The rise of charitable giving

A resilient economy and a more optimistic workforce has seen charitable giving grow 6.5 per cent in 2015, according to the most recent NAB Charitable Giving Index. According to the report, our charity dollar went to a wide range of charities. Humanitarian causes, such as the Red Cross and World Vision, represented around 35 per cent of all donations, ahead of health and disability charities with 12 per cent.

Wherever your clients prefer to direct their giving, there are benefits beyond the personal satisfaction of supporting a worthy cause. While the tax minimisation benefits available through structures such as investment bonds are well known, the significant tax advantages of philanthropic investment structures like private ancillary funds (PAFs) and donor-advised accounts (established under a public ancillary fund (PuAF)) are not as familiar to many clients.

The Government’s proposed changes to super in the 2016 Federal Budget may prompt advisers to look at philanthropic investment structures, and in particular the tax advantages they offer individuals, their families and friends, including:

  • donations into an ancillary fund are 100% tax-deductible
  • the income and capital gains earned are exempt from tax
  • unlike other trust structures, philanthropic funds are not subject to the ‘law of perpetuities’, enabling investors to create long-lasting legacies.

Beyond one-off donations, it may be appropriate to establish a charitable trust or fund to provide a longer lasting legacy. Typically there are three types of charitable trusts or funds – private ancillary funds, public ancillary funds and testamentary charitable trusts. The following table looks at the features of PAFs and PuAFs:


Private ancillary fundsPublic ancillary funds
Are your clients' contributions tax-deductible?

Yes, your clients can offset 100% of the value of their donation against their taxable income.

Under certain conditions, your clients could also elect to spread the tax deductions for a gift over a period of up to five income years (in any proportion)

Yes, your clients can offset 100% of the value of their donation against their taxable income.

Under certain conditions, your clients could also elect to spread the tax deductions for a gift over a period of up to five income years (in any proportion)

What is the minimum amount your clients need to establish their account or foundation? $500,000 $50,000
How much do your clients have to distribute to charity each year? 5% of the net value of the PAF (at 30 June of the preceding financial year) or $11,000 – whichever is greater 4% of the net value of your clients' accounts annually
Which charities can your clients support? Eligible charities need to be Item 1 Deductible Gift Recipients Eligible charities need to be Item 1 Deductible Gift Recipients
How are the underlying assets invested? The PAF’s assets need to be invested prudently. With your clients, you determine the strategy and underlying investments Advisers select a low-cost managed fund aligned to the clients' investment strategy

Only certain organisations are entitled to receive tax-deductible gifts. For more information visit the Australian Government website.

Don’t forget too – philanthropy can create a family legacy of giving that helps introduce the next generation of clients to your practice.

Testamentary charitable trusts

Unlike PAFs and PuAFs, a testamentary charitable trust is established by your client’s Will, after their death. While, like ancillary funds, the income and capital gains are tax-free, the initial contribution is not, as the trust is not endorsed as a Deductible Gift Recipient.

Unlike ancillary funds, charitable trusts are not restricted to supporting organisations endorsed as Item 1 Deductible Gift Recipients. This makes charitable trusts ideal structures for those wanting to set up scholarship funds or support grass roots charitable purpose organisations.

Remember, giving in June is possibly the best time to give as your clients claim the tax back in July.

For more on charitable giving, read IOOF TechConnect’s paper or visit the Australian Executor Trustees website.

Source: Australian Executor Trustees (AET)


Important
The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.