An introduction to philanthropic giving

This guide introduces financial advisers to the financial planning considerations that arise when clients have philanthropic goals.

Providing philanthropic advice may involve providing financial product advice and taxation (financial) advice, so financial advisers are well placed to meet their client’s philanthropic needs.

Common triggers for clients to consider charitable giving

Those experienced in the field of philanthropy identify a number of common triggers that cause clients to consider charitable giving, including:

a financial windfall (e.g. an inheritance)
the sale of a significant asset (e.g. a business or real estate)
writing or revising a will
year-end tax planning
a change in personal circumstances, which can cause a rethink of priorities
a resolution to support a particular community or address a social issue. A client might be passionate about supporting a cause they personally resonate with, for example, if they or a loved one has been impacted by an issue or received support from a charity previously, or they may simply want to create a legacy.

Philanthropy in the financial planning process

Philanthropy will not be suitable for all clients. As a broad paradigm, a client’s financial goals may be prioritised as:

Financial independence / retirement planning: Achieve personal financial independence, especially in retirement – i.e. accumulate and protect wealth.
Estate planning: Financially support children and/or grandchildren or other dependants to a self-determined level, either during the client’s lifetime and/or upon death - i.e. the effective distribution of wealth to family and loved ones.
Charitable giving: Provide broader community financial support via philanthropic giving – i.e. the effective distribution of wealth to chosen causes.

Financial advisers can assist their clients to understand their potential to achieve these goals, both in terms of their current asset levels and the expected future accumulation of assets. Discussion of stage three above may be appropriate once a client understands they will satisfy stages one and two.

Note that charitable giving may involve more than financial support alone – contributing time and expertise to various causes is highly valued by charities and community groups, and may be a viable alternative for those unable financially to reach stage three.

Options for charitable giving

The broad alternatives for charitable giving include:

Direct donations to charities
Bequests and bequeathing (via a will)
Indirect donations via a public ancillary fund (PuAF)
Indirect donations via a private ancillary fund (PAF).

Table 1 describes some of the pros and cons of these alternatives.

Table 1: Charitable giving options

Charitable giving method	Control of ultimate recipient of donation	Timing of when ultimate recipient receives funds	Taxation impact	Client’s financial risk
Direct donation to charity	Client determines the charity. May feel pressure to choose a charity by 30 June if donation is large.	Charity receives benefit immediately	Generally tax deductible in the year the donation is made if charity is a DGR*	Cannot recover funds once donation has been made e.g. where personal financial situation changes negatively
Bequest and bequeathing (via a will)	The bequest is made by the client, and can be changed prior to death by an amendment to the will.	After death of the client	No tax deduction. CGT exemption may apply where asset is bequeathed	As the bequest can be amended, there is no financial risk to the client during their lifetime.
Via a PuAF	Generally the PuAF trustees decide which charities to make grants to. Some PuAFs allow the donor to nominate the charities to support.	Separation of the timing of gifts to the fund and grants out to charities. Minimum of 4% of the fund balance must be granted each year.	Generally tax deductible in the year the donation is made	Cannot recover funds once donation has been made e.g. where personal financial situation changes negatively.
Via a PAF	The trustee (usually family members and one other ‘responsible person’) decides which charities to make grants to.	Separation of the timing of gifts into the fund and grants out to charities. Minimum of 5% of the fund balance must be granted each year.	Generally tax deductible in the year the donation is made	Cannot recover funds once donation has been made e.g. where personal financial situation changes negatively.

* Deductible gift recipient – see discussion below under ‘Direct donations’.

Direct donations

Individuals, trusts, super funds, partnerships and companies may be eligible for a deduction in relation to gifts of money or property of two dollars or more made to deductible gift recipients (DGRs) – see Diagram 1 in Appendix 1. DGRs are either specifically endorsed by the Australian Taxation Office (ATO) or listed by name in the income tax law. Importantly, this deduction is generally not available in relation to bequests, so donations made prior to death will generally be more tax effective.

