Preserving a system of philanthropy that works, while encouraging more Australians to embrace giving and increasing the flow of social capital to the thousands of charities our community relies on, is something we can all get behind, writes Judith Fiander.
Thanks to the largest intergenerational wealth transfer in the nation’s history – an estimated $5.4 trillion – we have an unprecedented opportunity to improve the flow of much-needed capital into the community sector and embed charitable giving deeply into our culture.
However, momentum in the space of structured giving could soon be reversed if the federal government lifts minimum distribution requirements for philanthropic private ancillary funds (PAFs) from the current 5 per cent to potentially as high as 8 per cent. To be clear, what is being discussed is raising the minimum – it’s not a ceiling. Many ancillary funds can and do give much more than 5 per cent, either as part of a plan to spend down the ancillary fund within a certain time or because they are fortunate to have the wherewithal to continue to top up the fund each year.
More now, less later, and not even more now...
On the surface, this may sound like a logical push to send more money to charities more quickly. But in practice, it will achieve the reverse. It’s a move that risks dismantling a system that has quietly enabled billions in charitable donations and long-term community investment since the introduction of PAFs over two decades ago.
ATO data and the Productivity Commission’s 2024 report, Future Foundations for Giving, show that structured giving is additive to the pool of giving – that is, PAFs and public ancillary funds (PuAFs) capture funds for the charitable sector that otherwise would not have arrived to charities directly. These are new funds committed to benefit the community.
Growing this pool of philanthropic capital could be helped by huge societal and economic changes as Australia experiences the largest intergenerational wealth transfer in its history, fuelled by decades of rising property and share values. Just a small sliver of that $5.4 trillion would make such a difference.
However, raising the PAF minimum distribution rate of 5 per cent risks both reducing long-term charitable giving in Australia and compromising the opportunity offered by the huge wealth transfer starting to take place.
Even Treasury’s own modelling shows that raising the minimum distribution rate could mean fewer dollars reaching charities in the long term, directly undermining the government’s 2030 target of doubling giving. Chart 2 in the Treasury consultation paper, drawing on real historical data, shows that if the PAF minimum distribution rate is raised from 5 per cent, Australian charities would enjoy an increase in philanthropic donations for about the next 18 years – and then a sector-wide decline would occur as the pool of funds runs down. It’s just maths.
Even the increase predicted during the early years assumes new PAFs and PuAFs continue to be established at the current rate. However, history has shown that any uncertainty around the rules reduces the number of new ancillary funds being established and not just for a year or two, but for several years. Taken together, increasing the 5 per cent would result in less money to charities in the longer term and less money to charities in the short term because of fewer new funds being established. Treasury acknowledges that if donors choose not to establish a structure where the money is irrevocably gifted to the community, there is no guarantee that the money instead goes directly to charities.
The decline in new structures and in giving over time from already established structures is alarming when one considers the complex, ongoing, often intergenerational issues with which the charity sector wrestles. Homelessness, poverty, climate change mitigation, and adaptation – these are intractable issues that take time and patient capital to resolve. These are precisely the types of issues that long-term, ongoing, sustainable sources of philanthropy are uniquely well-placed to support. Given the scarcity of this type of enduring, flexible funding available to charities in the long term, why would we take any action to curtail it?
If it ain’t broke…
So far, the PAF system has worked well, and we believe the core principles of the PAF model do not need changing. Since the structure was introduced by the Howard government in 2001, PAFs have provided more than $7 billion to charities, while preserving long-term capital and encouraging generosity by more Australians.
At Australian Philanthropic Services (APS), we’ve seen it ourselves. Since opening our doors 13 years ago as a charity on a mission to grow giving in Australia, APS clients have given over $1.3 billion to charities and now have more than $2.4 billion irrevocably donated into ancillary funds we administer, quarantined for community purposes, now and in the future.
One of the key elements influencing the success of ancillary funds to date has been stable policy settings and a consistent compliance regime.
Raising the minimum distribution rate will deter the establishment of new philanthropic structures by increasing the minimum threshold to entry, while forcing many existing structures to eat into their capital to offset distribution requirements, limiting their ability to provide sustained funding for years to come.
Worse still, it sends a signal that the rules are subject to change, which will be a red flag for donors making multi-year giving commitments. Sudden regulatory shifts erode confidence. Stability breeds generosity. Constantly changing rules do not.
But fundamentally, the system isn’t broken. We strongly believe that modifying a policy framework that is working well is potentially destructive of Australia’s pool of future philanthropic capital. The risk of unintended consequences is higher when there is no problem to solve.
In fact, the Productivity Commission was very clear about what is broken in the sector, and it is the currently confusing deductible gift recipient (DGR) system applied to charities. After multiple reviews and reports, there is widespread support for change in this area. The time has come for action.
Let’s focus on the real challenge: Increasing generosity
ATO data shows that only half of all Australians earning $1 million or more claim any tax-deductible donation to charities. Let’s work on encouraging more people of means to give, rather than focus on discouraging those Australians who are already giving.
There are now more than 3,000 ancillary funds in Australia, managing billions in capital committed to the community. The number of these vehicles could grow enormously with just a small amount of the $5.4 trillion moving from one generation to the next over the coming two decades.
Preserving a system of philanthropy that works, while encouraging more Australians to embrace giving and increasing the flow of social capital to the thousands of charities our community relies on – now, that’s something we can all get behind.
Judith Fiander is the CEO of Australian Philanthropic Services.
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