Private ancillary funds

Private ancillary funds (private AFs) may be eligible to be deductible gift recipients (DGRs).

To be endorsed under the DGR category for private AFs, a fund must meet all the following requirements:

• have an Australian business number (ABN)
• be in Australia
• comply with the rules in the Private Ancillary Fund Guidelines 2019 and all the trustees of the fund must comply with these rules
• have acceptable rules for the transfer of surplus gifts and deductible contributions on winding-up or revocation of endorsement
• apply to us for endorsement as a DGR.

See also:

• Is my organisation eligible for DGR endorsement?
• Private ancillary funds – trustee guidance
• Taxation Administration (Private Ancillary Funds) Guidelines 2019External Link

DGR requirements for private AFs

Your fund must have the following characteristics to be endorsed under the private ancillary fund (AF) DGR category:

• It is a 'fund'.
• It is established and maintained under a will or an instrument of trust.
• It is established and operated on a not-for-profit basis.
• It is allowed, by the terms of the will or instrument of trust, to invest money in ways that an Australian law allows trustees to invest trust money.
• It is established and maintained solely for the purpose of providing money, property or benefits to DGRs (except other private AFs or public AFs) or the establishment of such DGRs.
• Each of its trustees is a constitutional corporation.
• Each trustee has agreed, in the approved form, to comply with the rules in the Private Ancillary Fund Guidelines 2019 and none of the trustees have revoked that agreement.

What is a 'fund'?

A fund is a pool of money or property that is managed or held to make distributions to other entities. A fund does not deliver services.

What is an instrument of trust?

Trust deeds and wills are instruments of trust.

The ATO provides a model deed that can be used. It must be edited according to your individual circumstances - for example, to include the details of the trust.

As the model deed may be updated, you should use the current version available on our website. Copies you have previously downloaded may be out-of-date.

Applications for endorsement as a DGR using non-conforming deeds will not be accepted.

If the governing rules of the private AF change, the trustee must notify us in the approved form within 21 days of the change being made.

See also:

• Private ancillary fund model trust deed
• Notification of change to the governing rules of an endorsed private ancillary fund

Governing rules for the fund

You need to include the following governing rules in your trust deed:

• Objects of the fund
• Receipts
• Not-for-profit basis
• Prohibit from indemnity
• Responsible person
• Winding-up, ceasing to be a private AF or revocation of DGR endorsement
• The trustee must be a constitutional corporation

See also:

• Taxation Administration (Private Ancillary Funds) Guidelines 2019External Link

Objects of the fund

The governing rules contained in your trust instrument must reflect the objects of your fund.

Receipts

Receipts must be issued in the name of your fund.

Not-for-profit basis

A not-for-profit entity is one that is not operating for the profit or gain of its individual members. This applies both while the fund is operating and when it winds up.

Your fund must not provide any benefit directly or indirectly to any of the following:

• the trustee
• a member, director, employee, agent or officer of the trustee
• the donor or founder
• an associate of any of these entities.

The governing rules contained in your trust instrument must clearly set out and reflect this.

Prohibit from indemnity

The governing rules in your trust instrument must prohibit your fund from indemnifying the trustee, or an employee, officer or agent of the trustee for a loss attributable to their:

• dishonesty
• gross negligence
• recklessness
• deliberate act
• omission.

Responsible person

At least one of the people involved in the decision making of the fund has a degree of responsibility to the community. This person is generally called a 'responsible person'.

A responsible person must be an active director and a member of any other controlling body of the fund but cannot be any of the following:

• a founder
• a donor to the fund who has contributed more than $10,000
• an associate of a founder or a donor who has contributed more than $10,000.

Winding-up, ceasing to be a private AF or revocation of DGR endorsement

The trustee is required to transfer the following surplus to an eligible DGR, on the winding-up of the trust, it ceasing to be a private AF, or revocation of its DGR endorsement:

• gifts and deductible contributions made to the fund for its principal purpose
• any money received by the fund because of such gifts and contributions.

The trustee must be a constitutional corporation

A constitutional corporation is either:

• a corporation to which paragraph 51(xx) of the Australian Constitution applies
• a body corporate that is incorporated in a territory. A constitutional corporation would usually be registered with the Australian Securities & Investments Commission (ASIC) and have an Australian company number.

Less frequently, it may be incorporated under associations incorporation legislation in a state or territory and have an association or incorporation number.

Applying for DGR endorsement

To apply for DGR endorsement, complete the following application form, schedule and agreement:

• Application for endorsement as a deductible gift recipient
• Private ancillary fund – schedule for deductible gift recipient applicants
• Agreement to comply with the private ancillary fund guidelines

When lodging these documents, you will be required to provide a copy of your executed will or instrument of trust.

