Private Ancillary Funds (PAFs) are one of the most effective ways for Australians to create structured, long-term charitable giving. They combine flexibility, tax benefits, and the opportunity to build a philanthropic legacy. But how exactly does a PAF work, and what do you need to know before setting one up?
What Is a PAF?
A PAF is a type of charitable trust that allows individuals, families, and businesses to support eligible charities in a structured and tax-effective way. Once established, contributions to the fund are invested, and each year a portion of the assets must be distributed to approved charitable organisations. PAFs are overseen by the Australian Taxation Office (ATO) and the Australian Charities and Not-for-profits Commission (ACNC) to ensure compliance with strict regulations.
The Process of Establishing a PAF
Setting up a PAF involves several important steps to ensure compliance with the Private Ancillary Fund Guidelines 2019.
Setting Up the Trust
The process begins with creating a trust deed that complies with the rules governing PAFs. Trustees are appointed to manage the fund, and at least one “responsible person” must be included—someone with recognised standing in the community, such as a lawyer, accountant, or senior professional.
Gaining Deductible Gift Recipient (DGR) Endorsement
For a PAF to accept tax-deductible donations, it must be endorsed as a deductible gift recipient by the ATO. This step is critical to ensure the fund can receive contributions and distribute grants in line with Australian law.
If you’d like a more detailed step-by-step explanation, this overview of pafs provides further insight into establishment, compliance, and management.
How Contributions Work
Once established, contributions can be made by the founder, family members, businesses, or even external donors. These contributions are generally tax deductible in the year they’re made, with some flexibility to spread deductions across multiple years. This tax efficiency is one of the key benefits of choosing a PAF as a giving vehicle.
Investment of Fund Assets
The assets within a PAF are invested to generate returns, which helps the fund grow and support sustainable giving. Trustees are required to develop and follow a clear investment strategy that balances returns with appropriate risk management.
Annual Distribution Requirements
Every PAF must distribute at least 5% of its net assets each year to charities endorsed as deductible gift recipients (DGRs). This ensures that funds are actively directed toward charitable causes rather than sitting idle.
Governance and Compliance
Good governance is essential for a PAF to remain compliant. Trustees are responsible for oversight, and the involvement of a responsible person provides additional accountability. PAFs must lodge annual reports with the ACNC, maintain accurate financial records, and comply with ATO requirements.
Long-Term Benefits of a PAF
A PAF is more than just a tax-effective giving structure—it’s a vehicle for creating a lasting philanthropic legacy. Families can involve younger generations in decision-making, passing on values of generosity and responsibility. Businesses can formalise their charitable contributions, aligning them with corporate values and community engagement.
When a PAF Might Not Be the Right Choice
While PAFs offer many benefits, they may not be suitable for everyone. Establishment and ongoing administration costs can be significant, which is why they are generally recommended for those with at least $500,000 to contribute. For those seeking a simpler option, alternatives such as public ancillary funds or direct giving may be more appropriate.
Wrapping Up
A PAF works by combining contributions, investment strategies, and annual charitable distributions within a regulated trust structure. It offers tax advantages, long-term sustainability, and the chance to create meaningful impact. If you’re considering structured philanthropy, seeking professional advice will help determine whether a PAF is the right choice for your goals and circumstances.