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  • Establishing a private ancillary fund

    What steps do you have to take to establish a private ancillary fund with deductible gift recipient status?

    1. Create a trust that is a private ancillary fund (private AF).
    2. Obtain an Australian business number (ABN).
    3. Get endorsement as a deductible gift recipient (DGR).

    How can you show that the entity is a trust?

    A model deed that can be used to establish an acceptable form of trust for private AFs is available. It must be edited according to your individual circumstances.

    We may update the model deed from time to time. Therefore, you must ensure you are using the current version available on our website at the time your trust is created.

    How can you show that the trust is a private ancillary fund (private AF)?

    A trust is a private AF if all of the following applies:

    • its deed complies with the requirements of item 2 of the table in section 30-15 of the Income Tax Assessment Act 1997
    • each trustee of the trust is a constitutional corporation
    • each trustee has agreed to comply with the rules in the private ancillary fund guidelines, and none of them have revoked that agreement.

    How can you show that each trustee is a constitutional corporation?

    A constitutional corporation is a corporation to which paragraph 51 (xx) of the Australian Constitution applies, or a body corporate that is incorporated in a territory.

    A body corporate that is incorporated in a territory would have an Association or Incorporation Number.

    How can you obtain an Australian business number (ABN)?

    You can apply for an ABN:

    When completing the application for ABN registration:

    • for Question 1 – Type of entity: place X in the box for 'Discretionary trust - investment (includes charitable trusts)'
    • for Question 16 – From what date does the entity require its ABN? The date should be the date of establishment of the trust.

    How does a private AF become endorsed as a deductible gift recipient (DGR)?

    If you are applying to have the private AF registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC), you can use the ACNC's registration application form to apply for endorsement as a DGR. The ACNC will send the DGR application information to us automatically for our consideration.

    If you are already a registered charity, or are not required to apply to the ACNC, you can apply for endorsement of the private AF using the application for endorsement as a deductible gift recipient. You must also provide all of the following:

    See also:

    Private ancillary fund guidelines

    What are the private ancillary fund guidelines?

    The private AF guidelinesExternal Link are available on the ComLaw website. An explanatory statement is also available.

    See also:

    Common reporting standard

    Will a private AF have to report under the Common Reporting Standard (CRS)?

    Yes. If a private AF is a Financial Institution for the purposes of the CRS, it will need to report to us all of its Reportable Accounts (that is, accounts held or controlled by foreign residents).

    To determine if an Ancillary Fund has obligations under the CRS see:

    Public ancillary funds

    Private AF guideline 51 allows a private AF to amend its governing rules to convert the fund into a public ancillary fund with the agreement of the Commissioner. Do other rules apply?

    Yes. The trustee must have received agreement from the Commissioner to the amendments to the governing rules of the fund.

    In accordance with private AF guideline 48 that a trust must comply with a legally binding direction given to it by the Commissioner, the conversion can only be carried out in accordance with any legally binding direction given to the trust by the Commissioner.

    The trust must be entitled to endorsement as a public ancillary fund.

    Employees

    If a fund is established by, for example, the chairperson or chief executive officer of a corporate entity, will employees of the corporate entity be taken to be employees of the founder for the purpose of the private AF guidelines?

    Yes. The employees of the corporate entity will be taken to be employees of the founder for the fund that the founder established in their role as chairperson or chief executive officer of that corporate entity.

    Transfer of property

    In what circumstances can the transfer of all the property of a private AF to another AF occur?

    Private AF guideline 51A allows a private AF, with the agreement of the Commissioner, to transfer its assets to another ancillary fund if certain requirements are satisfied.

    Responsible person

    What does 'responsible person' mean?

    Individuals with a degree of responsibility to the community as a whole are generally known as 'responsible persons'.

    Individuals with a degree of responsibility to the Australian community as a whole' would generally include:

    • school principals
    • judges
    • religious practitioners
    • solicitors
    • doctors and other professional persons
    • mayors
    • councillors
    • town clerks
    • members of parliament
    • an individual before whom a statutory declaration may be made.

