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If you’re familiar with private or public ancillary funds (PAFs and PuAFs respectively), you’re likely well-versed in what these kinds of structures are and why they exist. But are you as familiar with the compliance obligations?
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Involved in a PAF? Here’s why you need an auditor
10 October 2024
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In simple terms, PAFs and PuAFs are tax-efficient structures established by high-net-worth 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 requirements.
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 often arises when the Trustee realises that the minimum distribution obligations haven’t been met by 30 June.
It’s important to understand that these Ancillary Funds cannot accrue a donation, meaning if the minimum distribution obligation wasn’t met by June 30, the Ancillary Funds are unable to simply make a donation after the fact and attribute it to the previous year.
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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 in July.
However, within Ancillary Funds, 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 the Ancillary Funds 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 Ancillary Fund 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.
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