can provide a greater degree of flexibility — donors are able to make tax-deductible donations immediately while determining which philanthropic pursuits or charities will be later

● In some cases, realized capital gains and income derived by a private ancillary fund may be tax-exempt

● Private ancillary funds can provide families or associations with the opportunity to engage in philanthropic giving and an ongoing legacy in a collaborative manner

● The funding that drives a private ancillary fund can be sustainable, allowing for the long-term contribution of donations by donors across multiple generations

Private ancillary funds can also provide individuals that have recently disposed of an asset with the ability to obtain a tax deduction in the year of sale in some cases. It’s important to note, however, that once a donation is made to the trust it cannot be revoked.

The process involved in establishing a private ancillary fund requires multiple steps, which include governance documentation, applying to governing bodies, appointing a trustee, establishing an investment strategy, following rules that dictate how donations can be accepted, and managing distributions. Find more details here.

The first step in establishing a private ancillary fund involves creating a private ancillary fund governing document. In most cases, this document takes the form of a deed trust. A private ancillary fund governing document must outline the purpose of the fund and specify the rules that will guide its operation.

The private ancillary fund governing document must also include a requirement that the private ancillary fund is maintained in order to ensure donations it receives are for charitable purposes and not business or private purposes.

Subsequent to executing the private ancillary fund’s trust deed, applications must be made to the Australian Taxation Office for the following:

● Deductible Gift Recipient
● Australian Business Number
● Goods and Services Tax (GST)
● Tax withholding and/or Fringe Benefits Tax purposes
● Tax File Number
● Income Tax Exempt Charity

An application must also be made with the Australian Charities and Not-for-profits Commission (ACNC) in order to obtain charitable status.

In order to protect the property of a private ancillary fund and operate it, a trustee must be appointed. There are a number of rules that govern the role of a trustee that must be followed. These rules dictate who can become the trustee of a private ancillary fund, what their responsibilities involve, and how they will develop or maintain the private ancillary fund’s investment strategy, distributions, and liability.

A private ancillary fund must develop, maintain, and operate in accordance with a written investment strategy. This investment strategy must address all key objectives of the private ancillary fund, the investment methods that will be used to achieve them, and any potential risks. All future decisions made by the private ancillary fund must be made in accordance with this written investment strategy.

There are a number of rules that dictate how a private ancillary fund interacts with donors. Most importantly, a private ancillary fund can not solicit any donations from the public.

There are rules that govern all distributions from a private ancillary fund. These rules include how much a private ancillary fund must distribute annually. The trustee of the private ancillary fund must develop and maintain this distribution strategy — failing to comply with the various obligations that distributions are subject to can result in significant penalties.

Private ancillary funds can function as a highly structured means of giving. The highly regulated nature of private ancillary funds, however, means that they are complex. The establishment and maintenance of a private ancillary fund demands expert legal, tax, and financial advice in order to remain compliant, such as making minimum annual distributions or lodging reports.

All private ancillary funds are regulated by the Australian Charities and Not-for-profits Commission and are obligated to adhere to the Private Ancillary Fund Guidelines 2019 (Guidelines). Private ancillary funds must also apply for endorsement as a tax concession charity from the ATO and are subject to the relevant income tax laws and requirements of the State trustee legislation relevant to them.

Private ancillary funds can function as a highly structured means of giving. The highly regulated nature of private ancillary funds, however, means that they are complex. The establishment and maintenance of a private ancillary fund demands expert legal, tax, and financial advice in order to remain compliant, such as making minimum annual distributions or lodging reports.

The Private Ancillary Fund Guidelines 2019 (Guidelines) cover a wide range of matters relevant to the operation and maintenance of a private ancillary fund. These guidelines include:

● Private ancillary funds must be established and operated from Australia solely to benefit other charities — specifically, Deductible Gift Recipients

● A private ancillary fund must be a not-for-profit

● Any surplus generated by a private ancillary fund must be directed towards executing the purpose of the private ancillary fund entity

● A private ancillary fund’s trustee is obligated to exercise appropriate skill and care when managing the fund

Private ancillary funds, in general terms, must distribute a minimum of five percent of the assets held by the fund as valued at the previous 30 June to Deductible Gift Recipients annually. Should the private ancillary fund’s expenses be met from the assets of the fund, the minimum distribution is subsequently set at $11,000 or the remainder of the fund and five percent of assets.

In specific circumstances, the private ancillary fund may apply to the Australian Taxation Office in order to have the minimum distribution amount reduced for a single financial year.

There are a number of investment restrictions that apply to private ancillary funds. A private ancillary fund is unable to invest in or borrow collectibles, for example. Investments made by a private ancillary fund must be at arm’s length, and the trustee is unable to give security over an asset held by the fund.

There are no specific legal requirements that dictate an exact minimum amount of cash or assets that must be met in order to establish a private ancillary fund. There are several factors that determine whether a private ancillary fund can be effectively established, such as whether maintaining a private ancillary fund is economically feasible.

The economic feasibility of a private ancillary fund is determined by factors such as whether a trustee is able to perform relevant duties themselves, or must outsource duties and tasks to third parties at an expense.

Private ancillary funds, in most cases, take a significant amount of time and expertise to establish and manage. Economically feasible private ancillary funds typically require a substantial initial investment in order to operate in a cost effective manner.

Before you establish a private ancillary fund, it’s important to consider the amount of capital or value of the assets you plan to give, the time frame in which you plan to give, and the level of engagement you’d like to have with the donation process.

You may not need a philanthropic structure such as a private ancillary fund if you are only giving a single one-off donation or are only giving within a short time frame. Similarly, a private ancillary fund may not be the best philanthropic vehicle for you if you are giving a relatively small amount on an annual basis, or if tax deductibility is not a requirement. In some cases, it may be easier for an individual to directly give a tax deductible donation to a charity.