Below is Chapter 10 of our ‘Private Ancillary Funds’ booklet. To read the other chapters of our booklet, click the links below:
- Chapter 1 – Giving back to the community
- Chapter 2 – Brief history
- Chapter 3 – An overview of ancillary funds
- Chapter 4 – What is a PAF?
- Chapter 5 – Who can be a trustee of the PAF?
- Chapter 6 – How are PAFs regulated?
- Chapter 7 – What are the audit requirements for a PAF?
- Chapter 8 – Governance
- Chapter 9 – Winding up a PAF
- Chapter 11 – Are they a good option for you?
- Chapter 12 – Overview of a PAF
Common questions about PAFs
Are PAFs subject to any borrowing restrictions? If so, are there any exceptions?
A PAF cannot borrow money except in very limited circumstances. If a PAF decides to borrow money it must meet all the following criteria:
- The borrowing of money must be to enable the trustee to make a donation that must be made under the Guidelines and the trustee would be unable to make if not for the borrowing;
- The borrowing does not exceed 90 days; and
- The borrowing would not result in borrowings exceeding 10% of market value of the PAF’s assets.
If the PAF fails to meet all the borrowing restrictions it may be subject to penalties.
Are there any stamp duty exemptions that apply for a transfer of property into a PAF?
There is a stamp duty exemption available for the transfer of property into a PAF but it is subject to some restrictions. The PAF must demonstrate that:
- The PAF has been established for charitable purposes; and
- The property will not be used for commercial or business purposes.
A PAF is not allowed to run a business. This means that you cannot transfer any properties that are used to run or operate a business into the PAF. However, properties that are used to derive rental income to distribute are considered permissible and do not fall under the business operation restriction.
Any real property held by the PAF must be valued at last once very 3 years through a certified and independent valuer.
Can a donor claim a tax deduction for the value of real property donated into a PAF? If so, what is the method of determining the value of the donation?
A donor can donate real property to a PAF and claim a tax deduction if:
- The property was purchased within 12 months of the donation; or
- The property is valued over $5,000.
If the property was not purchased, or in other words it was not acquired through the sale for money or some other form of payment, then the donor may not be able to claim under the first gift type. For example, property that the donor received as a gift, won or inherited is not considered ‘purchased property’ and is not tax deductible under the first gift type.
If the property is valued by the ATO at more than $5,000 then the donor may be able to claim a tax deduction. This valuation must be done by the ATO for the purpose of determining the applicable tax deduction. More information about obtaining an ATO valuation for donations can be found on the ATO website.
We recommend that the donor obtain specific advice from a tax accountant to ensure that the donation is correctly recorded, and the deduction is appropriately claimed.
Can a PAF run a business?
A PAF is prohibited from ‘carrying on a business. Under the PAF Guidelines, the trustee of a PAF must ensure that the PAF does not carry on a business but if the PAF has passive income activities this does not necessarily mean that the fund is carrying on a business. For example, if the PAF holds or deals with investments like shares or rental properties for the purpose of deriving income to be distributed to eligible DGRs, then it will not contravene the restriction.
If a PAF was operating as a trading entity or was found by the ATO to be carrying on a business in the circumstances, it may be subject to penalties.
Can I stay anonymous?
This is an issue that seems to weigh heavily on some philanthropists who want to do good, but don’t want to go public or be the subject of unsolicited requests for donations.
There are specific exemptions regarding details that are required to be entered on the (otherwise public) ACNC Register.
The following details can be withheld for PAFs:
- Name and ABN of the PAF;
- Contact details of the PAF (including address for service);
- Governing rules;
- Name of responsible person / entity;
- Information in Annual Information Statement; and
- Information in financial report, audit, or review report.
Do PAFs have a prescribed ‘expiry date’ / time limit (also known as a ‘perpetuity date’ and ‘vesting date’)?
Most trusts don’t last forever and have an ‘expiry date’, where the trust must ‘die’ and be wound up. A PAF will be subject to this expiry date if it has been established in all states in Australia, excluding South Australia.
If the PAF is established in South Australia, it is not subject to a mandatory expiry date – unless this is specifically included in the trust deed. However, if the PAF holds assets that are located in other states (like property), then it may still be subject to that expiry date.
The trust deed of the PAF will outline when the trust vests and under what conditions. You may wish to nominate certain objectives or events which would cause the trust to be wound up.
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The information contained in this post is current at the date of editing – 26 March 2024.