If you’re familiar with Private or Public Ancillary Funds (PAFs and PuAFs respectively), it’s likely you’re well versed in what this kind of structure is, and why it exists. But are you as familiar with the compliance obligations?
In simple terms, PAFs and PuAFs are tax-efficient structures established by high net wealth individuals for philanthropic reasons, allowing donations to be made and distributed.
They’re increasingly popular structures, with figures from the Australian Institute of Health and Welfare revealing the total number of PAFs in Australia increased almost 8% between 2011-12 and 2019-20 to more than 1800, with donations up more than 30% on average per year.
Both PAFs and PuAFs are eligible for deductible gift recipient (DGR) status, and both structures are bound by minimum annual distribution rates.
PAFs must distribute at least 5% of assets, or a minimum of $11,000 by the end of the financial year, while PuAF distribution rates are slightly lower, at 4% or at least $8,800.
An issue that can and does arise is when a new financial year begins and the PAF Trustee realises distribution obligations haven’t been met for the previous year.
It’s important to understand that PAFs cannot accrue a donation, meaning if the minimum distribution obligation wasn’t met by June 30, PAFs are unable to simply make a donation after the fact and attribute it to the previous year.
To use a business analogy – if an invoice is issued in June, but not paid until July, a business may still attribute the payment as a June expense, despite it being paid after the fact.
However, within PAFs, the payment is considered ‘giving’ and not an expense, and as such cannot be treated in the same way.
It’s the kind of discrepancy that would be picked up during an audit and highlights the importance of having an independent auditor as part of your financial team, along with your accountant.
Added to this, an experienced Auditor will also provide an independent assessment of PAF financials to identify any risks or potential concerns and maintain a high standard of internal governance of the structure.
Failure to meet compliance obligations can result in financial penalty, but also the potential loss of DGR status, meaning donations are no longer deemed tax-deductible.
It’s not a risk worth taking.
While the PAF guidelines are readily available, and should be reviewed by all Trustees, ignorance of regulatory and compliance requirements is never considered an excuse, and so the recommendation is always to seek professional advice if you’re in doubt.
Naz Randeria is the Managing Director of Reliance Auditing Services