Not so long ago I wrote about the new draft guidelines and legislation for Public Ancillary Funds. The new regime will come into effect on 1 January, but there will be a three year period for Public Ancillary Funds to transition.

At the Community Foundations Forum, David Ward, author of The Trustee Handbook, gave a session on what the proposed changes to Public Ancillary Funds really mean for organisations who are administering them.

Although the new legislation for Public Ancillary Funds will be federal, we should note that trust law for charitable trusts is state based. This creates two levels of administration as many foundations have both public ancillary funds (dgr funds) and charitable trusts (sometimes referred to as open funds).

The key difference is that donations made into public ancillary funds (or public funds) are tax deductible, and the monies can only be paid out to recipients who have both deductible gift recipient status and are deemed charitable institutions (or have tax charitable concession status) while recipients of funds from charitable funds only need have charitable status (but there is no tax deduction for contributions made into the fund).

At the moment my understanding is that in Victoria, decisions on how to distribute funds from both a public fund and a charitable fund have been based on a requirement to give out a minimum of 80% – 85% of income earned. The new requirements for public ancillary funds at face value seem to be simpler – being 4% of the value of the fund as at 30 June. There are two catches here. If one is administering two funds – ie a charitable fund and a public fund – you will now need to calculate separately for them to determine how much is available for distibution, and if the public fund is smaller than $220,000 there will be a requirement for a minimum payout (at this stage in the draft it is at $11,000, but there is a push for this to be reduced to $8,000).

I was struggling to get my head around this – as I had been thinking that just a straight 4% across all monies invested was an improvement, instead of the complicated formulae some organisations use to track funds which are invested in various ways such as managed investments, short to medium term fixed interest accounts, franking credits and the like. But when I realised that the 4% only applies to public funds (rather than charitable funds), I started to think about ways to properly manage and track. It also made me consider what some organisations call flow-through donations – where a donor makes a donation which is not to the endowment (invested in perpetuity), but needs to be paid out within the same financial year.

If you have a donor who wanted to do this, you would need to be much more careful to pay out their funds to eligible recipients before 30 June, so that those funds were not counted as part of the balace (of which we would need to pay out 4%) for the following year. This could affect the timing of grants rounds.

It also appears that the Australian Tax Office will be enforcing financial penalties where the funds granted have not met the 4% or minimum required, and that the penalties will be incurred by the trustee(s) rather than the fund itself. These commence at $3,000, and may be incurred where the recipient organisations do not meet both the DGR and charitable entity requirements.

It will be interesting to see what the ATO and Treasury decide on – as final submissions closed last week. I understand that Australian Community Philanthropy was putting in a submission on behalf of Community Foundations and that Philanthropy Australia was also giving an opinion.

Do you have a view on the proposed changes? Will this affect your organisation or fund/dgr requirements?