Below is Chapter 8 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 9 – Winding up a PAF
- Chapter 10 – Common questions about PAFs
- Chapter 11 – Are they a good option for you?
- Chapter 12 – Overview of a PAF
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 |
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The information contained in this post is current at the date of editing – 26 March 2024.