PAF 2011/1

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This legislative instrument was repealed by Taxation Administration (Public Ancillary Fund) Guidelines 2022 (F2022L00184).

Taxation Administration Act 1953

Made under section 426-110 of Schedule 1 to the Taxation Administration Act 1953.

Legislative Instrument

PART 1 - PRELIMINARY

1. Name of Guidelines

These Guidelines are the Public Ancillary Fund Guidelines 2011.

Includes amendments up to: Taxation Administration (Coronavirus Economic Response Package - Ancillary Funds) Amendment Guidelines 2020.

3. Interpretation

Expressions have the same meaning in these Guidelines as in the Income Tax Assessment Act 1997. The interpretation rules in Division 950 of that Act also apply to these Guidelines.

If a fund has 2 or more trustees, trustee means all of those trustees jointly, or any of them severally, as the case requires.

4. Penalties

If a person is liable to an administrative penalty under section 426-120 in Schedule 1 to the Taxation Administration Act 1953 because of a contravention of a provision of these Guidelines, the amount of the administrative penalty is the penalty that these Guidelines set out, or the penalty worked out in accordance with these Guidelines, in relation to that provision.

5. Part 2: Rules for endorsement as a deductible gift recipient

Part 2 sets out the rules that a *public ancillary fund must comply with in order to be endorsed, and remain endorsed, as a *deductible gift recipient.

6. Part 3: Transitional rules for funds established before 1 January 2012

Part 3 sets out transitional rules modifying how Part 2 applies to a *public ancillary fund that was a public fund endorsed as a *deductible gift recipient in item 2 in the table in section 30-15 of the Income Tax Assessment Act 1997 at the end of 31 December 2011.

PART 2 - RULES FOR ESTABLISHING AND MAINTAINING PUBLIC ANCILLARY FUNDS AS DEDUCTIBLE GIFT RECIPIENTS

OBJECT

7. The object of these Guidelines is to set minimum standards for the governance and conduct of a *public ancillary fund and its trustee.

GENERAL PRINCIPLES

8. A *public ancillary fund must be established, maintained and wound up in accordance with the following principles:

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it is an ancillary fund, it is philanthropic in character and it is a vehicle for philanthropy; and

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it is a trust that:

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seeks to comply with all relevant laws and obligations; and

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is open, transparent and accountable to the public (through the Commissioner and the Commissioner of the Australian Charities and Not-for-profits Commission (if a *registered charity).

ESTABLISHING A PUBLIC ANCILLARY FUND

PURPOSE AND OBJECTS OF THE FUND

9. A *public ancillary fund must be established and maintained, under a will or an instrument of trust, as a valid trust under *State law or *Territory law.

10. It must be established and maintained solely as described in item 2 in the table in section 30-15 of the Income Tax Assessment Act 1997.

10.1. Its governing rules must include objects that clearly set out and reflect the purpose of the fund.

10.2. Its governing rules must require that, on the fund winding up or ceasing to be a *public ancillary fund, its net assets must be provided as described in paragraph (a) of item 2 in the table in section 30-15 of the Income Tax Assessment Act 1997.

NOT-FOR-PROFIT

11. It must be established and operated as a not-for-profit entity.

11.1. Its governing rules must clearly set out and reflect that it is established and operated as a not-for-profit entity.

OPERATED IN AUSTRALIA

12. It must be established and operated only in Australia.

THE TRUSTEE

13. The trustee of the fund must exercise the same degree of care, diligence and skill that a prudent individual would exercise in managing the affairs of others.

14. At all times, a majority of the individuals involved in the decision-making of the fund must be individuals with a degree of responsibility to the Australian community as a whole.

14.1. An individual with a degree of responsibility to the Australian community as a whole includes an individual before whom a statutory declaration may be made.

Example: An individual who before whom a statutory declaration may be made include individuals who are licensed or registered to practice in a range of occupations such as a dentist, legal or medical practitioner; a nurse, a pharmacist, a bailiff, a bank officer or officer of a building society or credit union with 5 or more continuous years of service; a clerk of the court; a justice of the peace, a judge, magistrate; a member of various professional associations including a member of Engineers Australia, a member of Chartered Secretaries Australia; a member of the various professional accounting associations in Australia; a marriage celebrant, mayors, town clerks and members of Parliament; a government employee with 5 or more years of continuous service; a teacher employed on a full-time basis at a school or tertiary education institution.

14.2. The individuals referred to in guideline 14 must be actively involved in the decision-making of the fund either by being directors of the trustee or members of any other controlling body of the fund.

