Proposed Amendments to Public Ancillary Fund Guidelines and Private Ancillary Fund Guidelines

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On 22 December 2015, the Federal Government released an exposure draft proposing a number of amendments to the Public Ancillary Fund Guidelines and Private Ancillary Fund Guidelines.

The proposed commencement date for the changes is 1 July 2016.  The closing date for making a submission is 12 February 2016.

Recap – what are Public Ancillary Funds (PAF) and Private Ancillary Funds (PuAF)?

Private Ancillary Funds and Public Ancillary Funds are Deductible Gift Recipient (DGR) funds which are entitled to receive donations that are tax deductible, essentially for the purpose of distributing to other Deductible Gift Recipients, and which cannot engage in any other activities.

Distinct from Private Ancillary Funds, Public Ancillary Funds invite the public to contribute to the fund.

Policy intent is to encourage capital growth in both Public and Private Ancillary Funds in order to provide long-term solutions for deficiencies in income streams of the DGRs to which funds are distributed.

Amendments to the Public Ancillary Fund Guidelines and Private Ancillary Fund Guidelines

The following observations summarise the proposed amendments to the PuAF Guidelines.  The proposed amendments to the PAF Guidelines, although not discussed here in detail, bring the PAF Guidelines largely into line with the current and proposed PuAF Guidelines.

Minimum Annual Distribution

Currently Public Ancillary Funds have five years in which distribution is not required, but should be considered.  After this, each financial year, Public Ancillary Funds must distribute a minimum amount that is determined based on 4% of the market value of the fund’s net assets or $8,800, depending on whether or not any of the fund’s expenses are paid directly or indirectly from the fund’s expenses.

The proposed amendments replace the Minimum Annual Distribution of 4% with a variable percentage calculated each year based upon the lesser of:

  • “the average of the Reserve Bank of Australia’s target for the cash rate”; or
  • The rate calculated by a formula using the market value of the fund’s net assets in successive financial years and any non-compliant expenses of the fund.

For the Minimum Annual Distribution percentage to be more than 4% under these amendments the RBA cash rate would have to be higher than 4% or the net assets of the fund would need to have increased by more than 4%.

Trustee direction

Trustees are already required to prepare and maintain current investment strategies for Public Ancillary Funds.  The amendments propose to extend the matters to which the strategy must have regard to include:

  • The fund’s status as a charity registered with the Australian Charities and Not-for-profits Commission (ACNC) (if applicable); and
  • Material conflicts of interest (real or perceived) for the fund and its controlling individuals.

The amendments propose to extend investment options for Public Ancillary Funds by expressly allow trustees to enter into loan guarantees that are entered into for the sole benefit of one or more DGRs.

A note is proposed to advise trustees to consider the fund’s purpose and the non-binding preferences of donors when considering making distributions from a Public Ancillary Fund.

New Portability

Under the amendments, the Commissioner of Taxation may agree to the transfer of assets between Public Ancillary Funds if (amongst other things) none of the assets of the fund have been received from another ancillary fund during the previous 2 financial years.

Other amendments

The amendments recognise that Public Ancillary Funds may be registered as charities with the ACNC, and as such seek to eliminate duplicated obligations between the Commissioner of Taxation and the ACNC Commissioner in respect of:

  • Notifying of changes to governing rules;
  • Preparation standards and reporting of financial statements; and
  • Annual reporting of the auditor or reviewer’s report.

Other tidy-up amendments include the removal of references to the Australian Valuation Office (closed 30 June 2014) and of transitional guidelines which no longer apply.

We recommend that trustees of Private Ancillary Funds and Public Ancillary Funds familiarise themselves with the proposed amendments and make submissions if necessary, as well as ensure that any necessary changes in governing documents and procedures are implemented when the final amendments have commenced.