How Does a PAF Work?
Private Ancillary Funds, commonly known as PAFs, are becoming a popular way for Australians to support charitable causes in a structured and impactful way. They allow donors to create long-term giving strategies while benefiting from tax deductions, investment growth, and multigenerational involvement. If you’re considering structured philanthropy, understanding how a PAF works is an essential first step.
What Is a Private Ancillary Fund?
A Private Ancillary Fund is a charitable trust designed to manage ongoing philanthropic giving. It allows individuals, families, or businesses to make tax-deductible contributions, invest those funds, and distribute money to approved charities each year. PAFs are governed by the Australian Taxation Office (ATO) and the Australian Charities and Not-for-profits Commission (ACNC), ensuring they operate transparently and in line with national guidelines.
Key Components of a PAF Structure
A PAF is built on a clear trust structure that outlines how the fund is governed and operated. Understanding these components is key to ensuring the fund runs smoothly and compliantly. A helpful overview of how different pafs are structured can give insight into how roles and responsibilities are typically divided. The founder is the person or group who establishes the fund and contributes the initial capital. Trustees manage the fund’s operations, investments, and annual distribution decisions. Every PAF must also appoint at least one responsible person, an individual with community standing who helps oversee governance and ensures the fund adheres to all requirements.
How a PAF Works Step by Step
Establishing the Fund
The process begins with setting up a trust deed that complies with the Private Ancillary Fund Guidelines. The deed outlines the fund’s purpose, governance, and operational rules. Trustees are appointed, and a responsible person is included in the structure to provide oversight. The fund must then obtain deductible gift recipient (DGR) endorsement to ensure that donations are tax deductible.
Making Contributions
Once established, the founder and other donors can contribute cash or assets to the PAF. These contributions are generally tax deductible, with the option to spread deductions across multiple financial years. Contributions form the capital base from which future investment returns and distributions are generated.
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Investing Fund Assets
A key element of operating a PAF is investing its assets. Trustees develop and follow an investment strategy that balances growth, income, and risk. The goal is to grow the fund sustainably so it can continue distributing money to charities every year while maintaining long-term capital strength.
Distributing Funds to Charities
PAFs must distribute at least 5 percent of their net assets annually. These distributions can only be made to organisations that hold DGR status. By following this rule, donors ensure that their contributions have real, ongoing impact. PAFs can support a wide range of charitable causes, including health, education, welfare, environment, and more.
Governance and Ongoing Compliance
A PAF must comply with strict regulations. Trustees are responsible for meeting reporting obligations, maintaining clear records, and ensuring that investment and distribution activities align with the trust deed. Annual reporting to the ACNC and ATO is mandatory. The responsible person adds an additional layer of oversight to ensure decisions are made ethically, transparently, and in the best interest of the fund’s purpose.
Benefits of Operating a PAF
A PAF offers several advantages for strategic philanthropic giving. Donors benefit from tax deductions, the ability to grow their charitable impact through investment, and the chance to involve family members in long-term decision-making. PAFs also allow donors to support multiple charities over time, creating a legacy that can continue across generations.
When a PAF Might Be Suitable (and When It Might Not)
A PAF is well suited to donors who want to create a long-term philanthropic structure and have sufficient capital to establish and maintain a fund. Most advisers recommend a starting amount of around $500,000 to ensure sustainability. For those seeking a simpler alternative, options such as public ancillary funds or direct giving may be more appropriate.
Parting Advice
A Private Ancillary Fund provides a structured, tax-effective, and deeply meaningful way to support the causes you care about. By combining contributions, investment growth, and annual distributions, a PAF helps donors make a lasting impact while building a legacy of generosity. With the right guidance, it can become one of the most rewarding ways to give back.
