Perhaps your family business is interested in investing some of its profits in a charitable cause? Or perhaps you are considering your family’s philanthropic strategy as part of planning for a business or asset sale?
Many high net wealth families seek advice on different ways to manage their charitable endeavours. Setting up a Private Ancillary Fund (PAF) may be an attractive option for your family; it is a tax-efficient structure, but can offer so much more.
How do they operate?
A PAF is a structure that is set up to receive tax-deductible contributions from its founder with the sole purpose of investing the funds and making a minimum annual distribution to charities registered as Deductible Gift Recipients (DGRs).
The annual minimum distribution must be 5 per cent of the fund (or a minimum of $11,000). The PAF funds are pooled and invested, the income from which is tax-free. Any franking credits received on funds invested are also refundable.
The Directors of the trustee company of the PAF make all decisions, including when and where distributions are made and how funds are invested in the meantime. Given the annual distribution required, the investment strategy of the PAF must ensure a sufficient level of liquidity. One Director must be a ‘responsible person’ who is independent of the founder.
Many families make a large initial contribution because of a liquidity event, such as a business or asset sale, whereas some family businesses take the strategy of making a smaller initial contribution to the PAF with a view to grow the fund over time.
Benefits of a PAF
Not only does your family receive an upfront tax deduction in the year of the contribution, it also can give your family time to manage when and where DGR distributions are made over time.
Many high net wealth families use a PAF as an effective way to give back to the community and to grow their family legacy. Management of the PAF can facilitate family bonding and can be used as an ideal way to educate the next generation, who have limited investment and/or governance experience.
Some family businesses appoint an employee representative to the Board of the trustee company and provide visibility of the performance of the fund to employees as part of their cultural and employment retention strategy.
Important considerations and next steps
Your family needs to ensure that sufficient time is allowed to set up the fund as there are specific registration and compliance requirements.
If the contribution is being funded on the settlement of your business or asset sale, careful planning around the taxing point of a capital gain and the timing of the contribution is crucial.
Estate and Succession Planning advice also needs to be sought to determine who will be responsible for the future decision-making of the PAF.
Please reach out to us if you would like to learn more about PAFs and how they may fit into your family’s philanthropic strategy.
Learn more about how our Family business consulting services can help you
