Private charitable giving - new rules commence operation on 1 October 2009

Previous Bartier Bulletins in February 2009 and May 2009 discussed proposed changes to private charitable giving in the area of Prescribed Private Funds (now called private ancillary funds).  Such funds were originally introduced by the Howard Government in 2001 to encourage private philanthropy in Australia.  The proposed changes commenced operation on 1 October 2009.  It is important that those who established Prescribed Private Funds prior to 1 October 2009 and want them to continue, comply with the transitional rules and time limits.  Further, those seeking to establish private ancillary funds after 1 October 2009 need to comply with the new rules and Guidelines.

Legislative Framework

The legislative framework to give effect to the changes in this area was outlined in Schedule 2 of the Tax Laws Amendment (2009 Measures No. 4) Act 2009.  The amending Act made changes to a number of Acts including the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953.

Income Tax Assessment Act 1997

The Income Tax Assessment Act 1997 was amended to omit reference to the old name of Prescribed Private Fund and insert the new name of private ancillary fund.  It now includes a definition of private ancillary fund by reference to the meaning given in the Taxation Administration Act 1953.  The definition of private ancillary fund and the new rules relating to those funds are contained in Schedule 1 to the Taxation Administration Act 1953.

Taxation Administration Act 1953

Private ancillary fund has the meaning given by section 426-105 in Schedule 1 to the Taxation Administration Act 1953.  A private ancillary fund is essentially a valid private charitable trust under State law or Territory law established by trust deed or under a Will with a corporate trustee, with deductible gift recipient status and in most cases with income tax exempt charity status.

The Commissioner of Taxation (Tax Commissioner) is now responsible for determining whether a trust fund is a private ancillary fund and determining whether that fund is entitled to be endorsed as a deductible gift recipient.  The Tax Commissioner's decision is reviewable by the Administrative Appeals Tribunal and the Courts.

The new rules in Schedule 1 among other things:

• rename Prescribed Private Funds as private ancillary funds;
• give the Treasurer the power to make legislative guidelines about the establishment and maintenance of private ancillary funds (see section 426-110);
• move the full administration of private ancillary funds under the authority of the Tax Commissioner;
• give the Tax Commissioner the power to impose administrative penalties on trustees that fail to comply with the private ancillary fund guidelines and to remove or suspend trustees of non-complying funds; and
• set out the transitional rules for former Prescribed Private Funds.

Private Ancillary Fund Guidelines 2009

Guidelines have been made under section 426-110 in Schedule 1 of the Taxation Administration Act 1953 and the Guidelines commenced operation on 1 October 2009.  The purpose of the Guidelines is to set minimum standards for the governance and conduct of a private ancillary fund and its trustee.

The ongoing rules that a private ancillary fund must comply with are set out in Part 2 of the Guidelines.  A private ancillary fund must be a not-for-profit entity set up and run solely to benefit other deductible gift recipients.  It must be operated solely in Australia but can make distributions to deductible gift recipients that operate outside Australia.

A private ancillary fund must distribute a certain amount of its income and assets to active deductible gift recipients each year.  Guideline 19 provides that a fund during each financial year must distribute at least five per cent of the market value of the funds' net assets (as at the end of the previous financial year).

Guidelines 20 to 25 set out rules for when, and how, to work out the market value of the funds' assets.

The Guidelines also set out rules for record keeping by trustees, the requirement of an investment strategy, investment limitations and for the reimbursement or remuneration for trustees.

Part 3 of the Guidelines set out the transitional rules for former Prescribed Private Funds to help them make the transition into the new regime.  The transitional rules are contained in Guidelines 52 to 60.

In conjunction with the release of the 2009 Guidelines, the Australian Taxation Office has released a private ancillary fund model trust deed as of 1 October 2009 for consideration for use by applicants seeking to establish a private ancillary fund that complies with the Guidelines.

Action Required

Bartier Perry is presently assisting clients to ensure:

• former Prescribed Private Funds that are to continue and not be wound up comply with the transitional rules and time limits set out in the Guidelines; and

• private ancillary funds established from 1 October 2009 comply with the new rules and the Guidelines.

Author: Gerard Basha