Booklet: Private Ancillary Funds (PAFs) (Chapter 5 – Who can be a trustee of the PAF?)

Booklet: Private Ancillary Funds (PAFs)

Below is Chapter 5 of our ‘Private Ancillary Funds’ booklet. To read the other chapters of our booklet, click the links below:

Who can be the trustee of the PAF?

Like all trusts, a PAF must have a trustee.  Unlike other kinds of trusts, a PAF cannot have an individual trustee; it must have a corporate trustee.  This can be a company or incorporated association.  The trustee must exercise the same degree of care, diligence, and skill that a prudent individual would exercise in managing the affairs of others;

Who can be a director of a corporate trustee?

Most of the directors of the corporate trustee of a PAF will be family members of or otherwise closely connected to the founder.  Directors cannot be younger than 18 years old, mentally incapacitated, an undischarged bankrupt, have been disqualified from being a company director by ASIC or the ACNC or convicted of a taxation offence. 

The ACNC and the Commissioner of Taxation will suspend or remove a corporate trustee and appoint an interim acting trustee in situations where the PAF is non-compliant.

Responsible Person

At least one director of the corporate trustee must meet the ATO’s ‘responsible person test’. Under the Guidelines, a responsible person is independent from the founder and has a degree of responsibility to the Australian community as a whole.  This person is often the family lawyer or accountant or belongs to a professional association that has a code of ethics.  A more complete list of who may qualify as a responsible person is set out in the Guidelines and includes those people listed in the attached Schedule: Responsible Person.

A responsible person cannot be: 

  • The founder, or an associate of the founder; 
  • A donor who has contributed more than $10,000, or an associate of such a donor; or 
  • Except with the written consent of the Commissioner, an employee or agent of the founder or a donor who has contributed more than $10,000.

The duties and responsibilities of a responsible person are not different from the other directors, but the Guidelines require them to be active in the administration of the PAF, including the approval of the annual financial statements, the investment strategy, and the distributions. 

If the PAF does not comply with the requirement to have a responsible person (e.g. if the responsible person resigns, dies etc.), then the PAF effectively enters caretaker mode.  This means that the trustee can only exercise a discretion or power: 

  • To appoint a new trustee; 
  • To protect the property of the fund; or 
  • To deal with an urgent matter that cannot be postponed, 

until a new responsible person is appointed.

Payment

Directors of PAFs are generally unpaid unless the trust deed of the PAF allows remuneration.  If remuneration of directors is allowed by the trust deed, the Guidelines require remuneration for trustee services to be ‘reasonable’.16  If the trust deed is silent about remuneration, then only Licensed Trustee Companies can be paid trustee fees which are governed by the provisions of Corporations Act 2001 (Cth). 

Director’s direct expenses relating to the PAF may be reimbursed but must be approved by directors.

Who is responsible for the PAF?

The ultimate responsibility for the governance of the PAF lies with the trustee.  The directors of the trustee must ensure that the PAF is run correctly, is compliant with its deed, the law and the Guidelines and supports the purpose for which the PAF was established. 

Directors of the trustee have a fiduciary responsibility to manage the affairs of the PAF. They must: 

  • Avoid any actual or perceived conflict of interest;  
  • Run the PAF solely for the benefit of eligible DGRs; and 
  • Not provide personal benefit to the founder, trustee or any of their associates. 

The directors of the trustee as the ‘responsible entities’ for a registered charitable organisation must meet and uphold the following governance standards: 

  • Ensure the PAF is not-for-profit and maintains its charitable purpose; 
  • Comply with the relevant Australian laws and regulations; 
  • Ensure the directors are suitable; and 
  • Maintain and enhance public trust and confidence in the Australian not-for-profit sector.

Duties of the trustee

As a minimum, the trustee must perform the following duties: 

  • Maintain and manage the administration of the PAF; 
  • Manage the assets and investment of assets; and 
  • Direct distributions in accordance with the PAF’s purpose. 

