How Does a PAF Work?
Private Ancillary Funds (PAFs) are one of the most effective ways to make long-term, structured charitable contributions in Australia. They offer donors the opportunity to plan their giving strategically, enjoy tax benefits, and create a lasting impact for future generations. Understanding how a PAF works can help you decide if it’s the right approach for your philanthropic goals.
What Is a PAF?
A PAF is a charitable trust established under Australian law to manage charitable giving in a structured and tax-effective way. It allows individuals, families, and businesses to make tax-deductible donations, invest those funds, and provide consistent financial support to charitable organisations over time. PAFs are regulated by both the Australian Taxation Office (ATO) and the Australian Charities and Not-for-profits Commission (ACNC) to ensure transparency and accountability.
The Structure of a PAF
A PAF is set up as a trust, with a founder (the donor) who contributes funds or assets to establish it. The fund is managed by trustees, who are responsible for making investment decisions, overseeing annual distributions, and maintaining compliance. Every PAF must also have at least one “responsible person” — someone with recognised standing in the community, such as a lawyer, accountant, or senior professional — who ensures the fund operates ethically and in accordance with the law.
How a PAF Works in Practice
The process of managing pafs follows a consistent structure that ensures the fund operates efficiently and within Australian regulations.
Step 1 – Establishing the Fund
The first step is to create a trust deed that complies with the Private Ancillary Fund Guidelines 2019. Trustees are appointed to manage the fund, and a responsible person must be included in the governing structure. The fund must then apply for deductible gift recipient (DGR) endorsement to receive tax-deductible donations.
Step 2 – Contributing to the Fund
Once the PAF is established, the founder and other donors can contribute cash or assets. These contributions are generally tax deductible, and donors can choose to claim the deduction in the year it’s made or spread it over up to five years.
Step 3 – Investing the Assets
The funds held in a PAF are invested to grow over time. Trustees develop an investment strategy that balances growth and risk, ensuring there are sufficient returns to meet the annual distribution requirement while maintaining the fund’s capital base.
Step 4 – Distributing to Charities
Each year, a PAF must distribute at least 5% of its net assets to eligible charities. These recipients must be deductible gift recipients (DGRs) approved by the ATO. This structure ensures a consistent flow of funds to charities that align with the donor’s values and philanthropic goals.
Governance and Compliance
PAFs must follow strict compliance and reporting standards set by the ATO and ACNC. Trustees are responsible for maintaining accurate records, lodging annual reports, and ensuring the fund meets its annual 5% distribution requirement. The responsible person plays a crucial role in ensuring decisions are made ethically and transparently.
Key Benefits of Operating a PAF
A PAF offers several advantages for donors who want to give more effectively. It provides significant tax benefits, allowing donors to claim deductions while growing the fund through investment. It also enables long-term planning, with the flexibility to support a range of charitable causes over time. A PAF can help families build a legacy of generosity, teaching younger generations the value of structured philanthropy and responsible giving.
Is a PAF Right for You?
A PAF is best suited for individuals, families, or businesses looking to make substantial and ongoing charitable contributions. It’s particularly beneficial for those who value long-term planning and wish to create a meaningful legacy. However, if you’re seeking a simpler or smaller-scale approach, alternatives such as public ancillary funds or direct giving might be more suitable.
Summing Up
A Private Ancillary Fund is an efficient, tax-effective way to support the causes you care about. By combining investment growth, annual giving, and strong governance, PAFs ensure that your philanthropy makes a lasting difference. With the right professional guidance, you can build a structure that reflects your values and creates meaningful impact for generations to come.
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