Booklet: Private Ancillary Funds (PAFs) (Chapter 8 – Governance)

Booklet: Private Ancillary Funds (PAFs)

Below is Chapter 8 of our ‘Private Ancillary Funds’ booklet. To read the other chapters of our booklet, click the links below:

Governance

Governance of the PAF requires the trustee to be responsible, accountable and vigilant.  The trustee has a fiduciary duty to ensure that the trust is appropriately managed.  Failure to do so can result in penalties or other legal consequences. 

Liability

The governing rules of a PAF rund must prohibit the fund from indemnifying the trustee, employee, officer, or agent of the trustee for a los or liability attributable to:

  • A deliberate act or omission;
  • Dishonesty; and
  • Gross negligence or recklessness.
  • Penalties.

There are a range of penalties that can apply to the PAF for a breach of the Guidelines.  The rate of these penalties will vary depending on the type of breach and can be imposed on the trustee and the directors of the corporate trustee.  These penalties cannot be paid by the PAF and the PAF cannot indemnify the trustee for an act of dishonesty, negligence or deliberate breach of the trust.

The ATO has released a guidance which sets out how penalties will be applied.

Other consequences for non-compliance include: 

  • Suspension / removal of trustee; and 
  • Loss of entitlement to endorsement – meaning that any donations made to the PAF will not be tax deductible and presumably it would lose access to any other tax concessions so would be taxed like any other ordinary trust. 

If there is a suspected breach of the trust or a fiduciary duty, the Commissioner is also permitted to share certain PAF compliance information with the relevant State Attorneys General.  This can lead to legal action to seek some form of restitution. 

Please see the summary of possible penalties from the ATO for failure to comply with the Guidelines below:

Non-compliance PAF Guidelines Penalty Units

Failure to notify regarding change to governing rules (variations of the Deed).

 Guideline 17 5 penalty units

Failure to distribute the minimum annual distribution.

 Guideline 19 30 penalty units if the shortfall is greater than $1,000

Failure to rectify shortfall in distribution.

 Guideline 19.4 10% of shortfall reduced by penalty under Guideline 19.4

Failure to keep proper accounts

 Guideline 24 10 penalty units

Failure to provide accounts upon request by Commissioner 

 Guideline 25 10 penalty units

Failure to prepare financial statements 

 Guideline 26 10 penalty units

Failure to provide financial statements upon request by Commissioner 

 Guideline 27 10 penalty units

Failure to have the financial statements and compliance of the PAF audited

 Guideline 28 10 penalty units

Failure to provide the audit report upon request by the Commissioner

 Guideline 29 10 penalty units

Failure to prepare and maintain an investment strategy

 Guideline 30 10 penalty units

Failure to implement the investment strategy

 Guideline 31 15 penalty units

Failure to document the investment strategy in a written form

 Guideline 32 10 penalty units

Breach of investment limitations, including borrowing, related party transactions, and collectables

 Guideline 33 – 38 30 penalty units

Carrying on a business

 Guideline 40 Penalty amount equal to 25% of the net profits of the business

Uncommercial transactions

 Guideline 41 30 penalty units

Providing benefits (excluding exceptions) to the trustee, founder, donor or an associate.

 Guideline 42 Penalty amount equal to the amount or value of the benefit provided

Soliciting donations from the public

 Guideline 45 30 penalty units

Accepting donations which total >20% of the market values its assets from entities which are not the founder or associates

 Guideline 46 10 penalty units

 

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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