14.3. This guideline does not apply to the Public Trustee of a state or territory.

15. The trustee or any other controlling body of the fund must not exercise any discretion or power while guideline 14 is not being complied with.

15.1. However, the trustee or other controlling body may exercise a discretion or power:

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to appoint a new trustee; or

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to protect the property of the fund; or

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to deal with an urgent matter that cannot be postponed.

16. An individual must not be a director of a trustee or a member of any other controlling body of the fund, if he or she has been convicted of a taxation offence (within the meaning of Part III of the Taxation Administration Act 1953) that is an indictable offence.

16.1. If an existing director is convicted of such an offence, he or she must cease to be a director within 1 month after the conviction.

CHANGES TO GOVERNING RULES

17. The trustee must notify the Commissioner in the *approved form (within 21 days) of any change to the fund's governing rules.

17.1 However, the trustee does not need to notify the Commissioner under this guideline if the trustee is required to notify the Commissioner of the Australian Charities and Not-for-profits Commission of the same information under Division 65 of the Australian Charities and Not-for-profits Commission Act 2012.

Penalty: 5 penalty units.

LIABILITY OF TRUSTEE

18. The governing rules of a *public ancillary fund must prohibit the fund from indemnifying the trustee, or an employee, officer or *agent of the trustee, for a loss or liability attributable to:

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dishonesty of the trustee, employee, officer or agent; or

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gross negligence or recklessness of the trustee, employee, officer or agent; or

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a deliberate act or omission known by the trustee, employee, officer or agent to be a breach of trust.

OPERATION OF A PUBLIC ANCILLARY FUND

MINIMUM ANNUAL DISTRIBUTION

19. During each *financial year, a *public ancillary fund must distribute at least 4 per cent (minimum annual distribution rate) of the *market value of the fund's net assets (as at the end of the previous *financial year).

19.1. The fund must distribute at least $8,800 (or the remainder of the fund if that is worth less than $8,800) during that *financial year if any expenses of the fund in relation to that financial year are paid directly or indirectly from the fund's assets or income.

19.2. No distribution is required during the *financial year in which the fund is established or during the next 4 financial years.

19.3. A distribution includes the provision of money, property or benefits. If the fund provides property or benefits, the *market value of the property or benefit provided is to be used in determining whether the fund has complied with this guideline.

Example 1: If a public ancillary fund makes a gift of land to a public benevolent institution, it would include the market value of the land in calculating how much it has distributed.

Example 2: If a public ancillary fund leases office space to a deductible gift recipient at a discount to the market price, the fund is providing a benefit whose market value is equal to the discount.

Example 3: If a public ancillary fund invests in a social impact bond issued by a deductible gift recipient with a return that is less than the market rate of return on a similar corporate bond issue, the fund is providing a benefit whose market value is equal to the interest saved by the deductible gift recipient from issuing the bond at a discounted rate of return.

Example 4: If a public ancillary fund lends money to a deductible gift recipient at a discount to the interest rate which would be charged on a comparable loan sourced from a financial institution at arm's length, the fund is providing a benefit whose market value is equal to the discount.

Example 5: If a public ancillary fund guarantees a loan provided by a financial institution to a deductible gift recipient, the fund is providing a benefit whose market value is equal to the discount to the interest rate which would be charged on a comparable arm's length unsecured loan sourced from that financial institution.

Example 6: Continuing example 5, if the deductible gift recipient defaults on the loan and the fund is called on under the guarantee to make a payment to the financial institution on behalf of the deductible gift recipient, the payment is a distribution (being the provision of money, property or benefits).

19.4. The penalty for a contravention of this guideline is 30 penalty units if the shortfall is greater than $1,000.

19.5. If the Commissioner requests the trustee to rectify a shortfall in the distribution for a *financial year, the trustee must comply with the request within 60 days. If the trustee does not the penalty is 10 per cent of the shortfall as at the end of the 60 days reduced by any penalty (but not below nil) under guideline 19.4.

19.6. A distribution made to rectify a contravention of this guideline does not count towards compliance with this guideline for the year of the rectification.

Accessing a lower minimum distribution rate for a financial year

19.7. Upon application, in the *approved form, the Commissioner may reduce (but not to zero) the minimum annual distribution rate for a fund for a *financial year. The reduction may be subject to any conditions the Commissioner thinks fit.

19.7.1 Recognising the purpose and object of the fund, the Commissioner must only reduce the minimum annual distribution rate if the Commissioner is satisfied that there are circumstances that warrant the Commissioner reducing the rate.

19.7.2 The Commissioner may reduce the minimum annual distribution rate at any time, including after the relevant financial year has finished.

