Private Philanthropic Funds Reach Record Levels

Distributions from Private Ancillary Funds (PAFs) have grown to record levels in Australia reaching $251 million in 2012 and were estimated to exceed a cumulative $1.7 billion in 2014, according to a new report.

The PAF Report by fund managers JBWere Philanthropic Services reveals there are now 1,240 PAFs operating across Australia with a post GFC record number established in 2014. New South Wales saw its highest ever year of new PAFs and now has 42 per cent of all PAFs.

“Their introduction over 13 years ago, combined with the more recent jump in large and public gifts, has provided philanthropy in Australia its biggest leap forward in many decades,” according to report author, John McLeod.

The report found that distributions from PAFs have grown to record levels reaching $251 million in 2012 and estimated to exceed a cumulative $1.7billion in 2014.

“The strong and consistent growth in distributions has highlighted the value of having a dedicated philanthropic corpus through variable financial market conditions,” the report said.

“While the size of annual distributions from PAFs set another record level in 2012, two things stand out when looking at PAF distributions. Firstly, power of a growing corpus to deliver consistent and increasing levels of support for the charitable sector and secondly, the diversity of causes chosen by such a large group of individual PAFs.

“Given the relatively recent birth of the PAF vehicle, volatility in financial markets over this period and the uncertainty over PAF legislation changes, the continued and smooth rise in distributions is a welcome reward for a worthy sector and an idea championed by a small but influential and determined group of visionaries."

The report said that after plateauing in recent years, support for the welfare sector again showed its dominant position in 2012 with 28 per cent of distributions, a similar share to that seen across all non-religious giving in Australia.

“Welfare has now seen estimated total distributions of over $500million from PAFs. Sectors to see their share of donations fall in 2012 were culture and environment, although the former still enjoys much higher support from PAFs than that seen from the broader population,” the report said.

“Both health and research enjoyed a record share of distributions in 2012 with education and international affairs steady. The other notable area is ‘other’ which includes both legitimate smaller, eligible DGR causes but also includes some areas not allowed to be supported by PAFs. The most common of these is support of other ancillary funds, which, although down from a high of $11.6 million in 2011, still saw donations of $6.4 million in 2012."

The report said that family involvement and particularly the engagement of children is proving an important driver for the use of structured giving such as PAFs. This extends to all areas of their operations including distribution and investment decisions and it provides an ideal broad learning environment, often for both generations.

PAFs also continue to distribute around 9 per cent of assets annually, well in excess of the minimum 5 per cent  required, with the average PAF distributing around $250,000 each year.

“While the primary reason for the existence of PAFs is to provide support for the charitable sector (eligible DGRs), they can’t do that without funds and the bigger that pool of funds, the more support they can offer. Although there are a small number of ‘flow through’ PAFs which distribute most or all donations in the same or following year using the structure more as a discipline, most are building a corpus over time through a combination of new donations into the PAF and financial performance above distributions and costs,” the report said.

“The average PAF has consistently had assets valued in the $2-3 million range, well above our suggested $500,000 minimum size to justify use of this philanthropic vehicle.”

According to the report, many PAFs are doing more than simply making annual distributions from the returns of a traditional financial portfolio in an effort to maximise their social return.

"This can involve their choice and use of asset types such as impact investments, ethical or social screening or making PAF assets available for use by eligible DGRs such as low or no cost rental property, providing support beyond just dollars to their chosen causes.

“As the overall PAF structure gradually matures we are seeing the gap between new donations into PAFs and distributions from PAFs narrow. We expect this balance to reach equilibrium in around 10 years. We also estimate that annual distributions will top $1 billion over the next 20 years when the cumulative total of distributions should have reached $15 billion.

“While very well regulated, there are a few areas where PAFs have encountered operating problems including distributing to other ancillary funds and not also including an audit of PAF guideline compliance when having a financial audit completed.

PAFs were introduced as part of the former Howard Government’s response to a March 1999 report by the Business and Community Partnerships Working Group on Taxation Reform to improve philanthropy in Australia.

This led to the introduction of the Prescribed Private Fund (PPF) vehicle being available as a philanthropic structure from March 2001 and the first funds being established in June 2001.

Under the Abbott Government, the Prime Minister’s Community Business Partnership was re-established in October 2014 and is currently receiving submissions including the extension of portability to PAFs to allow their assets to be transferred to other ancillary funds in the event of their winding up.

This is currently only legislated for public ancillary funds.The attraction of PPFs included tax deductions for donations into them, exemptions from income tax and no public fundraising requirements (unlike public ancillary funds) while they were required to grant income to eligible deductible gift recipient (DGR) organisations. They also had to complete an annual audit and provide an annual return to the ATO while also having at least one external trustee/director of the fund.