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Charitable sub-fund arrangements allow you to use the DGR status of somebody else’s charity for your charitable purpose.
Charitable Sub-Fund Arrangements
In this final episode of our three-part mini-series about charities, we discuss Charitable Sub-Fund Arrangements with Darren Fittler of Gilbert + Tobin in Sydney, Melbourne and Perth.
If you haven’t done so yet, please listen to ep 315 and also to the last two episodes 424 and 425 to re-jig your memory. Here is what we learned, but please listen as Darren explains all this much better than we ever could.
Access the episode through a free podcast app on your mobile phone to listen while you drive, walk, or work.
Charitable Sub-Fund Arrangements
Setting up a charity (Item 1 DGR) is a lot of work and involves tedious admin. Hence, sub-funds are a popular alternative.
Sub-funds are about using a charity’s DGR 1 status as an umbrella when fundraising. Using the DGR as a host allows the legacy team – the family, friends, and community that support a cause or individual – to offer tax receipts while having some control over how the donations are used.
Here are twelve important points about sub-fund / sub-account arrangements.
1 – How to support a cause
In ep 315 and the last two episodes, we listed four ways to financially support a cause. Bequest in your will, donate to a charity, set up your own charity, or set up a PAF But looking into this more, you actually have five options to donate to a charity. You can:
Option # 1 – set up your own charity and donate to it
- 1a – your own DGR 1
- 1b – your own DGR 2 (PAF or PuAF)
Option # 2 – donate to somebody else’s charity – no strings attached
- 2a – somebody else’s DGR 1
- 2b – somebody else’s DGR 2 (PAF or PuAF)
Option # 3 – set up a sub-fund / sub-account within an existing charity and donate to that sub-fund or sub-account
- 3a – within a DGR 1
- 3b – within a DGR 2 (PAF or PuAF)
Option # 4 – donate to somebody else’s sub-fund / sub-account within an existing charity
- 4a – somebody else’s sub-account in a DGR 1
- 4b – somebody else’s sub-fund within a DGR 2 (PAF or PuAF)
Option # 5 – leave a bequest in your will – and instruct your estate to do any of the options above.
And of these five options, in this episode we focus on option no. 3 and 4 – donating to an existing charity’s sub-fund or sub-account.
2 – Sub-fund v Sub-account
Both PAFs and PuAFs can offer sub-fund arrangements. A sub-fund is just a legal agreement, a sub-account.
The term ‘sub-fund’ seems to be closely linked to PuAFs. So if you offer a sub-fund arrangement within a DGR 1 charity, call it a ‘sub-account’, ‘donor account’, ‘tracked account’ or something similar to avoid confusion. We will call it a ‘sbu-account’.
3 – A Sub-Fund is a Legal Agreement
A sub-fund or sub-account is a legal agreement between a DGR and a legacy team.
4 – A Sub-Fund is Not a Legal Entity
A sub-fund or sub-account is not an entity as such. It sounds like one, but it isn’t. Even if you give the A sub-fund or sub-account a name, that name is for marketing or branding only. It doesn’t create a separate entity.
5 – A Sub-Fund is like a bucket
Think of a A sub-fund or sub-account as a bucket set aside for a special purpose.
6 – Your Sub-Fund is not your money
Even though it is your A sub-fund or sub-account, the money is no longer yours. The DGR is the legal owner of that bank account and the funds collected. However, by signing the agreement, the DGR has committed to using the funds in a certain way.
7 – Two ways to use your sub-fund
When a legacy team fundraises for a A sub-fund or sub-account – be it through an event or not – there are two ways to do it:
Option # 1: Organiser collects payments
The legacy team collects all payments in their own bank account, pays all expenses, and then transfers the profit to the DGR’s bank account, earmarked for a certain sub-fund. Anything that happens outside the DGR’s bank account has nothing to do with the sub-fund. That is a matter between the legacy team and their supporters, and the DGR has no control over that relationship. The payments from supporters to the legacy team are not tax-deductible donations to a DGR.
Option # 2: Donors donate directly to the DGR
All donations are paid directly to the DGR’s bank account, earmarked for a certain sub-fund. The DGR pays the expenses and reimburses the legacy team for their expenses. All payments to the DGR hit the sub-fund, qualifying as a tax-deductible donation.
Example
The local gym holds a ‘Train the Trainer’ fun event, collects payments, and transfers an amount to a DGR’s sub-fund. Only the transfer from the gym to the DGR hits the sub-fund. Payments from gym members to the gym are made outside the sub-fund.
8 – Donations to a sub-fund are tax-deductible
All donations to a sub-fund within a DGR are tax deductible, whether they flow through a sub-fund or not. In fact, whether there is a sub-fund is irrelevant to the tax receipt. On the other hand, payments to a legacy team are not tax deductible.
9 – You can have a sub-fund in any entity
Since sub-funds are just legal agreements, you can have sub-funds in any form of charity. You can even have them within a PAF. In fact, that is what a public PAF is. An ancillary fund with many different sub-funds.
10 – Invest or Pass on
A sub-fund can be a flow-through fund, where donated funds are not invested but are transferred to other DGR 1 charities or the host charity itself within the same year. A sub-fund could also invest the funds and then distribute a portion of the earnings as instructed by the sub-fund agreement.
11 – Other Services
While we have been talking about money and bank accounts, the host charity might offer much more to the legacy team, from advice and support, over webpages and payment facilities to social media support, etc.
12 – Sub Fund, Seed Fund, Endowment Fund, etc
Charities talk about ‘sub-fund’, ‘seed fund’, ‘endowment sub-fund’, etc., but these are just ‘made-up’ terms to describe different forms of possible legal agreements, i.e. describe when and how much money is coming into the sub-fund and what is to happen with the money. These are not legal terms as such.
This is an overview of what we took away from this interview but please listen as Darren Fittler goes into a lot more details.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 12 August 2024
Tax Talks spoke to Darren Fittler - Lead partner in Gilbert + Tobin's Charities + Social Sector group at Gilbert + Tobin Lawyers - for more details.