19.7.3 In determining whether to reduce the rate and what the reduced rate should be, the Commissioner must have regard to:

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the general market conditions in Australia; and

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the past, current and expected levels of returns from the fund's investments; and

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the long-term impact on the assets of the fund from not reducing the rate for a *financial year; and

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the level of distributions made by the fund in previous financial years; and

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the investment strategy and distribution strategy of the fund; and

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the size of the fund; and

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the compliance history of the fund and the trustee; and

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the fees and expenses of the fund; and

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the terms and other circumstances relating to any gift to the fund under a will; and

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any other relevant matter that Commissioner considers relevant.

VALUATION

20. The *market value of the fund's assets (other than land) must be estimated at least annually.

20.1. Subject to guideline 22, the trustee may estimate the *market value itself or arrange for a qualified valuer or another appropriate entity to make the estimate.

20.2. Whoever makes the estimate must base it on reasonably objective and supportable data. The methodology and data used for an estimate should be documented in the fund's records.

20.3. The estimate should be of the *market value as at the end of the relevant *financial year. Unless to do so would be unnecessarily onerous and expensive, the estimate should be conducted within 2 months before or after 30 June for each asset.

21. The *market value of land must be estimated at least once every 3 *financial years.

21.1. The *market value of land must be estimated by a certified and independent valuer or by the Commissioner.

21.1.1. The trustee must obtain from the valuer a written estimate of the *market value of the land. The written estimate must also include the valuation methodology and a reference to supporting materials used in making the estimate.

21.2. The trustee may use the estimate as the *market value of the land for the next 3 *financial years.

22. If the Commissioner considers the estimate of the *market value of any asset to be unreasonable, the Commissioner may request the trustee to arrange for another valuation to be undertaken. The trustee must comply with the request.

23. Estimates must be completed before the fund is required to give to the Commissioner its *income tax return for the relevant *financial year.

ACCOUNTS

24. The trustee must keep, or cause to be kept, proper accounts in respect of all receipts and payments of the fund and all financial dealings connected with the fund, and must retain those accounts for a period of at least 5 years after the completion of the transactions or acts to which they relate.

PENALTY: 10 penalty units.

25. The trustee must make the accounts available to the Commissioner upon request.

PENALTY: 10 penalty units.

FINANCIAL STATEMENTS

26. The trustee must prepare, or cause to be prepared, financial statements showing the financial position of the fund at the end of each *financial year.

26.1. The financial statements must be prepared in accordance with the *accounting standards.

26.2. All transactions (except for gifts) between the fund and a founder of the fund, a donor to the fund, the trustee, a director, officer, *agent, *member or employee of the trustee, or an *associate of any of these entities must be disclosed in the financial statements.

26.3. The financial statements must be prepared before the fund is required to give to the Commissioner its *income tax return for the relevant *financial year.

PENALTY: 10 penalty units.

27. The trustee must make the financial statements available to the Commissioner upon request, unless the financial statements have already been given to the Commissioner of the Australian Charities and Not-for-profits Commission.

PENALTY: 10 PENALTY UNITS.

AUDIT

28. Except as set out below, each *financial year the trustee must arrange for an auditor to audit:

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the financial statements of the fund; and

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compliance with these Guidelines by the fund and the trustee.

28.1. The auditor must be a registered company auditor (within the meaning of the Corporations Act 2001).

28.1.1. The Public Trustee of a state or territory may have the Auditor-General of that state or territory undertake the audit.

28.2. Unless the Commissioner, by written notice, provides otherwise, a public ancillary fund with revenue and assets of less than $1 million in relation to a particular financial year, may instead have its financial statements and compliance with these guidelines reviewed rather than audited.

28.2.1. A reviewer must be a registered company auditor (within the meaning of the Corporations Act 2001). However, an individual who is taken to be a registered company auditor under section 324BE of the Corporations Act 2001 is taken to be a registered company auditor for the purpose of this guideline.

28.3. The auditor or reviewer must undertake the review or audit, and provide the fund with a report, in accordance with the *auditing standards.

28.4. The audit or review must be finalised before the fund is required to give to the Commissioner its *income tax return for the relevant *financial year.

PENALTY: 10 penalty units.

29. The trustee must make the report available to the Commissioner upon request, unless the report has already been given to the Commissioner of the Australian Charities and Not-for-profits Commission.

PENALTY: 10 penalty units.

INVESTMENT STRATEGY

30. The trustee must prepare and maintain a current investment strategy for the fund.

30.1. An appropriate investment strategy should set out the investment objectives of the fund and detail the investment methods the trustee will adopt to achieve those objectives.

