If you or your family set up a Prescribed Private Fund (PPF) as a way of channelling your philanthropic giving, you are probably aware that your PPF converted to a Private Ancillary Fund (PAF) on 1 October 2009.
Under the transitional arrangements for the conversion, compliance with the PAF guidelines was not compulsory until 1 October 2012 for funds with rules that prevented complying straight away.
1 October 2012 has now come and gone. Is your PAF complying with the rules?
The PAF guidelines
Under the 2009 conversion, all previous PPFs are taken by the Australian Tax Office (ATO) to be endorsed as PAFs, and to have agreed to the PAF guidelines.
One important change is that PAFs and Public Ancillary Funds cannot distribute their funds to each other. The transitional arrangements, which allowed a converted PPF with non-corporate trustees to transfer its funds to another PAF with only corporate trustees, will no longer apply.
Key differences between PPF and PAF rules:
- PAFs are required to have minimum annual distribution of 5% of market value of fund’s net assets, as at end of previous financial year –at least $11,000 if 5% is less than this and fund expenses are paid from fund income or assets.
- If you have not replaced your individual trustees with corporate trustees (standard PAFs’ trustees must be corporate trustees), at least one trustee must be a person with a degree of responsibility to the Australian community on the board of the PAF’s trustee. This person cannot be a founder, major donor of over $10,000 to the fund, or associate of a founder or major donor (as defined in s 318 of the Income Tax Assessment Act 1936 (Cth))
Trust law
In making changes to your PAF in order to comply with the guidelines, you will need to ensure that your changes comply with state trust law on replacing trustees and transferring trust assets.
Consequences of failing to comply with the PAF guidelines
Any PAF which does not comply with the guidelines can have its Deductible Gift Recipient (DGR) endorsement revoked. If your fund has broken other tax laws, further legal action by the ATO is also a possibility.
We can assist your organisation to conduct a review of your governing documents to ensure your Fund complies with the PAF Guidelines. Please contact our office on (07) 3837 3600 for assistance or further information.
Options
You may decide that you would prefer to wind up your converted PPF rather than make significant changes for compliance purposes.
The ATO has indicated that if you choose this option, you need to provide them with a final audit report, and financial statements showing that the fund has no remaining assets.
We can assist your organisation to conduct a review of your governing documents to ensure your Fund complies with the PAF Guidelines. You can contact our office on (07) 3837 3600.
Disclaimer: This article provides an overview only of the changes to compliance requirements for Prescribed Private Funds converted to Private Ancillary Funds, and in the interest of brevity, it is not all inclusive. It should not be considered to be legal advice. You should obtain legal advice for your or your organisation’s specific circumstances rather than relying on general information.