Third Dimension – Changes to Ancillary Fund Guidelines

September, 2016

By John Vaughan-Williams, Laywer

An Ancillary Fund is recognised by the Australian Tax Office (ATO) as a special type of fund, which is eligible to be endorsed as a Deductible Gift Recipient (DGR). Some are registered as charities with the Australian Charities and Not-for-profits Commission (ACNC), and others are operated by registered charities.

DGRs are split into two types, which are known as ‘Item 1 DGRs’ and ‘Item 2 DGRs’. An Item 1 DGR is one that conducts activities, but an Item 2 DGR is one whose permitted purpose is to make donations to Item 1 DGRs, while not conducting any activities itself.

Ancillary Funds are always Item 2 DGRs; this structure provides a gateway for donors that would like to donate to DGRs, but do not want to make the decisions as to which DGRs to support.

Ancillary Funds are created by trust deeds, and are split into two types – private and public. Both have bodies corporate as trustees, which determine how the assets held in the ancillary fund will be distributed.

A Public Ancillary Fund raises its funds from the general public, whereas a Private Ancillary Fund restricts its fundraising to a specific group, commonly members of a family. The private ancillary fund structure can be a good way of formalising the philanthropic endeavours of individuals or families who have accumulated wealth and then want to make donations that will be held in a centralised source.

In recent times, there has been uncertainty regarding the legal requirements for Ancillary Funds, particularly surrounding distributions.

Since the original Public Ancillary Fund Guidelines were released in 2009, and the Private Ancillary Fund Guidelines were released in 2011, there has been considerable conjecture as to whether and how they will be amended. Following an exposure draft of amendments to the guidelines for both private and public ancillary funds in December 2015, the guidelines were amended in late April of this year, with immediate effect.

The recent amendments have generally been welcomed by the sector, and followed previous submissions for change from within the sector. The most important effects of the recent amendments are summarised below.

1. Private Ancillary Funds can distribute to Public Ancillary Funds

Private Ancillary Funds are now allowed to distribute assets to Public Ancillary Funds in certain circumstances, whereas this was not previously permitted. This provides greater flexibility for Private Ancillary Funds that would like to contribute to a larger fund that exists for a similar purpose, or upon winding up.

2. Wider Definition of Responsible Person

It is a requirement that directors of the trustee body corporate of an Ancillary Fund include a minimum number of “responsible persons”, who meet certain minimum criteria. For a Private Ancillary Fund, there is a minimum of one, and for Public Ancillary Funds, the minimum is three.

The definition of “responsible person” has been widened, to include anyone before whom a statutory declaration can be made. This creates greater flexibility in the establishment of Ancillary Funds, and the appointment of trustee directors.

3. Minimum Distribution Rate

Both Public and Private Ancillary Funds have always been subject to a “minimum distribution rate” – this is a minimum percentage of its net assets, assessed at the end of the previous financial year, that must be distributed to its beneficiaries during that financial year.

This minimum percentage is designed to ensure that Ancillary Funds are actually working to fulfil their purposes, and not merely hoarding assets.

While the percentages have remained the same under the amendments, the Commissioner of Taxation has the discretion to waive them in special circumstances. This change allows circumstances to be considered where, for example, the assets are likely to be worth significantly more in later financial years.

4. Reporting Streamlined between ATO and ACNC

Ancillary Funds that are registered charities now only have to report to the ACNC, and not also to the ATO. This welcome change follows the government announcements earlier in the year which confirmed the future of the ACNC.

5. Less Onerous Financial Reporting

Under the previous guidelines, all private ancillary funds were required to have their accounts audited by a registered auditor under the meaning of the Corporations Act 2001 (Cth). In line with the government’s wider agenda of reducing red tape for charities and not-for-profits, the new guidelines amend this requirement, by now allowing smaller private ancillary funds (ones with assets of less than $1 million in a particular financial year) to have their accounts reviewed, rather than audited. The person who conducts the review does not necessarily need to be a registered company auditor, but can be a person who is a member of a professional accounting body.

A review is generally cheaper, and involves less administration for the organisation involved. While an audit requires evidence to be put forward to show that the accounts show a true and accurate picture of the finances of the organisation, a review only requires the person conducting the review to state whether anything has come to his or her attention to suggest that the financial report is substantively misstated.

6. Wider Investment Options

The examples of permitted investment of funds by Ancillary Funds are now wider. Ancillary Funds can now conduct the following activities, as well as directly giving funds to Item 1 DGRs:

      a. Lend money to a DGR at a better interest rate than the market rate for a financial institution;

      b. Guarantee a loan to a DGR provided by a financial institution; and

      c. Make payments under the guarantee, if the DGR defaults.

While there is room for further amendment of the Ancillary Fund guidelines in the future, these changes follow a string of recently welcomed changes for the not-for-profit sector in Australia. These recent changes include the rescue of the ACNC, as well as changes to requirements for public benevolent institutions.

This article originally appeared in Third Dimension- Winter 2016

Contact Mills Oakley

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.com.au

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