Philanthropy Australia Responds to Public Ancillary Fund Reform

Philanthropy Australia has cautioned the Federal Government not to change the current distribution requirements for Public Ancillary Funds (PuAFs) in its response to a national Discussion Paper on "Improving the Integrity of PuAFs".

The Gillard Government released the Discussion Paper on the proposed regulatory changes earlier this year saying it will give Australians who donate to general fundraising charities confidence their donations will reach people most in need.

The Assistant Treasurer Bill Shorten said at the time that the proposed changes will improve the accountability of Public Ancillary Funds which have a duty to distribute donations as efficiently as possible to the charities seeking public support.

The discussion paper proposes several changes to the current regulatory system, including the introduction of legislative guidelines, a regular valuation of assets, clarification of investment and distribution rules and a system of administrative penalties for small breaches.

In its response to the Discussion Paper, peak body, Philanthropy Australia says it fully supports any moves to make the system simpler and more effective.

However, it says it does not see any justification for changing the current distribution requirements for Public Ancillary Funds from a percentage of income to a percentage of capital. It says the argument that a higher level of distribution will ensure a higher level of accountability could be viewed as incorrect as there appears to be no logical connection between the two.

In particular, Philanthropy Australia says it sees no justification in using even the 5% distribution rate for Private Ancillary Funds as a starting point on which to base the distribution rate for Public Ancillary Funds.

It says if this change is introduced, there will be many unintended consequences.

Philanthropy Australia has called on the Government to consider the following points:

• Trustees of Public Ancillary Funds will generally be implementing a more conservative investment strategy than the trustees of PAFs, stemming from the public nature of the funds. Public Ancillary Funds also face higher costs than many PAFs, particularly fundraising costs. Given these restrictions it is unlikely that a PuAF will be sustainable in the long term while paying out at a rate of 5%.
• A distribution rate of 5% or higher will threaten the perpetual nature of sub funds administered by Community Foundations and Charitable Endowment Funds, and make it less likely that donors will make donations. It is likely that many of these donors, rather than diverting their funds directly to item 1 DGRs, will simply choose not to give at all if the attractions of perpetuity are withdrawn.
• Some sub funds have not received any tax benefits (eg, where funded by a bequest) and it would be excessively onerous to introduce a regime that threatens the perpetuity of such funds based on consideration of forgone tax revenue.
• According to the ATO Taxation Statistics 2007/08, in the 07/08 year only 4,169 individuals who made donations of over $25,000. However, there were over 30,000 individuals who made donations of over $5000. Many of those donors will be making contributions to sub-funds of community foundations or charitable endowment funds. Philanthropists in a lower wealth bracket should not be penalised by a higher distribution rate than faced by their wealthier counterparts.
• Many donors to Public Ancillary Funds, particularly those who have established sub-funds, have donated to these funds because they believed their gift would ensure community benefit in perpetuity. The introduction of a 5% or higher distribution rate will lessen, not strengthen, the trust of those donors.
• Complying with a 5% distribution obligation may not be possible legally for many trusts due to either the terms of the initial gift to the PuAF that may restrict the distribution of its capital, or the terms of the trust deed. For example, the deed may only permit the distribution of income. If income in a year was less than the 5%, the trustee would not be able to comply with the requirement. The deed may not be able to be amended.
• Sufficient flexibility to cover “social investment” circumstances such as where a public ancillary fund holds illiquid assets such as a building which may be provided to a DGR for a lower than market value, or “soft loan”, should also be included.

Philanthropy Australia says if a new distribution rate is introduced, grandfathering of existing funds (i.e. keeping the old rules for an extended period) will be required.

In 2007-08, Australians provided over $2.3 billion in tax deductible donations to various Australia charities, some of which passed through 1,500 Public Ancillary Funds.

The proposed changes introduce a new regulatory framework similar to that introduced on 1 October 2009 for Private Ancillary Funds. The measure will start on 1 July 2011.

The discussion paper is available on the Treasury website at www.treasury.gov.au.

Philanthropy Australia's submission can be downloaded at www.philanthropy.org.au