The ‘ATO valuation’ mentioned in diagram 1 (see Appendix 1) is based on a Valuation Certificate issued by the Australian Valuation Office (which is part of the ATO).

A deduction cannot create or increase a tax loss, and so cannot lead to carry-forward tax losses. However, a deduction relating to a gift of money or property (where the property is valued at more than $5,000) can be voluntarily spread over five income years, including the income year in which the gift is made. This may allow a client to consider making a larger gift in the current year than might otherwise be contemplated. An election to spread the deduction over more than one year must be made via an ATO approved form before the income tax return is completed for the year in which the donation is made. Variations can be made to future years provided the variation relates to a year in which a tax return has not been lodged.

Once the gift has been made, the DGR may use the funds immediately for any purpose consistent with the established objectives of the DGR. However, once the gift has been made, the donor generally has no legal recourse to recover the funds.

Example:

Janice wishes to gift an investment property purchased in 2005 to a charitable organisation which is a DGR. The ATO has valued the property at $440,000.

Janice’s taxable income is currently $250,000, and is not expected to change over the next five years. However, a gross capital gain of $300,000, resulting from the disposal of the property, will mean that Janice’s taxable income, after allowing for the 50% CGT discount, would be $400,000 in 2022-23.

Although Janice’s gift of $440,000 is immediately tax deductible, she elects to spread the deduction over five years, as follows:

Year	Income pre-deduction	Deduction	Taxable Income
2022-23	$400,000	$220,000	$180,000
2023-24	$250,000	$70,000	$180,000
2024-25	$250,000	$50,000	$200,000
2025-26	$250,000	$50,000	$200,000
2026-27	$250,000	$50,000	$200,000
Total:		$440,000

As Janice has offset income that would otherwise be taxed at 45% (plus Medicare levy), the total tax benefit is $206,800 ($440,000 * 47%). The charity has immediate use of the property.

Gifts upon death - bequests and bequeathing

Generally direct donations to most DGRs from a deceased estate cannot be claimed as a tax deduction.

There can however be a difference in outcome depending on whether the estate bequeaths an asset or sells an asset and bequeath the proceeds.

Estate sells asset and bequeaths the cash

Where the estate disposes of the asset, any realised capital gain or loss is attributed to the estate. The subsequent donation to the DGR is not deductible.

Estate bequeaths the asset

Where the estate bequeaths the asset, any realised capital gain or loss is exempt. The donation is not deductible to the estate.

Example (continued):

Compare the tax position if Janice made a testamentary gift instead of gifting the property whilst still alive.

For assets acquired by the deceased from 20 September 1985 (i.e. post-CGT assets), the estate assumes the deceased’s cost base. If Janice’s estate were to sell the asset and gift the cash proceeds, the sale would give rise to a net capital gain of $150,000. Assuming no other income in the estate, the estate’s tax liability would be $40,567. Alternatively, if the estate had other taxable income of at least $180,000, the tax liability resulting from the sale would be $67,500 (i.e. the net capital gain of $150,000 taxed at 45 per cent).

If the estate were to bequeath the property to the DGR, the net capital gain of $150,000 would be exempt from tax.

In this scenario, bequeathing the property rather than selling the property and donating the proceeds results in a tax benefit of between $40,567 and $67,500.

However, the charity will not have use of the property until Janice has passed away.

Testamentary gifting provides flexibility to the client. As the gift is not effective until death, the client has the flexibility to change their mind and amend their will to alter the amount, type and beneficiary of the gift. This may be important if the client’s financial capacity is severely impacted by unforeseen circumstances.

However, from the recipient’s viewpoint (i.e. the charity), a testamentary gift means they will not receive any benefit until after the death of the client, which may be years, or decades, away. In addition, there is a risk that a successful family maintenance or other challenge to the client’s will frustrates the client’s charitable intention.