Administration

One of the core requirements for the trustee under the Guidelines, trust laws of each State and the ACNC governance standards is to maintain and uphold competent administration of the PAF.  This can be done by: 

  • Ensuring all trust assets are held in the name of the trustee or, if authorised by the deed, statute or the Courts, a custodian of the assets; 
  • Maintaining an up-to-date and comprehensive record-keeping system of all relevant documents for administering the Trust. This can include: 
    • Copies of the governing documents (including the PAF Deed, corporate trustee constitution, and any materials provided by the ACNC or ATO upon registration); 
    • Contact information of all directors of the trustee (including director’s identification numbers); 
    • Declarations of conflicts of interests; 
    • Investment strategy documents; 
    • Director/trustee resolutions (including any agendas, minutes, and resolutions); 
    • Grant agreements or receipts; 
    • Records of financial transactions and ownership; 
    • Expenses; and 
    • Financial reports.
  • Preparing Annual Financial Statements in accordance with accounting standards and ensuring they are available to the ATO on request (or provided to the ACNC), including:
    • Estimating the market value of fund assets annually (except for land required once every 3 years); and 
    • Reporting those estimations to ATO annually.
  • Lodging an annual income tax return, either: 
    • If registered with ACNC: by lodging Annual Information Statement by 31 March each year; or 
    • If not registered with ACNC: by lodging Annual Information Return in paper format to ATO by 28 February each year. 
  • A PAF must issue a receipt for every gift it receives. The receipt must include the following details: 
    • The name and ABN of the PAF; 
    • The name of the donor; and 
    • A statement that the receipt is for a gift received by the PAF.

Investment

The trustee must ensure that the trust assets are properly managed for the purpose of the PAF (to benefit eligible DGRs).  To do this, the trustee will need to develop and maintain a written investment strategy which addresses the following: 

  • Key objectives 
  • Potential risks; and 
  • Investment methods. 

The investment strategy and portfolio must be reviewed annually. 

The trust may employ an external investment manager to advice on and execute the investment strategy. 

The trustee must adopt the ‘Prudent Person Rule’.  In general terms, when exercising investment powers, prudent investment requires trustees to be mindful of several considerations.  These include: 

  • The purposes of the trust, and the needs and circumstances of the beneficiaries;
  • The desirability of diversifying trust investments;
  • The nature and risk associated with existing trust investments and other trust property; 
  • The need to maintain the real value of the capital or income of the trust; 
  • The risk of capital loss or depreciation, and the potential for capital appreciation; 
  • The likely income return and its timing; and 
  • The length of a proposed investment, and the overall probable duration of the trust.

The nature and extent of the prudent person regime and trustee investment differs in each State.  Generally, the rules allow trustees of new and existing trusts to invest, reinvest or vary investment in any form of investment in any form of investment unless specifically forbidden under the terms of the trust. 

There are some limitations to investment.

  • The PAF cannot run a business; 
  • Investment transactions must be arm’s length, and on terms favourable to the fund and which do not provide a material benefit to the founder, donors, trustee, directors, employee or associates; 
  • Conflicts of interest must be declared and managed; 
  • Collectibles cannot be purchased and any donated must be sold within 12 months; 
  • A PAF’s ability to borrow is very limited; 
  • A PAF cannot give a security over fund assets other than a guarantee for the benefit of an eligible DGR; 
  • Any restrictions or directions in the deed, investment strategy or subsequent Court Order must be complied with.

Distributions

The trustee should consider developing and maintaining a written distribution strategy for the PAF.  This will detail the expected distributions and their recipients.  This is not compulsory but is a useful way for the trustee to ensure that the PAF will make its required minimum annual distributions for the financial year and for the trustee to plan ahead. 

Unless agreed by the Commissioner, there is a minimum quantum that the PAF must distribute each year – currently the greater of 5% of the net value of the PAF on 30 June or $11,000 (unless all expenses of the fund are being met from outside the fund in which case the 5% minimum applies).  Distributions do not include the expenses of the PAF. 

Future payments of multi-year commitments count as distributions in those future years. 

Distributions to a DGR may take the form of low or no interest loans, guarantees or below market rents.  The value of the benefit to the DGR is counted as part of the PAF’s distribution. 

PAFs can only distribute to eligible DGRs in accordance with the purposes specified in the trust deed.  It is a core responsibly of the trustee to ensure that only eligible organisations receive distributions.  Trustees must ensure:

  • Only ‘Item 1’ DGRs receive a distribution from the PAF. The vast majority of DGRs are ‘Item 1’ DGRs; usually these are the funds, authorities and institutions which directly engage in activities (unlike PAFS which support the activities of those funds, authorities and institutions); and 
  • The PAF does not distribute to ‘Item 2’ DGRs (such as other PAFs or Public Ancillary Funds). 

A trustee can identify an organisations tax status by: 

  • Using the ABN Lookup website; 
  • Using the ACNC Register website; or 
  • Asking the organisation for an ATO DGR Endorsement Notice, which can be obtained from the ATO.

 

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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