Giving Fund Distribution Reforms for NFP

Introduction

The Australian Government has announced significant reforms for private and public ancillary funds, which will now be known as ‘giving funds’. These changes, including an increased minimum annual distribution rate, are designed to support the federal goal of doubling philanthropic giving in Australia by 2030.

This article explains the key giving fund reforms, including the introduction of a three-year smoothing mechanism to provide greater flexibility for distributions. It also covers the expansion of the community charity Deductible Gift Recipient (DGR) category, which aims to reduce red tape for eligible organisations.

Interactive Tool: Check Your Readiness for the New Giving Fund & Distribution Rules

Ancillary Fund Rule Changes

What is changing?

The Federal Government has announced upcoming changes for Private Ancillary Funds (PAFs) and Public Ancillary Funds (PuAFs). These giving fund reforms introduce several modifications to the existing framework for charitable giving.

The key changes include:

• The renaming of Public and Private Ancillary Funds to Giving Funds.
• An increase in the minimum annual distribution rate for these funds.
• The introduction of a distribution smoothing mechanism, allowing funds to average their distributions over a three-year period.

New names for Ancillary Funds

As part of the giving fund reforms, both Public and Private Ancillary Funds will be renamed. The new terminology is intended to better reflect the primary role these funds play in facilitating charitable giving in Australia.

The proposed new names are:

• PuAFs will become ‘public giving funds‘.
• PAFs will become ‘private giving funds‘.

Updates to Minimum Distribution Rates

The government will increase the minimum annual distribution rate for both public and private giving funds. To qualify for tax concessions, these funds are required to distribute a minimum percentage of their net assets to charities each year.

The minimum annual distribution rate will be set at 6% of net assets. This is an increase from the current rates, which are 5% for PAFs under Section 15(1) of the Taxation Administration (Private Ancillary Fund) Guidelines 2019 (Cth) and 4% for PuAFs under Section 15(1) of the Taxation Administration (Public Ancillary Fund) Guidelines 2022 (Cth).

While this reform increases the minimum required payout, many funds already exceed this level. Treasury analysis shows that about two-thirds of public funds and half of private funds have distributed more than 6% recently. The average distribution rate for PAFs between 2000 and 2021 was 8%, and for PuAFs between 2011 and 2021, it was 15.3%.

The Three-Year Distribution Smoothing Mechanism

Operation of the Mechanism

Through the giving fund reforms, a smoothing mechanism will be introduced that allows funds to average their distributions over a three-year period. This change provides greater flexibility for meeting the minimum annual distribution requirement. 

In certain circumstances, a giving fund can use this averaging method to manage its charitable payouts more strategically over time.

This initiative is conceptually similar to changes made to ancillary fund guidelines in 2020. Those changes permitted funds that exceeded the minimum distribution rate in the 2019-2020 and 2020-2021 financial years to distribute lower amounts in subsequent years. This was intended to promote philanthropic giving during the COVID-19 economic downturn.

Flexibility for Larger or Multi-Year Initiatives

The distribution smoothing mechanism is designed to support funds that are involved in larger or multi-year charitable projects. It enables a giving fund to make a significant distribution in a single year and then distribute less than the minimum rate in the following two years.

This flexibility can be especially useful for a fund that is:

• Supporting a major project requiring a large upfront contribution.
• Responding to short-term or immediate community needs.

By allowing for averaged payouts, the reform helps philanthropy advisors and their funds plan for and commit to substantial, long-term initiatives without being constrained by a fixed annual distribution rate.

Policy Rationale & Stakeholder Response for Not-for-Profit Governance Professionals

Government Objectives to Double Philanthropy

The giving fund reforms are part of a broader Australian government objective to double philanthropic giving by 2030. Increasing the minimum annual distribution rate is intended to improve support for Australian charities by ensuring more capital flows to them in the short term. 

The government’s position is that this allows charities to provide more services now, while still permitting giving funds to invest and generate returns for future distributions.