Donations to a public ancillary funds (PuAF)

A PuAF (colloquially pronounced ‘puff’) that meets certain regulatory requirements may be endorsed by the ATO as a DGR, so a gift to a PuAF may be tax deductible in a similar manner as a direct donation.

A PuAF is a not-for-profit entity which is established by trust deed or via a will, is philanthropic in character and is open, transparent and accountable to the public (via ATO reporting). Its sole purpose must be to provide money, property or benefits to certain other DGRs (referred to in tax law as item 1 DGRs).

PuAFs are required to solicit funds from the general public, so they usually have a large number of unrelated donors. Hence the administration and management costs are shared by a large number of donors, which will generally create cost efficiency per donor depending on the overall charging structure of the PuAF. In practice PuAFs have a lower minimum donation threshold than is considered effective for a PAF. Some PuAFs accept initial donations of as little as $20,000, whereas $500,000 is typically recommended for the cost-effective establishment and ongoing operation of a PAF.

The trustee of a PuAF is generally at arm’s length to the donors and is required to comprise a majority of Responsible Persons. As the trustee is responsible for the administration, investment and governance activities of the fund, all that’s left for the donors to consider is which charities they would like to support, assuming the PuAF allows that choice.

Gifting via a PuAF, rather than directly to charities, removes the pressure to choose a charity in the current income year. As at February 2023 there were close to 25,000 charities in Australia which can accept tax deductible donations[1], so choosing a charity can be challenging. As a PuAF is in effect a feeder-fund, a large tax deductible gift can be made to the PuAF in one year, with the distribution of grants from the PuAF to charities occurring over several subsequent years. This means that the donor may have an ongoing involvement beyond making the initial donation.

As a minimum of only four percent of the fund balance must be granted out to charities each year, a PuAF can accumulate donations in a sub-fund until enough funds exist to justify the establishment of a PAF. With the Commissioner’s approval, all the net assets of a PuAF sub-fund may be transferred to a PAF.

Private ancillary funds (PAFs)

Gifts to PAFs (colloquially pronounced ‘paffs’) may be tax deductible also. A PAF, in contrast to a PuAF, is largely privately managed. The administration, investment and governance activities of the fund are the responsibility of its corporate trustees, the directors of which will typically involve donors and their family, but must include at least one Responsible Person who is not a founder, a major donor, or an associate of the founder or a major donor.

A key distinguishing point between PAFs and PuAFs is the level of funds ($500,000 is typically quoted) needed to justify the establishment and administration costs of a PAF. But other differences exist also.

As a PAF cannot solicit donations from the general public, and although parties not related to the PAF can make donations, generally donations come from family members related to the PAF founder.

Broadly a PAF is required to annually distribute at least five per cent of the fund’s net assets, compared to broadly four per cent for PuAFs. This distribution requirement demands the ongoing engagement of those involved in the PAF, which may include the founder’s children.

These features mean that a PAF is often suitable as an intergenerational philanthropic vehicle for wealthy families. A PAF allows large donations to be made immediately, or whenever is suitable to the donors. However, subject to the minimum distribution requirements, grants to allowable DGRs (item 1 DGRs) can be made over an extended period of time if desired, and independently of the initial donations to the PAF. This provides a family with long term control and engagement with their philanthropic activities.

Establishing and running a PAF requires specialist knowledge as there are many legislative compliance activities that must be met. Failure to meet these requirements can result in financial penalties. These penalties are imposed on the corporate trustee and can be recovered from the directors if they cannot be recovered from the corporate trustee alone.

PAFs are similar in many aspects to SMSFs - Table 2 in Appendix 2 provides a comparison of the key features of PuAFs, PAFs and SMSFs.

