Giving structures for new philanthropists

Accountants can engage in deeper, values-based conversations with high-net-worth (HNW) clients through educating them about other types of giving structures such as private ancillary funds.

ATO data in 2017 revealed that 4 out of 10 High Net Worth Australians (those earning over $1 million per year) are not donating to charity. At all. For the affluent members of society, this is quite a surprising statistic. But on the bright side, it represents a lot of potential for growth in philanthropy. And according to the Giving Australia report 2016, compared to 10 years ago there are a smaller number of people who are giving, but those individuals are actually giving more in total.

We do need to pause for a second and consider why a whopping 37 per cent of affluent Aussies are not digging deep, particularly when there’s no shortage of charity campaigns urging them to do so. Research points to barriers such as a general lack of knowledge about new types of giving structures and ways in which donors can formalise their philanthropic interests.

Particularly for high net worth individuals, sharing wealth can be extremely rewarding and with the right giving structure, it can reap immediate and generous tax deductions, and allow people to see the impact of their giving while they’re still alive.

Private ancillary funds

Setting up a private ancillary fund or ‘PAF’ has become increasingly popular since the government introduced the structure in 2001. They provide a link between people who want to give (‘donors’) and organisations that can receive tax deductible donations as deductible gift recipients (DGRs) and were established by the government to incentivise and encourage philanthropy. Private ancillary funds can offer a number of benefits in terms of tax concessions, managing intergenerational wealth transfers within families and optimising financial resources for maximum social impact.

For clients with $1 million as a starting figure, a PAF could help them earn immediate income tax concessions while supporting charitable causes long-term. A PAF is a charitable trust controlled by a company as trustee. The ATO website provides guidance on establishing a private ancillary fund and managing distribution and compliance.

Due to the complexity of setting up a PAF, some advisers and accountants refer their clients to organisations like Australian Philanthropic Services (APS) which is a non-profit organisation with an all-encompassing PAF service. It is actually designed to support advisers and accountants who have clients with philanthropic interest. PAFs are governed by the ATO and have strict compliance obligations through the Australian Charities and Not-for-profits Commission (ACNC). APS can also support the client and their family directly with their grant-making.

We’ve seen that there is a real benefit for accountants and advisers in providing philanthropic advice in the way it deepens their connections with their clients through having more values-based conversations. Whilst PAFs have been developed to offer generous tax deductions for individuals (earnings through investments are income tax-exempt and franking credits are refunded), there is a lot of ongoing accounting administration, compliance and investment management involved. This creates opportunities for advisers and accountants however it’s good to know that the governance and compliance side of this can be outsourced by organisations like APS.

During each financial year, except for the financial year in which the fund is established, a PAF must distribute at least 5 per cent of the market value of the fund’s net assets. This distribution must go to a charity with special Deductible Gift Recipient status. This aspect of a PAF can create big opportunities for the charities on the receiving end as it can provide a great deal of financial sustainability. In times of increased funding uncertainty, such assurance can be very beneficial for a charity and its long-term planning which in turn can increase the impact of its program delivery. Scrambling for funding each year can make it difficult for an organisation to stay efficient and on mission.  Research tells us that planned giving can be 6 times greater than ad hoc donating and for the charity too, it is definitely several times more beneficial. When you know the money is coming in and you can rely on it over time, the allocation of it becomes more planned and potentially much more impactful.

If an individual doesn’t have as much as a million to spare but does have $50,000 at a minimum, they could consider establishing a sub-fund within a public ancillary fund. It’s very quick and easy with the administrative burden the sole responsibility of the trustee. The donations to the sub-fund are tax deductible and you can choose to spread this deduction over 5 years. The Australian Philanthropic Services Foundation is one such public ancillary fund and each year it asks its donors to recommend the charities they want to support. This is currently a popular option for advisers and accountants to provide a tax effective solution while enabling their client to build their philanthropic capital for the future.

According to Philanthropy Australia there are currently 3000 registered private ancillary funds or public ancillary funds in Australia. There is definitely room to grow here.

People wanting to give can also feel overwhelmed with the number of worthy causes and charities to support, and without the time to invest in weeding out the best or most impactful ones, they hesitate and eventually just don’t give at all. And we know that when you make an ad hoc donation, it’s really difficult to see the impact.

We encourage accountants and financial advisers to make contact with us or other non-profits who have a mission that is aligned with their clients’ values and interests. Philanthropic advice really should only recommend trusted charities that advisers know and understand so it’s a good idea to do some research. A charity’s annual report should be your ultimate information resource and will give you an idea of its governance and leadership. A donor’s money shouldn’t simply help a charity perform better. It should help a charity scale its (already) strong performance for greater impact.

We’re increasingly seeing donors interested in funding the impact area (such as homelessness, domestic violence or addiction and recovery) instead of the specific program, understanding that our costs and needs extend beyond programs and allowing for their funding to be used optimally and where it’s needed most. For an interested donor, there are a lot of opportunities for engagement and really experiencing the joy of giving through seeing their social impact. The most significant change we’ve seen with the introduction of private ancillary funds is greater interest and engagement from the donor. As a PAF enables more tax-effective long-term giving, well-off individuals are able to witness and experience the impact of their giving while they’re living. And although we used the term ‘donating to charity’ in the first sentence of this article, we really do look at some of our major givers as partners, not just donors.

Many donors that do have existing structures such as family trusts or private ancillary funds have also set them up to encourage inter-generational philanthropy among their own children and grand-children.  And often it’s the younger generation really wanting to get involved and make a difference.

Estate planning

Gone are the days when estate planning was just for the super-rich. At the Salvos, we’ve seen enormous impact from a gift in someone’s will either in the form of a home or other asset left to us or a percentage of their estate. As an accountant, a simple reminder or question to a client about their will can make all the difference. The best scenario for a gift in someone’s will is when they leave a percentage of their estate after having taken care of family and loved ones. This means that as the asset value grows, so too does their legacy. People can also choose to leave money to charity through a perpetual trust which will provide ongoing support to a charity via an endowment fund.

Paul Ramsay left a $3 billion bequest in his will to the Paul Ramsay Foundation. This gesture has changed the philanthropic landscape of Australia. And while not many Australians could aspire to this level of philanthropy, it urges us to consider our own potential legacy and the things we can potentially help achieve for years to come.

Caroline Fisher, development manager – trusts and foundations, Salvation Army

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