Philanthropy not-for-profit welcomes ATO clarity on PAFs

APS, a not-for-profit organisation which supports ‘tax effective’ giving through PAFs, said the draft determination TD 2025/D3 would support charitable trustees and donors to act confidently and compliantly.

“Private and public ancillary funds have supported Australians on their philanthropic journey for around 25 years, and additional guidance is welcome as they continue to build and evolve as important instruments of philanthropy,” Judith Fiander, chief executive of APS, said.

“The ATO has a right and responsibility to audit, data-match, and, where necessary, impose penalties on anyone who misuses the system.

“Such oversight is essential, and we are committed to working with regulators to ensure that the framework for ancillary funds remains transparent and trusted.”

In its draft ruling, the ATO defined a ‘benefit’ as any advantage, gain or improvement of position, not limited to money or property. It could be immediate, future, contingent or arise by removing a liability or burden.

PAFs were required to make minimum annual distributions to deductible gift recipients (DGRs), currently set at 5 per cent of the fund’s total value. The ATO said that a benefit only counted as a distribution if the DGR actually received it, if it was objectively ascertainable, provided a real advantage, had a market value, and represented a net benefit.

According to the Productivity Commission, approximately $11.6 billion was held in PAFs in 2020–21. Approximately half (49 per cent) of PAFs distributed between 5-6 per cent of their net assets, hovering just above the minimum distribution rate.

The tax office added that ancillary funds benefited from favourable tax treatment, with income generally exempt from tax and donations deductible. As these concessions could be otherwise misused for private benefit, the ATO noted that funds must meet strict conditions to retain their PAF status.

Since launching 13 years ago, the APS said its clients had donated over $1.3 billion and earmarked $2.4 billion for future charitable use. It added that cases of misuse appeared minimal.

“We believe cases of misuse among more than 2,400 PAFs are extremely rare. In our experience as administrators of the largest pool of PAFs in the country, our clients are diligent, compliant and motivated by genuine philanthropic intent,” Fiander said.

The APS also said that the government’s proposal to lift the minimum annual distribution rate from five per cent to eight per cent could have unintended negative consequences.

“A higher mandatory minimum distribution rate will discourage individuals and families from establishing a giving fund or encourage existing donors to leave philanthropic capital in less structured, and less transparent, vehicles such as family trusts or private companies,” Fiander said.

“That could reduce the overall pool of capital available to charities in the long run. Exactly the opposite of what the community needs.”