30.2. The strategy must reflect the purpose and circumstances of the fund and have particular regard to (but not be limited to):

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the risk involved in making, holding and realising, and the likely return from, the fund's investments, having regard to the fund's objects and its expected cash flow requirements (including distribution requirements); and

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the composition of the fund's investments as a whole, including the extent to which the investments are diverse or involve the fund being exposed to risks from inadequate diversification; and

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the liquidity of the fund's investments, having regard to its expected cash flow requirements (including distribution requirements); and

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the ability of the fund to discharge its existing and prospective liabilities; and

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the investment requirements imposed by *State laws or *Territory laws; and

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status of the fund as a *registered charity (where applicable); and

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real or perceived material conflicts of interest in holding particular investments (including those relating to individuals involved in the decision-making of the fund); and

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the terms and other circumstances relating to any gift to the fund under a will.

PENALTY: 10 penalty units.

31. The trustee must implement the investment strategy, and must ensure that all investment decisions are made in accordance with it.

PENALTY: 15 penalty units.

32. The investment strategy (and a record of the associated decision-making processes) must be available in a written form so that the trustee, an auditor, a reviewer or the Commissioner can determine whether the fund has complied with these Guidelines and other *Australian laws.

PENALTY: 10 PENALTY UNITS.

INVESTMENT LIMITATIONS

33. The trustee must not *borrow money or maintain an existing borrowing of money.

33.1. However, this guideline does not prohibit a trustee from *borrowing money if:

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the purpose of the borrowing is to enable the trustee to make a distribution to a *deductible gift recipient which the trustee must make under these guidelines and which, apart from the borrowing, the trustee would be unable to make; and

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the period of the borrowing does not exceed 90 days; and

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the borrowing, when made, would not result in total borrowings exceeding 10 per cent of the *market value of the fund's assets.

33.2. This guideline also does not prohibit a trustee from *borrowing money if:

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the purpose of the borrowing is to enable the trustee to cover settlement of a transaction for the acquisition of a financial instrument; and

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at the time the relevant investment decision was made, it was likely that the borrowing would not be needed; and

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the period of the borrowing does not exceed 14 days; and

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the borrowing, when made, would not result in total borrowings exceeding 10 per cent of the *market value of the fund's assets.

33.3. Guideline 33 also does not apply to the acquisition of a financial instrument excluded by the Commissioner from that guideline.

34. The fund's investments must be made and maintained on an *arm's length unless another guideline allows otherwise.

35. The trustee must not give a security over, or in relation to, an asset of the fund.

35.1. However, this guidelines does not apply to:

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the acquisition of a financial instrument excluded by the Commissioner from that guideline; or

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an agreement to guarantee the repayment of any money lent by a creditor for the sole benefit of one or more *deductible gift recipients.

36. The fund must not acquire an asset (except by way of gift) from, and must not make a loan or provide any other kind of financial assistance to, a founder of the fund, a donor to the fund, the trustee, a director, officer, agent, *member or employee of the trustee, or an *associate of any of these entities except:

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by way of an arm's length commercial transaction;

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on terms more favourable to the fund than would otherwise be expected under an arm's length transaction.

37. The trustee must keep the assets of the fund separate from all other assets.

37.1. However, this guideline does not prevent a licensed trustee company or the Public Trustee of a state or territory from operating common funds for investment purposes.

38. The fund must not acquire an asset (except by way of gift) if the asset is capable of being a *collectable.

38.1. If the fund acquires such an asset by way of gift, it must sell or distribute the asset within 12 months after acquiring it.

39. The penalty in relation to each of guidelines 33 to 38 is 30 penalty units.

40. The fund must not *carry on a *business.

40.1. However, a fund does not contravene this guideline merely because its investment activities, because of repetition, volume and regularity, mean that it is *carrying on a *business.

40.2. A fund also does not contravene this guideline if it undertakes public fundraising appeals.

40.3. The penalty for a contravention of this guideline is an amount equal to 25 per cent of the net profits of the business for each *financial year during all or part of which the contravention continues.

UNCOMMERCIAL TRANSACTIONS AND BENEFITS TO FOUNDER/DONOR

41. The fund must not enter into any transaction that is uncommercial when entered into, unless the transaction is:

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with a *deductible gift recipient covered by item 1 in the table in section 30-15 of the Income Tax Assessment Act 1997; and

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in the course or furtherance of the fund's purpose.

41.1. However, the fund may enter into an uncommercial transaction if it is on terms more favourable to the fund than would otherwise be expected under an arm's length transaction.

PENALTY: 30 penalty units.

