Booklet: Private Ancillary Funds (PAFs) (Chapter 4 – What is a PAF?)

Booklet: Private Ancillary Funds (PAFs)

Below is Chapter 4 of our ‘Private Ancillary Funds’ booklet. To read the other chapters of our booklet, click the links below:

What is a PAF?

A PAF’s governing rules must clearly set out that it is established and operated as a not-for-profit entity.

A PAF is a sole purpose trust.  It can be established while you are alive by an instrument of trust, or it can be set up under your Will.  It requires Australian Taxation Office approval for tax concessions.  Its operation is governed by its trust deed, the Guidelines, the trust laws of each State and Commonwealth legislation.  A more complete list of the relevant legislation is found in the attached Schedule: Legal Framework. 

Unlike a family trust or discretionary trust, which may have a range of purposes and distribute income and capital to a wide range of beneficiaries within a family group, a PAF’s sole object is charitable, and its class of beneficiaries is limited to charities that are registered with the ACNC as Deductible Gift Recipient (DGR) charities. 

To qualify as a PAF, the fund must have the following key components: 

  • It must be not-for-profit and philanthropic in character; 
  • It must be established and operate only in Australia; 
  • It must have a corporate trustee (not individuals); 
  • It must only provide money, property or benefits to charitable organisations that are endorsed as DGR charities; 
  • It must have at least one director of the corporate trustee who is a ‘responsible person’; 
  • It must maintain a current investment strategy; and 
  • With the exception of the first year, each year it must distribute the ‘minimum annual amount’ (currently the greater of 5% of the market value of the fund’s net assets or $11,000, unless otherwise agreed by the Commissioner of Taxation).

What is the purpose of a PAF?

A PAF’s governing rules must clearly set out that it is established and operated as a not-for-profit entity, with any surplus generated directed towards the functioning of the PAF or distributed to DGR registered charitable organisations.  This means that the fund cannot operate a business or provide profit or personal gain to its members.  This does not mean that the PAF cannot make a profit, but rather that any profit generated must be used solely for the purposes of the fund. 

A PAF must be philanthropic.  This means that a PAF’s constitutional documents must reflect the charitable purposes of the PAF which must be maintained and evidenced through the lifespan of the PAF.  When establishing the trust, you may decide to specify that the PAF has a particular philanthropic focus (for e.g. medical research) or allow flexibility in how and where funds are directed. 

Who can donate to the PAF?

You can give money to your PAF at any time, including directing a gift through your Will.  If you wish, you can also invite family members and friends to donate to your PAF.  A PAF cannot seek donations from the public and cannot accept donations totalling more than 20% of the value of the fund at the previous 30 June from persons other than the founder of the PAF, and the relatives, associates or employees of the founder.

Established and operated in Australia

According to the Guidelines, a PAF must be established and operated only in Australia. However, this does not mean that the PAF cannot distribute to an eligible DGR that operates outside of Australia.

 

To download a PDF of our booklet, enter your email below.

 

The information contained in this post is current at the date of editing – 26 March 2024.

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