A Private Ancillary Fund (PAF) offers a powerful way to manage charitable giving while enjoying tax benefits and building a philanthropic legacy. But how does a PAF actually work in practice?
This blog breaks down the process, structure, and responsibilities involved in operating a PAF to help you understand whether it’s the right vehicle for your charitable goals.
Setting Up a PAF
A PAF can be established by individuals, families, private companies, or trusts who wish to formalise their charitable giving. To set up a PAF, a trustee must be appointed—this can be an individual or a corporate trustee.
At least one member of the trustee board must be a “responsible person”—someone with a recognised position of responsibility in the community, such as a lawyer, accountant, or doctor. This requirement ensures proper oversight and accountability in managing the fund.
Once established, the PAF operates under a trust deed and must comply with guidelines set by the Australian Taxation Office (ATO) and the Australian Charities and Not-for-profits Commission (ACNC).
Making a Donation to the PAF
Donors contribute money or assets to the PAF, creating the capital base of the fund. These donations are tax-deductible, allowing the donor to reduce their taxable income in the year the donation is made.
If the donation is large, donors can choose to spread the deduction over up to five years for tax planning flexibility. The donated funds are then invested and used to make grants to eligible charities over time.
For a deeper understanding of how donations, tax benefits, and fund management work together, it’s helpful to explore more about what is a PAF and the rules governing its operation.
Investing the Fund’s Assets
Once the donation is made, the assets in the PAF are invested to grow the fund’s value over time. Any income generated by these investments—such as interest, dividends, or capital gains—is tax-exempt within the PAF.
Trustees are responsible for developing an investment strategy that balances growth with the need to distribute funds annually to eligible charities. Investments must be made prudently, aligning with the fund’s charitable purpose and compliance obligations.
Distributing Grants to Eligible Charities
Each year, a PAF must distribute a minimum of 5% of its net assets to eligible charities. Grants can only be made to organisations endorsed as Deductible Gift Recipient (DGR) Item 1 charities in Australia.
Trustees have the flexibility to choose which eligible charities receive funding, allowing donors to support causes that align with their values. Grant-making decisions are reviewed annually to meet the required distribution and maintain compliance.
Compliance and Governance Requirements
A PAF is subject to several ongoing compliance obligations. Trustees must:
- Prepare audited financial statements each year
- Submit an annual information statement to the ACNC
- Report to the ATO to maintain the fund’s tax concessions
Maintaining compliance is essential to preserve the fund’s tax-exempt status and continue operating legally. Trustees may engage professional advisers to assist with accounting, legal, and reporting requirements.
Role of Trustees and Advisers
Trustees play a central role in managing the PAF, overseeing investments, approving grants, and ensuring compliance with legal and tax regulations. Given the responsibilities involved, many trustees work closely with professional advisers, including accountants, lawyers, and financial planners.
Advisers provide guidance on governance, reporting, and investment strategies, helping the PAF achieve its philanthropic and financial objectives.
Benefits of a PAF Structure
A PAF offers several advantages:
- Tax-deductible donations in the year of contribution
- Tax-free investment income, allowing funds to grow efficiently
- Flexibility to decide when and where grants are made
- Opportunity to create a long-term philanthropic legacy across generations
For donors seeking greater control and a structured approach to giving, a PAF can be a highly effective vehicle.
Conclusion
A Private Ancillary Fund provides a structured, tax-effective way to manage charitable giving while maintaining flexibility and control over grant-making. From setup and donations to investing and compliance, a PAF enables donors to build a lasting philanthropic impact.
If you’re considering establishing a PAF, seeking professional advice can help ensure you understand the responsibilities, benefits, and opportunities involved.
