Q. I have recently sold a family business and I face a substantial tax bill for Capital Gains. I have been told I could establish a Charitable Trust to offset the tax; I would receive a 100% tax deduction for any contribution made and I choose how and when to give the funds to charitable organisations. Could you please explain if this is correct and what options I have.
A. The traditional approach to philanthropy in Australia is to donate a lump sum directly to a charity or to leave a bequest in a will. However there are alternatives that enable a benefactor to establish a Charitable Trust whilst alive. The benefactor receives the tax advantages of a lump sum donation plus retains the flexibility to give on a regular basis to various charitable organisations of their choice. There are 2 main types of Charitable Trust structures that you could consider; Public Ancillary Funds (PuAF) and Private Ancillary Funds (PAF).
Public Ancillary Funds (PuAF) utilise an existing Public Trust or Community Foundation and creates a special sub account for the benefactor’s contribution. PuAF’s are recommended for those who want to contribute a smaller amount. Benefactors need to be investing at least $20,000 to make a PuAF viable. A PuAF enables the benefactor to have control and direction over which charitable organisations they give to on an ongoing basis. Ongoing responsibility for Management and administration is handled by the Public Ancillary Fund as Trustee rather than by the benefactor.
Private Ancillary Funds (PAF) are individual Charitable Trusts established by an individual, family or company benefactor. A PAF is perpetual and thereby allows for intergenerational giving. PAF’s are suitable for those who can afford to donate at least $300,000 as a lump sum. A PAF provides flexibility and control over investment decisions as well as control over giving to eligible charities or organisations.
The ongoing management and responsibility of a PAF is similar to the duties and obligations of a Trustee of a Self Managed Super fund. Unlike a SMSF, a PAF must have a Corporate Trustee. The PAF trustee bears full responsibility for investment, administration, grant making and complying with the law.
The PAF must appoint an Independent director who is not a family member or a related party. The independent director must be a “responsible person”; generally someone who has responsibility to the broader community and is a member of a professional body that is bound by a code of ethics and rule of conduct.
Income earned within the PAF is generally tax exempt. PAFs are obligated to distribute 5% or $11,000 a year whichever is the greater to eligible charities or organisations. To be eligible, an organisation must satisfy the ATO requirements of a Deductible Gift Recipient.
For those looking for a more structured and consistent approach to giving, PuAFs and PAFs offer considerable flexibility and control. Ongoing donations can be made at any time. Once donations are made to the fund, they must be used for charitable purposes. Donations to either PuAF or PAF attract the same tax deductions as making a donation directly to a charity. Tax deductions can be claimed as a lump sum in the year of donation or spread across five years. For those on a high income, there can be significant tax advantages in this approach.
An alternative for those wishing to leave a legacy on their death is a Testamentary Trust. Members of the family can be appointed Trustees of the fund on the benefactors death. Testamentary trusts differ from PuAFs and PAFs as the beneficiaries don’t have to be a Deductible Gift Recipient, making the options for giving wider.
The establishment of a Charitable Trust is not just for the mega wealthy, since 2001 there have been over 1100 PAFs established with assets of over $3 billion dollars giving $200 million a year to charitable organisations. Charitable Trusts provide an opportunity to provide a lasting legacy that you and your family can be involved in whilst you are alive and for future generations.
Establishing a PAF is not simple and requires expert advice. For further information speak with your Financial Adviser or Accountant or contact Philanthropy Australia. www.philanthropy.org.au.