There are now 1,240 private and public ancillary funds operating across Australia who collectively distribute well in excess of $251 million to charities each year.
If you are interested in joining the philanthropic community and setting up a public or private ancillary fund before 30 June 2015, now is the time to begin establishing the fund.
Why act now?
Private and public ancillary funds are efficient, low cost and tax effective structures for charitable giving. A key advantage of the structures is that funds are able to be endorsed as income tax exempt and as a deductible gift recipient meaning that donors are able to claim a tax deduction for any donations made to the fund.
In order to establish a fund as a charitable private or public ancillary fund, an application needs to be made to the Australian Charities and Not-for profits Commission (ACNC) for endorsement as a registered charity before any application for income tax exemption or deductible gift recipient status can be processed by the ATO.
Establishing an ancillary fund can take time depending on how easy it is to collect information, prepare and execute the relevant documentation and how long it takes for an ancillary fund to be endorsed by the ACNC and the ATO.
The closer we get to 30 June 2015 the more pressure there is on the ACNC and the ATO to process endorsement applications and the longer it may take for foundations to actually get endorsed.
Accumulation & minimum annual distributions
The Public Ancillary Fund Guidelines (Guidelines) commenced on 1 January 2012. The Guidelines provide that for the first four financial years following the establishment of a public ancillary fund, the fund will not be required to make any distributions and can instead accumulate its income and assets.
If your public ancillary fund was established in the income year ending 30 June 2012, this financial year will be the last year your fund can accumulate and not make any annual distribution. From 1 July 2015, your fund will need to make a minimum annual distribution of at least 4% of the market value of the fund’s net assets or $8,800, whichever is greater.
Traditionally, entities that wished to carry out fundraising activities and be endorsed as deductible gift recipients generally needed to be established as private or public ancillary funds. However, following recent case law developments there may now be opportunities to establish different charitable giving vehicles such as public benevolent institutions (PBIs) and health promotion charities (HPCs).
Unlike private and public ancillary funds who are endorsed as income tax exempt and as deductible gift recipients, PBIs and HPCs have access to additional tax benefits including an exemption from fringe benefits tax.
What should you do?
If you want to establish an ancillary fund or other charitable organisation and make deductible donations to that organisation in your 2014-2015 income tax return, we recommend taking steps to establish the fund or organisation now to allow sufficient time for the ACNC and the ATO to consider and approve the application.