42. The fund must not *provide any material benefit (except as set out in guideline 43), directly or indirectly, to:

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the trustee; or

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a *member, director, employee, *agent or officer of the trustee; or

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a donor to the fund; or

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a founder of the fund; or

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an *associate of any of those entities (other than a *deductible gift recipient).

PENALTY: An amount equal to the amount or value of the benefit provided.

FEES AND EXPENSES

43. The trustee may apply income or capital of a *public ancillary fund:

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to reimburse the trustee for reasonable expenses incurred on behalf of the fund; and

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to pay fair and reasonable remuneration for the trustee's services in administering the fund.

DONORS

44. The fund must be public in nature.^[1]

45. The public must be invited to contribute to the fund.

46. The fund must issue a receipt (upon request) in respect of each gift it receives.

46.1. The receipt must include the name and *ABN of the fund and the name of the donor and must state that the receipt is for a gift received by the fund.

COMPLIANCE WITH ALL RELEVANT LAWS

47. The fund must comply with all relevant *Australian laws, all legally binding directions given to it by the Commissioner and all the requirements contained in these Guidelines.

48. The trustee must ensure that the fund's distributions to *deductible gift recipients do not put at risk the validity of the trust under *State law or *Territory law.

WINDING UP A PUBLIC ANCILLARY FUND OR TRANSFERING FUNDS TO ANOTHER ANCILLARY FUND

WINDING UP OR CEASING TO BE A PUBLIC ANCILLARY FUND

49. Except as set out in guideline 50, if the fund winds up or ceases to be a *public ancillary fund, all the fund's net assets must be provided as described in paragraph (a) of item 2 in the table in section 30-15 of the Income Tax Assessment Act 1997.

PORTABILITY

50. With the agreement of the Commissioner, a *public ancillary fund may transfer assets to another *ancillary fund if:

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it transfers all of its net assets to that ancillary fund (or if the public ancillary fund has sub-funds, it transfers all of the net assets of the sub-fund to that ancillary fund); and

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it has already complied with guidelines 19 to 19.6 (as affected by Part 3) for that financial year (about minimum annual distributions); and

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the net assets have not previously been transferred to another ancillary fund during the previous 2 financial years.

50.1 The Commissioner must not agree to the transfer of assets between *ancillary funds if the transfer involves moving assets contributed, either directly or indirectly, by the general public from a public ancillary fund to a private ancillary fund.

PART 3 - TRANSITIONAL RULES FOR PUBLIC ANCILLARY FUNDS

INTRODUCTION

51. These transitional rules apply to a *public ancillary fund that was a public fund endorsed as a *deductible gift recipient in item 2 in the table in section 30-15 of the Income Tax Assessment Act 1997 at the end of 31 December 2011.

51.1. These transitional rules are intended to help a public ancillary fund make the transition into the new regime.

GOVERNING RULES INCONSISTENT WITH THESE GUIDELINES

56. If a fund does not have a trustee that is a *constitutional corporation, then guideline 14 does not apply to the fund. Instead, at least a majority of individuals who are trustees of the fund must have a degree of responsibility to the Australian community as a whole.

57. If a fund has an existing borrowing as at 31 December 2011, the fund may maintain that borrowing despite guideline 33. However, the fund may not alter the terms of the borrowing without the prior agreement of the Commissioner.

TRANSITIONAL RULE: CORONAVIRUS ECONOMIC RESPONSE - CARRY FORWARD CREDIT FOR DISTRIBUTIONS IN EXCESS OF MINIMUM

57. This guideline applies to a *public ancillary fund if the fund exceeds its annual minimum distribution for the *financial years 2019-20 to 2020-21, as calculated under guideline 57.1, by more than 4.

57.1. Work out how much a *public ancillary fund exceeds its annual minimum distribution for the *financial years 2019-20 to 2020-21 as follows:

57.2. Where this guideline applies, the minimum annual distribution rate for a *public ancillary fund for the purposes of guideline 19 for a *financial year covered by guideline 57.3 is 3 per cent.

57.3. The following are the *financial years covered by this guideline for a *public ancillary fund:

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the 2021-22 financial year; and

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the 2022-23 financial year; and

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a subsequent financial year or years for each amount of 2 the result of the method statement in guideline 57.1 exceeds 4.

Example: If the result of the method statement is 7 for a public ancillary fund, the 2023-24 financial year is also covered by this guideline.

Legislation history

Amendment history

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12 June 2020

Bill Shorten
Assistant Treasurer

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Registration Number: F2020C00520

Registration Date: 24 June 2020

Related Explanatory Statements:

PAF 2011/1 - Explanatory statement

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