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Since 2000, changes have been made to how philanthropic efforts are treated by the Australian tax system – offering smarter ways for donors to arrange their giving to benefit them and future generations. JBWere Consultant, John McLeod discusses how to structure your philanthropic giving.
There are many ways people help charitable causes in Australia – ranging from involvement as volunteers through to direct financial support.
Since 2000, there have been several changes to how philanthropic efforts are treated by the tax system which offer smarter ways for donors to arrange their giving to benefit them and future generations. John McLeod, Consultant with JBWere Philanthropic Services, looks at the options available for best structuring philanthropic giving.
The help provided and causes covered by around 600,000 organisations that comprise Australia’s not-for-profit sector is huge. Just under 10% of these organisations are large enough to utilise some form of tax concession support (Tax Concession Charities) and around half of those are defined as Deductible Gift Recipients (DGRs). They are therefore able to provide tax deductible receipts to donors.
While there are several types of DGR, most are type 1, also known as “doing” charities, but there are also around 3,000 type 2 DGRs known as “giving” charities or ancillary funds. Around 70% of giving in Australia is done by living individuals, with an additional 10% each through bequests, trusts/foundations and companies. For individuals, the choice of how best to arrange your giving will depend on several interrelated factors, including what causes you are supporting, the timeframe for your donations and whether you desire and can utilise a tax deduction for the donation.
For example, donations to religious causes do not attract tax deductions, nor do bequests after death.
So, what do we mean by structuring your philanthropy and when does it make sense? Structuring generally refers to putting funds aside into a trust or foundation and then using those funds to make donations to charities over an extended timeframe. A key advantage of this compared to making a donation directly to charity is the opportunity to create a family legacy by involving your children and making ongoing donations. Another advantage is the ability to best match the use of the tax deductibility of a (potentially large) initial donation with high income years (for example, a significant tax event or a period of high income in the pre-retirement years). Then, as the funds sit within a tax-exempt trust or foundation, they have the ability to grow further while having the capacity to make ongoing distributions to eligible charities for many years or even in perpetuity.
One of the fastest growing philanthropic structures over the past decade has been foundations, particularly Private Ancillary Funds (PAFs). Since their introduction by the Federal Government in 2001, over 1,240 have been established. Today they hold around $4 billion in assets and have donated around $1.7 billion to eligible charities.
The structure you choose will generally match the type of charities you want to support. If you don’t need a tax deduction, then a structure such as a charitable trust (or testamentary trust if established through a Will) could suit you while allowing distributions to a wider group of charities.
However, if a tax deduction is useful for your donations, then an ancillary fund is likely to be used. Both charitable and testamentary trusts plus ancillary funds can enjoy tax-exempt status, including the refund of franking credits from eligible dividends.
For Ancillary Funds, there are two types, Private and Public. As the names suggest, each has been designed to suit a particular situation. The main differences centre on legal control and the ability to engage in fundraising.
Private Ancilliary Fund (PAF) trustees (usually the donor and their family plus an independent, responsible person) have legal control over the investments of the fund and can make distributions to the charities of their choice, but they can’t raise funds from the public.
Donors to a Public Ancillary Fund (for example, Community Foundations or the JBWere Charitable Endowment Fund) can only recommend where distributions are made and can’t control fund investments, but are relieved of administrative and reporting duties, which are handled by the overall fund’s trustee.
Structuring your philanthropy for greater control and tax benefits makes sense in many situations, as evidenced by the rapid growth in PAFs. Deciding if, when and how you could establish a philanthropic fund may be worth exploring with one of our experts. Interested NAB Private Wealth clients should approach their Private Client Manager or Advisor in the first instance.
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