The Government has recently released the Private Ancillary Fund and Public Ancillary Fund Amendment Guidelines 2016 (Amendments), which apply from 5 May 2016.

The Amendments makes a number of small, but important, changes to both the Private Ancillary Fund Guidelines 2009 (PAF Guidelines) and Public Ancillary Fund Guidelines 2011 (PuAF Guidelines).

The Amendments will affect you if you are:

  • on the governing body of a Public Ancillary Fund (PuAF) or a Private Ancillary Fund (PAF)
  • looking to establish a PuAF or a PAF
  • an accountant, lawyer or other professional advisor assisting PuAFs or PAFs.

What changes have been made?

The Amendments introduce changes which:

  • align the PAF Guidelines with the PuAF Guidelines
  • broaden the range of individuals who may qualify as responsible entities
  • introduce portability into the PAF Guidelines, by allowing a PAF to transfer its assets to another ancillary fund if certain conditions are met and the Commissioner agrees to the transfer
  • allow smaller private funds to seek a review instead of an audit
  • give the Commissioner of Taxation ( the Commissioner) the power to lower the annual minimum distribution rate of a fund in appropriate circumstances
  • update the investment strategy rules to, among other things, ensure that funds consider their status as a registered charity and any conflicts of interest in preparing and maintaining a strategy
  • remove red tape by ensuring that material provided to the Australian Charities and Not-for-profits Commission (ACNC) is not required to be provided separately to the Australian Taxation Office
  • update the PAF Guidelines and PuAF Guidelines to reflect the introduction of the ACNC
  • allow ancillary funds to provide loan guarantees over borrowings of DGRs
  • provides further examples to aid in determining the value of a distribution, by specifying how the market value of that distribution is to be calculated
  • remove references to the Australian Valuation Office following its closure on 30 June 2014
  • repeals spent and redundant guidelines.

Further details regarding some of the important changes

Minimum ancillary fund distribution rate

The Amendments have retained the current minimum annual distribution rate of 4% for PuAFs and 5% for PAFs, but provided the Commissioner with discretion to reduce this rate in certain circumstances.

In exercising this discretion, the Commissioner must have regard to a number of factors, including the:

  • general market conditions
  • returns from the fund’s investments
  • impact of not making the reduction
  • level of distribution in prior years
  • fund’s investment strategy
  • size of the fund
  • fund’s compliance history
  • fees and expenses of the fund.

The introduction of this discretion is designed to provide additional flexibility to assist funds in exceptional circumstances, such as where a fund receives a large gift which is subject to investment limitations, or where a fund has made large distributions in prior years. The Commissioner may choose to apply his discretion but also impose conditions on the PuAF or PAF.

To request an exercise of the Commissioner’s discretion, a PuAF or a PAF must meet all of its annual lodgement obligations and make an application in writing to the Commissioner providing the necessary fund details.

Reducing red tape in reporting

For both PuAFs and PAFs, the Amendments prevent reporting duplication and reflect the introduction of, and the role played by, the ACNC by:

  • providing that a fund need not report to the Commissioner if it is already required to report to the ACNC
  • clarifying that compliance with the ACNC reporting requirements will satisfy the requirements in the PAF Guidelines and PuAF Guidelines for funds that are registered charities.

Additionally, private ancillary funds with revenue and assets of less than $1,000,000 have the option of seeking a review of their financial report and compliance with the PAF Guidelines rather than a full audit, which will reduce compliance costs from audit fees.

Updates to investment strategy rules

Following a review by the ATO into ancillary fund compliance, it was discovered that a small number of funds had imprudent investments with related parties, or had entered into a number of related party transactions with donors and founders of the fund.

As a consequence, the Amendments adjust the matters that trustees must consider in developing and maintaining their fund’s investment strategy, which must reflect the purpose and circumstances of the fund. In addition to the current mandatory considerations (such as the risk, composition and liquidity of the fund’s investments), the strategy must have particular regard to:

  • the status of the fund as a registered charity (if it is one)
  • any perceived or actual material conflicts of interest in holding particular investments, including those relating to individuals involved in the decision making of the fund
  • the terms and circumstances relating to any gift to the fund under a will, particularly where the gift is large such that the it cannot be quickly and easily divested to comply with the investment strategy rules.

Practically, this means that annually the trustee must consider and document these matters in its investment strategy. The trustee must consider and act in accordance with these matters and the broader investment strategy. Failing to produce the investment strategy to the Commissioner when requested, or to implement the investment strategy, is a penalty under both sets of guidelines.

Moreover, this stricter approach has been further supplemented by a slight increase (of 5 penalty units) in the penalty imposed for failure to comply with the investment strategy rules.

Responsible person requirements

One final point to note is that the responsible person requirements have been broadened and now include any person who can witness a statutory declaration. While there is some overlap with the categories of people who were already listed as ‘individuals with a degree of responsibility to the Australian community’ such as anyone who belongs to a professional body with a code of ethics and rule of conduct, it can now also include people with 5 or more years of experience as, for example, nurses, bank officers, government employees, teachers.

Portability requirements

In the case of PAFs, the Commissioner can now consent to the transfer of a PAFs assets to another ancillary fund subject to certain requirements. This provides more flexibility for PAFs who may wish to wind up but rather than transfer their net assets to a DGR, are now able to transfer them to another PAF or PuAF.