Equity Trustees: Tips and traps of June 30 giving

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Charitable giving and the associated tax benefits are on the minds of many looking to reduce their tax bill in the lead up to June 30. There are, however, pitfalls in this tactic for the inexperienced donors and it pays to take a measured and structured approach to philanthropy, according to Equity Trustees.

“Philanthropic considerations should not just be a once a year deliberation. A good financial strategy should include a structured and long-term approach to philanthropic giving which will also provide tax advantages,” said Ms Tabitha Lovett, General Manager , Philanthropy at Equity Trustees.

“There are a number of areas to be aware of to ensure that your June 30 giving achieves your objectives of helping those in need as well as being tax effective.”

Take an ongoing approach

Although it may seem easy to write a cheque for a chosen charity as June 30 looms, achieve a tax deduction and feel that the charity sector has been supported, it is worth taking a more structured approach to giving to achieve long-term benefits.

“It is easier to establish a perpetual charitable trust than most people think and it does not need to be expensive or complicated. There is also a perception that charitable trusts are just for the very wealthy which isn’t the case. A donation of $20,000 is enough to seed and establish a philanthropic vehicle.

“Ultimately, a perpetual charitable trust can help to better fulfil a donor’s philanthropic goals in a much more targeted and lasting manner and will ensure a greater impact on their chosen charity or cause rather than ad hoc donations.”

Choose your structure

Typically, there are three main types of charitable trusts available: private ancillary funds, sub-funds with public ancillary funds or testamentary charitable trusts.

“Overall, a sub-fund with a public ancillary fund has significantly lower start-up costs than a private one,” Ms Lovett said.

“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 want to start small but nevertheless wish to have some direction over which charities, programs or causes they support. Sub-funds are a particularly good option for people who don’t want to be involved with investment decisions.”

Donations to sub-funds attract the same tax deductions and considerations as making a donation directly to a charity. Private ancillary funds (PAFs), on the other hand, are often used for family foundations. PAFs are suitable for those who can donate at least $300,000 in investible assets.

The income generated by a PAF’s investments is tax-free so that funds available each year are not depleted through tax. There are currently more than 1,000 PAFs in Australia which distribute around $200 million annually to charitable organisations.

“Testamentary charitable trusts are the traditional way of leaving a lasting legacy and are a common vehicle for distributing funds to charitable organisations and causes. The difference from the other two options outlined above and beneficiaries don’t have to be a Deductible Gift Recipient, making the options for giving wider.

“Income produced within the trust is tax-free but the initial establishment amount is not tax deductible as the trust comes into effect on a person’s death through their Will. This means the benefactor doesn’t have to be concerned with the consequences of gifting money during their lifetime or being involved with the trust’s administration.“

Monitor your giving efforts

Ms Lovett said that Equity Trustees requires charitable organisations to submit progress and acquittal reports each year on how the grant funds have been expended.

“The benefit of receiving the reports is that a philanthropist can track and evaluate the outcomes achieved with the funds and make decisions about what projects or charities to support in future years.“

Ensure your PAF or a PuAF is distributing the correct amount each year

There are specific but different distribution requirements for a PAF and a PuAF.  The advantage of using the PuAF sub-fund option rather than a standalone PAF is that a PuAF has lower minimum distributions 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,” says Ms Lovett.

Ensure your trust has the appropriate underlying investment

“Considering that between 4-5 % of the fund’s market value needs to be distributed each year, the fund needs investment return in excess of this amount if it is to be of a perpetual nature,” Ms Lovett says.

“This means that a conventional perpetual trust must have a reliable dividend yield higher than the equity market as a whole so franking credits are often very important.

“Good asset allocation is also vital – a diversified growth fund is a good place to start.  This will revolve around a core Australian equity allocation with a focus on defensive sectors that generate reliable dividends while, at the same time, balancing capital gain and incomes with a low level of risk.”

Of particular note in recent years is the increasing demand for funding from charities, Ms Lovett says.

“The number of requests for grants from charities is on the rise and the ratio of the funds requested against the income we have to distribute is around 8:1.  This situation is increasing, not decreasing.

“While government and private sector funding for charities can ebb and flow, the proceeds from perpetual charitable trusts continue to be distributed, regardless of the financial climate or government funding priorities, which is a good thing for the charity sector and the community they support.”

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Trusted since 1888, Equity Trustees Limited helps with the financial and emotional challenges of preserving, growing and transitioning wealth between generations. It provides a range of financial services to corporate and private clients including Wealth and Asset Management, Estate Planning and Administration, Philanthropy, Superannuation, Aged Care Advice and Placement.

Equity Trustees is a publicly listed company on the Australian Securities Exchange (ASX: EQT) with offices in Melbourne, Sydney, Brisbane and Perth.

For further information, please contact:
Tabitha Lovett
General Manager, Philanthropy
Equity Trustees Limited
Phone: 1300 133 472
Mobile: 0438 288 682