An intro into charitable giving
Australians donate about $10 billion a year to charity, representing an important source of income for the sector.
For many of us, giving to charity is an occasional event – typically small amounts in cash and often as part of attending a fundraiser, attending church or buying a raffle ticket.
In the midst of a global pandemic a lot of people have had health and livelihoods impacted and as a result charities of all types are seeing high and ongoing demand for help.
In giving, just as in investing, having a plan is paramount.
Increasingly, wealthy Australians are using a structure introduced by John Howard in 2001 called a private ancillary fund, which is essentially a tax-free charitable trust formed for the purpose of investing money and distributing the earnings to charity.
So what is a private ancillary fund? And how can it help you find ways to put more structure into your charitable donations?
Fundamentally, a PAF allows a donor to maintain control of assets in a tax-free environment in return for agreeing to donate a minimum percentage of the capital every year to charities.
A PAF is a trust with a corporate trustee, managed by a board that can consist of the founder, family and friends and with a ‘responsible person’ unrelated to the founder sitting as an independent director.
Donations of cash and assets can be made to the fund as often as you like without limit and usually with an associated tax deduction. Bequests of assets in a will to a PAF are exempt from capital gains tax.
So what’s the catch?
There are a few strict rules that need to be complied with. A PAF cannot solicit donations from the public and cannot operate a business or actually conduct charitable work. Instead, it can only manage investments and donate money.
Most importantly, every year the fund must distribute 5 per cent of its value to a charity, with a minimum annual distribution of $11,000.
That mandatory minimum means a PAF is only normally suitable for those of us with more than a few hundred thousand dollars to set aside. Advisors suggest $1m minimum is more sensible.
For those of us with less, there are a number of public ancillary funds that can take donations from the public. They allow smaller donations and yet can still give you control of which charity gets the earnings each year.
It’s worth remembering that you don’t need to be worth tens of millions to make a difference to a charity.
Most charities are quite small operations. Two-thirds of Australian charities have less than $250,000 in annual revenue and more than a third have revenue of less than $50,000.
So even modest donations can have an impact on many charities’ operations.
So how can you get started?
It’s worth having a conversation with your family about how you want to use your wealth for good and how you might want to be remembered.
Some people aim to help their local community where they can have a tangible impact. Others seek to make contributions to solve global problems.
The next step is to consider how exactly you will make contributions. Philanthropy does not have to be limited to cash but can also be stocks and securities, real estate and even jewellery and art.
Knowing the tax implications of charitable giving is also important. Many donations in Australia are tax-deductible in the year they are made or – in some circumstances – over the following five years. The key is that the donation was made to an organisation registered with the Australian Taxation Office as a deductible gift recipient. Deductible gift recipients do not need to be charities: organisations like hospitals, art galleries and schools can also qualify.
In a year bookended by bushfires and this seemingly endless pandemic, perhaps 2020 is the time we all take a look at how we can give back to society.
Reach out to JBS Financial to help to discuss how you can incorporate charitable giving in your financial plan!