PAF v PuAF – what is the difference between the two?
PAF v PuAF
In this episode, we will examine the similarities and differences between PAFs and PuAFS with Darren Fittler of Gilbert + Tobin in Sydney, Melbourne, and Perth, a corporate lawyer focusing on charities and not-for-profits.
Please listen to episode 315 of Tax Talks first. In it, we discuss private ancillary funds in great detail with Simone Daniels of Andreyev Lawyers in Sydney.
In February 2023, per the ACNC report, there were 2,035 PAFs – private ancillary funds – and 1,172 PuAFs – public ancillary funds – in Australia. Now, I wanted to give some examples of PuAFs, but it is quite hard to quickly work out who is a PuAF without investing too much time in who isn’t. So the two examples I have come up with are the Australian Communities Foundation and the Sydney Community Foundation. But of course, there are another 1,170 other PuAFs in Australia.
So here is Darren Fittler of Gilbert + Tobin in Sydney about PAFs and PuAFs.
Here is what we learned, but please listen as Darren explains all this much better than we ever could.
To listen while you drive, walk or work, access the episode through a free podcast app on your mobile phone.
PAF v PuAF
Part B – Public and Private Ancillary Funds
In episode 242 we focused on DGR 1 charities. In this part, let’s focus on donors and how they can structure their giving through PAFs and PuAFs.
We covered Private Ancillary Funds in episode 315. The following focuses on the similarities and differences between public and private ancillary funds.
1 – Four Ways to Give
There are four ways you can give to a cause:
1 – Direct donations from one of your entities to a charity (possibly into a sub-fund)
2 – Bequest in your will
3 – Running your own charity
4 – Donations through Public Or Private Ancillary Funds (PAFs and PuAFs).
So it is this last one, we focus on here.
2 – Why a PAF
Public and private PAFs are about giving. They are not charities themselves but are about giving to charities. And they are about timing.
PAFs and PuAFs give you flexibility in timing. by unlocking the link between your tax deduction and the actual payment to a charity.
By donating to a PAF or PuAF, you can receive a tax deduction when you want it. And you can still maintain some control (more control in a PAF, less control in a PuAF) until the funds are actually transferred to a DGR 1 charity.
3 – Special Purpose Trusts
PAFs and PuAFs are special-purpose trusts, but they are just one form of special-purpose trust. There are others, such as disability trusts, SMSFs, testamentary trusts, etc.
All trusts are governed by trust law, which is state law. In addition, there are special guidelines for ancillary funds.
4 – Common Points of Public and Private Ancillary Funds
Public and private PAFs have many things in common. Both are:
- Discretionary trusts
- Conduits between donors and Item 1 DGRs.
- Item 2 DGRs (if endorsed by the ACNC)
Both must:
- Pursue a sole purpose (like an SMSF, disability or testamentary trust)
- Have a corporate trustee
- Have a ‘responsible person’ on the board
- Distribute some income (as a certain percentage of assets) each year
- Distribute income to Item 1 DGRs only
- Distribute capital upon vesting to Item 1 DGRs only
- Comply with ancillary fund guidelines at risk of losing ACNC registration
Both can:
- Live forever since not subject to the law against perpetuity
- Retain income, so don’t have to distribute all income each year
- Give donors flexibility of timing
- Give donors some control over funds (more in a PAF, less in a PuAF)
5 – Differences between Public and Private Ancillary Funds
Despite their many similarities, public and private ancillary funds are different.
Public PAFs ask for donations from the public. Private PAFs can’t ask the public. They can only receive donations from their founders, relatives, associates and employees.
Public PAFs give you limited control over how your funds are invested. Private PAFs give you full control over how the funds are invested.
6 – How a Private PAF works
Let’s say you need a tax deduction of AUD 10m now since you made a large capital gain. But the charity of your choice should only receive AUD 1m each year. More would swamp them with cash and create too much admin.
So you set up a private PAF and transfer the AUD 10m into it. Voila, you have your tax deduction. Your private PAF invests the funds, earns income and transfers AUD 1m each year for the next 11 years (assuming a 10% cumulative return). Over those 11 years, you still have control. You can change your mind and stop donating to one charity and instead donate to another.
7 – How a Public PAF works
Same scenario as above, but you can’t be bothered setting up your own private PAF. Far too much admin and headaches. So you transfer the AUD 10m to a PuAF. You get your tax deduction. Meanwhile, the PuAF invests the funds for you (for a fee), and each year you tell them where you want the AUD 1m to go.
So these are the similarities and differences between PAFs and PuAFs in a nutshell, but please listen since Darren Fittler goes into a lot more details.
MORE
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.