Find out about:

• DGR endorsement start date
• Consequences of DGR endorsement
• Notification of endorsement
• If your application is refused
• If there are delays in notification

See also:

• abn.business.gov.auExternal Link
• Penalties
• Claiming tax deductions

DGR endorsement start date

The application form will ask you for the date you want your fund to be endorsed from.

Consequences of DGR endorsement

The following are the consequences of DGR endorsement:

• Gift deductibility
• Australian Business Register
• Receipts
• Self-review
• Record keeping
• Annual returns

Gift deductibility

Your fund will be entitled to receive income tax deductible gifts from the date its DGR endorsement starts and while it is endorsed. Claiming tax deductions for gifts to a DGR are claimed by the person or organisation that makes the gift (the donor).

Australian Business Register

The Australian Business Register (ABR) records if an organisation has DGR status and if that DGR is a private AF.

Receipts

When your fund issues a receipt for a tax deductible gift, it must include certain information on the receipt. If your fund does not include this information on its receipts, your endorsement may be revoked.

Self-review

You must notify us in writing if your fund's circumstances change and it stops being entitled to DGR endorsement. This obligation means you will need to carry out regular reviews of your fund's status. The law does not require any particular intervals between reviews, but we recommend a yearly review.

Trustees and directors of trustees of private AFs may be liable for administrative penalties if they represent a private AF as being entitled to remain endorsed as a DGR and the fund is not entitled.

Record keeping

As a DGR, your fund must keep adequate accounting and other records that detail and explain all transactions that are relevant to its status as a DGR. You must maintain these records for at least five years after the completion of the transactions or acts they relate to. The penalty for not keeping proper records is 10 penalty units.

Annual returns

Trustees are required to lodge an ancillary fund return for each financial year. Ancillary funds that are registered with the Australian Charities and Not-for-profits Commission (ACNC) will lodge their ancillary fund return with the ACNCs annual information statement (AIS).

Notification of endorsement

We will send you written notification of the outcome of your application, to tell you if your fund has been endorsed or refused endorsement as a DGR.

If your application is refused

If your fund's application for endorsement is refused, you can have the decision reviewed by us. You will need to put your full reasons for seeking a review in writing. If endorsement is refused after the review, you will be advised of further appeal rights.

If there are delays in notification

If you believe we are too slow in notifying you if your fund is endorsed, you can have your application treated as if it had been refused. The deemed refusal will trigger formal review rights.

The earliest you can notify us that you want your application to be treated as if it had been refused is the later of the following:

• the end of the 60th day after you made the application
• the end of the 28th day after the last day on which you gave us information or documentation that we had requested.

To have your application treated as if it had been refused, you must give us written notice that you want it treated in that way. Your application will be deemed to be refused on the day you give such notice.

Minimum annual distribution requirements

During each financial year, apart from the year the fund is established, a private ancillary fund must distribute at least 5% of the market value of the fund’s net assets (as at the end of the previous financial year).

The fund must distribute at least $11,000, or the remainder of the fund if that is worth less than $11,000, during that financial year, if both of the following applies:

• the 5% is less than $11,000
• any of the expenses of the fund in relation to that financial year are paid directly or indirectly from the fund's assets or income.

A distribution is the provision of money, property or benefits.

Penalties may apply for not meeting the minimum annual distribution requirements, but a fund can apply to reduce the minimum annual distribution rate.

See also:

• Application to reduce the minimum ancillary fund distribution rate

Amended guidelines for COVID-19 response

The guidelines have been amended to encourage increased distributions to deductible gift recipients (DGRs) as a result of the COVID-19 pandemic.

Private ancillary funds that exceed their minimum annual distribution rate for the 2019–20 and 2020–21 financial years, by a total of five percentage points or more, will have a lower minimum annual distribution rate of 4% in future years.

To determine if a private ancillary fund is eligible, they will need to work through the following steps:

Step 1	Add together the ancillary fund's annual distribution rate for the 2019–20 and 2020–21 financial years, rounding each year's rate to the nearest whole number.
Step 2	Reduce the combined rate from step 1 by 10% which is the minimum required annual distribution rate for the two years. The balance is the fund's credit amount.
Step 3	If the credit amount at step 2 is 5% or more, the fund is eligible to apply the reduced distribution rate at step 4.
Step 4	For every 2% of the fund's credit, their minimum annual distribution rate will reduce to 4% for one financial year. This applies from the 2021–22 financial year until the fund's credit is less than 2%. The fund can still choose to exceed the minimum annual distribution rate in those financial years.

This means that eligible private ancillary funds will have a 4% minimum annual distribution rate for at least the 2021–22 and 2022–23 financial years.

 

Eligibility of private ancillary funds to be deductible gift recipients, and minimum annual distribution requirements.