Australian Unity: charity begins at EOFY

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While philanthropy shouldn’t be viewed as an ad-hoc afterthought, the end of the financial year is an opportune time for individuals to really focus on giving back and providing support and care to those who most need to receive it, all while minimising tax in the process.

Concerns regarding franking credits, capital gains tax and negative gearing changes have been alleviated with the recent Coalition election win, and this has meant many individuals feel increased confidence in their financial future and, ostensibly, able to turn their minds to giving back to communities.

So, how can Australian’s able to give do so in an efficient manner? And what are the tax structure considerations this close to the end of financial year?

Critically, June 30 falls on a Sunday this year, therefore it will be important for those who are giving to charity to ensure that the contribution is received by the charity before Friday, 28 June. It is not the date that the donation is made but the date that it is received that is important for tax deductibility.

It is also essential that charities selected have deductible gift recipient (DGR) status. Without this status, donors are unable to receive a tax deduction for their donation. A tax deduction is available for donations of greater than $2 made to a DGR recipient.

For individuals who prefer the idea of a formal and structured giving commitment and the establishment of a philanthropic legacy, to avoid a last minute EOFY rush in the future, and to provide a meaningful charitable donation, consideration could be given to the establishment of a sub-fund in a public ancillary fund. Unlike ad-hoc donations or even recurring donations, charitable trusts are designed to grow capital over time, while generating sustainable income for granting distributions.

Philanthropic structures can be established in a number of ways, to suit a variety of financial and personal circumstances, and philanthropic objectives.

Fundamentally, many Australian communities still have a significant gap in the standard and availability of critical services and support, such as health, housing and access to reliable and good quality food.  By establishing a charitable trust and creating a ‘philanthropy loop’, donors are helping make communities a better place for all.

Choosing the best philanthropic approach

There are three main options for individuals, all of which provide a structure that allows funds to be invested and managed, with income generated available for distribution to charitable entities and programs.

These structures include: Public Ancillary Funds; Private Ancillary Funds; and Testamentary Trusts.  Each has different requirements, approaches and benefits, however all provide a structure that facilitates the establishment of a long-term, sustainable philanthropic legacy.

A sub-fund within a public ancillary fund has significantly lower establishment costs than a private ancillary fund. Charitable accounts or sub-funds are individual funds set up under the umbrella of a public ancillary fund (PuAF). PuAFs are recommended for those who wish to start on a smaller scale but nevertheless wish to provide recommendations as to the charities, programs or causes their granting distributions support. Sub-funds are a particularly sound option for people who do not wish to be involved in investment decisions.  It is worth understanding the various structures available in determining the most appropriate approach.

  • Public Ancillary Fund: this is a fund usually managed by a trustee company, which allows individuals with smaller amounts available for an initial donation, to establish a charitable sub-fund during their lifetime. The sub-fund established can accept future donations from the individual; members of the individual’s family; and the broader community.  All donations received into the sub-fund are tax deductible.
  • Private Ancillary Fund: this is a fund established by an individual via a Deed but is only able to receive future, additional donations from the original donors. As a standalone trust, the fund’s financial statements must be audited annually, and an appropriate investment strategy must be implemented and regularly reviewed.
  • Testamentary Trust: this is established via a clause in a Will upon the passing of the individual.  As the trust is established upon passing, the funds donated into the trust are not tax deductible.  The trust is then administered by the appointed trustee into perpetuity.  Usually, initial capital of at least $50,000 is required to ensure the trust is sustainable.

There are specific but different distribution requirements for a PAF and a PuAF. The advantage of using the PuAF option rather than a PAF is that a PuAF has lower minimum distribution requirements, allowing a donor to build the capital of the fund.

PuAFs must distribute the equivalent of 4% of the fund’s market value (capital and income) each year whereas PAFs are required to distribute 5% of market value (capital and income).

These three structures are sustainable, efficient ways to formalise philanthropic objectives, and prospective donors should consult with a qualified professional in determining which approach is best suited to their individual financial position.

The art of giving

It is a time of significant, unprecedented change in the philanthropy sector globally, including an emerging cohort of substantial donors contributing directly to highly impactful community projects.

This shift has continued to increase donor interest in concepts such as impact investment. Many charities have been negatively impacted as a result of this shift and continue to be reliant on recurring grants via charitable foundations, structured giving and bequests.

Middle Australia is appreciating that they are comfortably well off and wish to give back during their lifetime. While most still provide for family members in their Will, many do not intend to leave all their assets and wealth to family members, who are often comfortably well off in their own right. Rather structured charitable giving either during their life or as bequest in their Will, becomes a priority.

There is immense power and self-satisfaction in the establishment of a giving legacy, such as via the establishment of a perpetual charitable foundation.

The concept of philanthropy should be something that strikes a chord with all Australians. Irrespective of our personal financial position and circumstance, we have all lost a loved one, observed people seeking our help on the side of a city street, and comforted a friend or colleague going through a tumultuous period in their lives.

It is often said that Australia does not have a significant and embedded philanthropic culture – particularly when compared to countries such as the United States – but we approach philanthropy in different ways and unlike other jurisdictions, women in Australia are more philanthropic than men, particularly in areas such as volunteering.

Millennials too are driving a new type of philanthropy, with younger generations promoting their own charitable giving on social media through status updates and other feeds, and motivating others to give and contribute to a better community. More generally, online platforms and crowd-funding initiatives are playing an increasingly important role in Australian philanthropy as young people give in ways, and on platforms, with which they are familiar.

Social and economic misfortune can impact any and all of us, at any time – often without warning. Unfortunately, philanthropy is not always front of mind for individuals and awareness of how and when to give remains an ongoing challenge.

Raising the public profile of philanthropic initiatives and how critical it is to Australia now, but also to the evolution of more inclusive, kind communities and future generations of Australians, is something we all need to consider. And for our own happiness and future wellbeing – and that of our families – the current prioritisation of philanthropy needs to improve. We can all do more.

Providing accessible knowledge on philanthropy and expanding the conversation of how important charitable giving is in the Australian market is critical to countering some of the impacts of social and financial upheaval. Identifying traits in philanthropy and charitable giving among various Australian demographics, such as millennials and women, helps us better understand the nuances of charitable giving, both in terms of who is donating, and who needs assistance the most.

Through the sheer power of giving and kindness – effectively linking those who can afford to give, with those who need to receive, a virtual ‘philanthropy loop’ is created. It is through philanthropy loops that we can positively and sustainably impact our communities and contribute to the lives of individuals who need support and assistance at some time in their lives. And for those able to give, that time is now!

While philanthropy shouldn’t be viewed as an ad hoc afterthought, the end of the financial year is an opportune time for individuals to really focus on giving back and providing support and care to those who most need to receive it, all while minimising tax in the process.

There is a widely held perception – albeit misinformed –  that establishing a perpetual charitable trust is expensive or complicated, and only for the very wealthy. But this is simply not the case.

Establishing a charitable trust with a trustee company provides donors with comfort that their foundation will be operating within a legally compliant framework, it will be managed professionally into perpetuity and the funds will be invested in a manner that seeks to preserve the real value of the capital, whilst generating a consistent income stream for granting to charitable organisations and projects.

A measured and planned approach to philanthropy will help ensure funds are granted to preferred causes and, if an ongoing strategy is established, can create a consistent and significant level of financial support for chosen charities over an extended period of time.

The original article was published in FS Private Wealth: