The short answer to this question is, ‘yes’.
However, you need to carefully step through a number of constraints and hurdles. If you do not meet these requirements, then you will be in breach of the Taxation Administration (Private Ancillary Fund) Guidelines 2019 (the Guidelines), the consequence of which is likely to be a penalty.
First, the core purpose of setting up a PAF is to confer donations on Item 1 Deductible Gift Recipient (DGR) organisations. (Guideline 8) Once money has been contributed to the PAF it belongs to the ‘public’ and should not be used for any other purpose. Acquiring an asset from the founder (or associate) has the potential to confer a benefit on these parties, which would be contrary to this core purpose.
The PAF must have in place a formal Investment Strategy that governs how the PAF invests its surplus funds pending the donation of those funds to DGR charities. (Guideline 20) The acquisition of the asset from the founder (or associate) must clearly fall within the terms of the Investment Strategy. (Guideline 20(4)) This means that the asset must be of a type that the PAF has indicated an intention to invest in (e.g. a listed security, real property, etc), and otherwise align with the objectives of the fund and the investment strategy (e.g. meet any relevant ESG profile, etc).
There is a specific prohibition against a PAF acquiring an asset from the founder (or associate). (Guideline 21(7)) Importantly, there is an exception to this prohibition if the asset is acquired ‘by way of an arms’ length commercial transaction’ (Guideline 21(7)(c)) or ‘on terms each of which is more favourable to the fund than would otherwise be expected under an arms’ length transaction.’ (Guideline 21(7)(d)) For this reason, we recommend that any asset acquired by the PAF from the founder (or associate) be acquired on terms slightly more favourable than arm’s length terms, (e.g. at a slight discount).
There is also a specific prohibition against a PAF entering into an uncommercial transaction with, or conferring benefits on, the founder, a donor (or their associates). (Guideline 22) With respect to acquiring an asset of the founder (or associate), this prohibition does not add much to the prohibition in Guideline 21. However, it is relevant if the asset into which the PAF has invested thereafter has some uncommercial dealing with the founder, donor or associate.
In summary, a PAF can acquire an asset from the founder (or associate). However, the transaction must be consistent with the PAF’s Investment Strategy and entered into (and maintained) on an arm’s length commercial basis.
If you would like to speak to one of our experienced lawyers about your PAF, call us on 1300 654 590or email us.
You can also download one of our PAFs booklets here.
The information contained in this post is current at the date of editing – 26 April 2023.