Private Ancillary Funds (PAFs) have been around for more than a decade and the growth in philanthropy in Australia over that time has continued to fuel the interest in PAFs.

Initially these funds were known as Prescribed Private Funds (PPFs). In 2009 the Federal Government issued fresh Guidelines (Guidelines), which brought about a substantial number of changes for PPFs. Amongst other changes, the Guidelines applied as follows:

  • “Prescribed Private Funds” were renamed to “Private Ancillary Funds” (PAFs);
  • Trustees are obliged to comply with the Guidelines. Prior to the 2009 Guidelines the ATO’s guidelines for PAFs served mainly as a guide to the ATO to determine the tax exempt status of PPFs;
  • Trustees are obliged to distribute capital and income in accordance with the Guidelines (specifically paragraphs 19 and 55 of the Guidelines). Until 30 June 2014 trustees of some PAFs still have the option to adopt the distribution Guidelines in the form of an investment plan, or to continue in terms of an existing Accumulation Plan. Prior to the 2009 Guidelines trustees of PAFs were required to prepare an “accumulation plan” (Accumulation Plan) only, and this plan was not regulated by the Guidelines.

We focus only briefly on the new obligations which trustees of PAFs face in relation to the annual distribution of capital, gifts and income.

It is FYE 2013 already

Time flies as the saying goes and the financial year end for the 2013 tax year will arrive very soon.

The question that inevitably arises at this time of the year for trustees of PAFs is whether, or how, PAFs need to comply with Guidelines when finalising their annual distributions and tax returns.

Specific questions which may arise for trustee are whether a PAF may continue in terms of an existing Accumulation Plan, or whether the Guidelines impose certain minimum distributions, or even if the transitional arrangements are still available to be followed.

I am a trustee of a PAF – what must I do in terms of distributions?

If up to now your PAF has been distributing funds in accordance with an existing Accumulation Plan, you ought to consider whether the PAF should:

  • continue with the Accumulation Plan; or
  • be governed by the accumulation a distribution rules as set out in the Guidelines.

A choice by a PAF to convert to the Guidelines in respect of any financial year must be made before the day the PAF is required to file its income tax return for the relevant financial year.

You should review whether your PAF has already converted to an investment plan that complies with the 2009 Guidelines.

I want to continue with the Accumulation Plan – how do I do that?

So you haven’t already elected in a previous tax return to distribute funds in accordance with the Guidelines?You can then distribute funds (but before 30 June 2013 so hurry up!) in terms of your existing Accumulation Plan, just as you have done in the past.

You can do that not only for the 2013 financial year but also for the 2014 financial year, if that is preferred.

Or you could distribute in terms of the Accumulation Plan for the 2013 financial year, and switch to the Guidelines’ distribution rules for the 2014 financial year and thereafter.

I want to make the switch to the Guidelines now – what do I need to do?

On or before then 30 June 2013 you must distribute to eligible beneficiaries in accordance with either Option A or Option B below:

  • Option A

Distribute:

5% of the PAF’s net assets as at the end of the previous financial year; but

with a minimum distribution of $11,000 (or the balance of the assets if the total assets are worth less then $11,000) if any of the expenses of the PAF in relation to that financial year are paid directly or indirectly from the PAF’s assets or income.

  • Option B

5% of each gift received in the previous financial year; and

all trust income within the current financial year, save for an amount equal to the 30 June capital value of the trust fund multiplied by the Consumer Price Index of the previous year, which may be retained.

This is best illustrated by way of an example:

If the PAF’s net assets were $1,000,000 and total income for 2009-10 financial years was $100,000, then:

The minimum distribution is as follows:

Option A: 5% of total capital, that is 5% of $1,000,000 = $50,000.

Option B: 100% of income, that is 100% of $100,000, less CPI of say 2.4% that may be retained, that is $2,400 = $97,600.

I have already elected Option A in a previous financial year – what should I do now?

You must only distribute in terms of Option A above.

What about the 2014 FY and beyond?

If you are adhering to an existing Accumulation Plan, you may distribute funds in accordance with your plan for the 2014 financial tax year.

If by 30 June 2014 you still have not converted to the Guidelines, you may distribute in terms of Option A or Option B above.

If you have chosen Option A in the past, or will do so for the 2013 financial year, you must only distribute in terms of Option A.

From FY 2015 and beyond all PAFs must distribute in terms of only Option A.

Do I really have to?

Once you become liable to distribute in accordance with Option A (and depending on your circumstances you may have already become liable), you could incur (or could have incurred) a penalty of 30 penalty units if the shortfall is greater than $1,000 for each of the years that you contravene (or have contravened) the Guidelines.

How do I choose between Option A and Option B, if these options are still available to me?

As to whether Option A or Option B will deliver the best result for your PAF is a mathematical equation. You should work out, based on the total capital held, and gifts and income received, which option will allow you to retain the most of your capital and/or income. Have another look at the example which is provided above.

The Guidelines have brought about lot of extra compliance obligations – is it still a benefit to have a PAF?

Benefits of a PAF include:

  • Complete control – a PAF gives you total control over how capital is invested, and the amount given each year to support your favourite charitable causes. Giving is planned and effective.
  • A family legacy – giving through a PAF inspires future generations, and provides families with unexpected and welcome rewards, as they share philanthropic values.
  • Taxation benefits – the money donated into a PAF (both now and into the future) can be tax deductible. A PAF is a tax exempt structure, and franking credits are refunded, so the philanthropic dollar goes much further.