To help decide which structure is most suitable, an important first question is whether to establish a charitable fund while alive or after death.
If the former, the next questions to consider are how much you can initially donate to establish the fund and how involved you want to be in the fund’s investment and granting strategies.
Public ancillary fund
A public ancillary fund (PuAF) is usually managed by a trustee company, which allows individuals with smaller amounts available for an initial donation to establish a charitable sub-fund during their lifetime. The sub-fund can accept future donations from the individual, family members and the broader community. All donations received by the sub-fund are tax deductible.
The sub-fund can be named, which effectively establishes a legacy that can transition across many generations into the future. Those who set up the sub-fund can be involved in decision-making regarding granting, thus helping to direct income to causes about which they feel passionate.
A key benefit of this approach is that the minimum initial donation is $20,000, which is lower than other structures, and the tax deduction from the initial donation can be spread over five years. Charitable trusts are designed to support growth capital over time, while generating sustainable income for granting distributions. All the investment, compliance and administrative requirements are undertaken by the trustee.
Private ancillary funds
Aprivate ancillary fund (PAF), like that run by former Westpac boss Gail Kelly and her family,is established by an individual via a deed but is only able to receive future, additional donations from the original donors. As a standalone trust, the fund’s financial statements must be annually audited and an appropriate investment strategy must be implemented and regularly reviewed.
The minimum initial donation is about $200,000. This initial donation provides sufficient capital to generate required income, in line with annual minimum distribution requirements (at least five per cent each year of the fund’s net value or $11,000, whichever is greater), as well as meeting administration, reporting and compliance costs.
A testamentary trust is established via a clause in a will after you die. As the trust is established upon death, the funds donated into the trust are not tax-deductible. The trust is administered by the appointed trustee into perpetuity. Usually initial capital of at least $50,000 is required to ensure the trust is viable.
A key difference with testamentary trusts is there are fewer limitations on the charitable entities to which the trust may grant funds. This can provide you with broader options for granting.
Importantly for each these charitable structures, all income and capital growth have tax-free status, as they are endorsed by the ATO as tax-exempt.
Individuals are also able to grant directly to a broad range of charitable entities and programs and, in many cases, receive an associated tax deduction. This can be particularly useful for those on a high income seeking a more significant diversity of granting options. Of note is the requirement for property or other chattels donated to be valued by the Australian Tax Office at greater than $5000. Individuals can claim any applicable tax deductions in the income year in which the donation is made, or spread the deduction over the four income years immediately after the donation.
Regardless of which structure you choose, all provide the benefit of enabling people to become involved in the causes that are most important to them and their families, and often bring family members across multiple generations together to consider and discuss their philanthropic values and legacy.
Emma Sakellaris is executive general manager of Australian Unity Trustees Limited.