Useful resources:

Macquarie, Private Ancillary Funds Fact sheet
Philanthropy Australia
Australian Philanthropic Services
Australian Taxation Office, Private Ancillary Funds
Australian Taxation Office, Public Ancillary Funds

Appendix 1: Diagram 1: Tax deduction for gifts to DGRs

* Applies to trading stock disposed of outside of ordinary course of business

Appendix 2: Table 2: PuAFs, PAFs and SMSFs

	PuAF	PAF	SMSF
Purpose	A publicly offered feeder-fund between donors and DGRs (item 1 DGRs)	A privately run feeder-fund between donors and DGRs (item 1 DGRs)	A privately run retirement savings and pension vehicle
Regulator	ATO and ACNC*		ATO
Entity structure	Trust		Trust
Who can be the trustee?	Corporate or Public Trustee	Corporate only	Corporate or individual
Decision making requirements	Must involve a majority of Responsible Persons	Must involve at least 1 Responsible Person	N/A
Time to establish	1-2 days (sub-fund)	Around 2 months (varies)	Around 2 months (varies)
Costs to establish	Minimal upfront costs (sub-fund)	Vary	Vary
Minimum initial funds	Recommended $20,000 (but some providers accept less)	$500,000	N/A
Ongoing costs	Usually 1-2.5% of account	Vary	Vary
Taxation of fund earnings	Tax free		Generally 15%; tax free in pension phase
Who can donate/ contribute to the fund?	General public	Generally those with close relationship to founder (20% limit for others)	Individual member contribution cap, age/work test and fund cap restrictions may apply
Annual minimum payment (to DGRs for Ancillary Funds, and to ABP recipient for SMSFs)	4% (or $8,800 if 4% < $8,880 and expenses are paid from the fund)	5% (or $11,000 if 5% < $11,000 and expenses are paid from the fund)	Account based pensions: 4% - 14% (based on age)
Year 1 minimum payment (to DGRs for Ancillary Funds, and to ABP recipient for SMSFs)	Nil		Pro-rated by number of days in year (applicable to account based pensions)
Who can be a beneficiary of the fund?	Certain DGRs only (item 1 DGRs)		Members, and (generally) their dependants or estate
Fund residency requirements	Established and operated only in Australia		“Australian Superannuation Fund” requirement
Does a sole purpose test apply?	Yes, broadly to provide money, property or benefits to certain DGRs (item 1 DGRs)		Yes, generally regarding retirement and/or death benefits
Is trustee required to report changes to governing rules?	Yes		No
Can the fund carry on a business?	No		Yes, if not in breach of other SIS rules
Is an investment strategy required?	Yes, in written form		Yes
Are there requirements to keep fund assets separate?	Yes, must keep assets separate from all other assets		Yes, keep assets separate from personal assets and those of a standard employer sponsor or associate of.
Is the fund required to maintain investments on arm’s length basis?	Yes		Yes
Are non-commercial transactions more favourable to the fund allowed?	Yes		Yes, although can result in non-arm’s length income
Is there a ban on acquisitions from related parties to the fund?	Acquisition only on arms-length terms or terms more favourable to the fund		Yes, with limited exceptions
Is there a ban on collectables?	Yes		Yes, with limited exceptions from 1 July 2011
Is there a general borrowing prohibition?	Yes, with limited exceptions		Yes, with limited exceptions incl LRBAs
Can the fund give security over a fund asset?	No		No
Is there a prohibition on the fund lending and providing financial assistance to certain parties?	Yes		Yes
Can funds be transferred in, other than as donations or contributions?	Yes, from (other) public ancillary funds		Yes, from any complying super fund
Can funds be transferred out, other than as grants to DGRs or benefit payments to members?	All assets or sub-fund assets to a PAF with Commissioner’s agreement	Convert to a PuAF with Commissioner’s agreement	To any complying super fund
How often are fund assets required to be valued?	Annually except for land (3 yearly)		Annually
How often are income tax returns required?	Annually		Annually
How often are financial statements required?	Annually		Annually
How often are fund audits required?	Annually		Annually
What are the record keeping requirements?	Retain for 5 years		Retain for 5 years

* Australian Charities and Not-for-Profits Commission

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