Treasury analysis suggests that a giving fund can maintain its operations for decades, even with a 6% annual distribution rate and without new contributions. Many funds already distribute at or above this level.

Sector Concerns Regarding Intergenerational Support

Many stakeholders in the philanthropy sector have raised concerns about the changes. They argue that the policy reflects a short-sighted view of the role that a giving fund plays for both donors and the charities they support.

The primary concern is that a higher annual distribution rate will diminish the capacity of a giving fund to provide long-term, intergenerational support. While distributions may increase in the immediate future, this change could reduce the overall benefit to charities over a longer period. 

There are also concerns that the reform may lead some philanthropists to be more reluctant to establish a new giving fund or contribute as much to an existing one.

Expansion of the Community Charity DGR Category for Tax Advisors

Endorsement of New Community Charities

Under the broader giving fund reforms, the Australian Government has endorsed 34 new community charities as DGRs. Community charities are locally focused charitable bodies that support various community initiatives by distributing funds to other organisations that are endorsed as DGRs.

This model offers significant flexibility, allowing a single community charity to support a wide range of local priorities. These can include:

• Education programs
• Mental health services
• Social inclusion initiatives
• Environmental sustainability projects
• Disaster recovery efforts

Previously, organisations often needed to establish and operate multiple DGR-endorsed entities to support different charitable purposes, such as separate entities for environmental and cultural activities. 

The community charity DGR category allows them to direct tax-deductible donations to a wide range of causes without being restricted to a single category.

Removal of the Ministerial Declaration Requirement

To streamline the endorsement process for community charities, the government is removing the requirement for a ministerial declaration. This change is designed to reduce red tape for eligible organisations seeking DGR status.

Under the previous framework, a community charity had to be specified in a ministerial declaration before it could apply to the Australian Taxation Office (ATO) for endorsement. 

Eliminating this step simplifies the administrative process, making it more efficient for these charities to become endorsed and begin receiving tax-deductible donations.

When Will the Change Take Effect for Giving Funds?

The Two-Year Transition Period

The giving fund reforms will not take effect immediately for every fund. The new minimum distribution rate is set to apply from the first financial year after the relevant guidelines are amended.

However, existing giving funds will have a two-year transition period before they are required to meet the new 6% distribution rate. This allows current fund managers time to adjust their strategies to the new requirements.

Application to Existing Giving Funds

As a result of the transition period, no operational changes are required for any existing giving fund for at least the next two years. During this period, trustees and directors have an opportunity to plan and reassess their investment and distribution strategies. 

This will help ensure the fund can maintain a sustainable 6% payout while preserving capital for long-term or generational giving.

Next Steps for Giving Fund Management

Reassessment of Investment & Distribution Strategies

The two-year transition period before the new giving fund reforms take effect offers a valuable window for planning. Fund managers should use this time to reassess their current investment and distribution strategies. The primary goal is to ensure the fund can achieve a sustainable 6% payout rate.

This reassessment is particularly important for any giving fund that aims to provide long-term or generational support. A careful review will help preserve the fund’s real capital while adapting to the increased minimum distribution rate required by the reform, and it is wise to seek guidance from not for profit lawyers during this process.

Consideration of Further Contribution Strategies

Alongside reviewing investment and distribution plans, it is also advisable to consider new contribution strategies for your giving fund. Developing additional strategies for contributions may help offset the higher required distributions under the new rules. This proactive planning can support the long-term sustainability and impact of the fund.

Conclusion

The Australian Government’s giving fund reforms introduce significant changes for ancillary funds, including an increased minimum distribution rate and a new three-year smoothing mechanism. These reforms, combined with an expansion of the community charity DGR category, are designed to offer greater flexibility and boost philanthropic giving.

With a two-year transition period before these changes take full effect, it is a good time for fund managers to reassess their strategies. For tailored legal guidance on adapting your giving fund’s governance and distribution plans to these reforms, contact the expert not for profit lawyers at Law Bridge.

Frequently Asked Questions