    Private AF guideline 14 requires that at all times at least one of the individuals involved in the decision making of a private AF be an individual with a degree of responsibility to the Australian community as a whole. The individual cannot be a founder, a donor to the fund who has contributed more than $10,000, or an associate of a founder or such a donor.

    You are establishing a company to be the trustee. Regarding the composition of the board of the trustee company, you need a responsible person. Does the ATO have any special requirements for the other members of the board?

    The only requirements for other directors are those under Corporations law. The Corporations Act 2001 details the circumstances under which an individual will be automatically disqualified from managing corporations.

    These include where the person has:

    • a conviction on indictment of an offence in relation to decisions that affect the business of a corporation or its financial standing
    • an offence involving a contravention of the Corporations Act 2001 punishable by imprisonment for 12 months or more
    • an offence involving dishonesty punishable by more than three months imprisonment
    • conviction for an offence against the law of a foreign country punishable by more than 12 months imprisonment
    • has been declared an undischarged bankrupt.

    Active Director

    What is meant by 'active director' in private AF guideline 14.1?

    Private AF guideline 14.1 requires the responsible person to be 'an active director of the trustee'. This wording is used to emphasise the expectation that a responsible person will actively fulfil their role as a director recognising, for example the fiduciary duties involved with doing so, and the potential personal liability on the director. The responsible person should be able to provide evidence they have actively fulfilled their role as a director of the board.

    The directors must, as a board, make decisions on matters of fundamental importance. This includes, but is not limited to, investments, distributions, and significant decisions concerning the market value of the fund's assets. The responsible person is expected to actively participate in those decisions. They are not expected to agree with each decision of the board.

    The directors need not make every investment or distribution decision. The board may decide that investment strategies or distribution policies are to be implemented by a person who is not a member of the board, such as an appropriate third party or employee. The investment strategy or distribution policy should be sufficiently detailed to provide clear guidance to the third party or employee.

    The directors may seek advice from, and may delegate administrative functions to, a person who is not a member of the board. For example, directors may seek advice from investment advisers on investment decisions and may delegate administrative matters or functions to an employee. The responsible person is expected to participate in almost all meetings of the directors and attend meetings at which decisions on matters of fundamental importance will be made. This includes, but is not limited to, investment strategy and distribution policy and significant decisions concerning the market value of the fund's assets.

    Trustees

    Your private AF has a constitutional corporation as the trustee but the TAA says that each trustee must be a constitutional corporation. Does the private AF need another trustee?

    No. If the fund has only one trustee which is a constitutional corporation, the requirement that each trustee of the trust is a constitutional corporation has been met.

    Private AF guideline 17 requires the trustee to notify the Commissioner in the approved form of any change to the fund's governing rules. Where can the approved form be found?

    Next steps:

    A former PPF has an individual as the only trustee. If the individual is to be replaced, does the replacement have to be a constitutional corporation?

    No. It is accepted that the replacement of the individual may be another individual.

    If a private AF has two or more corporate trustees, does private AF guideline 14 require each trustee to have at least one responsible person on its board?

    No. If there is more than one corporate trustee, and they are required by the deed to make all decisions jointly, only one responsible person is needed.

    Is there a public website for accessing the names of trustees and/or founders of private AFs , including private AF those that were formerly PPFs?

    No. The Australian Business Register (ABR) displays an entity's name, trading name and Australian business number (ABN).

    You are the person who put in the original capital to set up a private AF. Can you prescribe in your will that your estate be given to your private AF? If so, is it a settling of capital through the vesting of the estate or is it a donation?

    You can make a gift in your will to a private AF. Gifts made under a will are not deductible, but gifts of property are exempt from capital gains tax if the DGR endorsement is effective before the death of the giver.

    What is the demarcation between what is public information and what is private information of the fund?

    The information that you give the ATO in the annual return would include the name and ABN of the recipient DGR. The ATO does not make this information public.

    Distribution

    Is the trustee expected to have sufficient liquidity in the fund to allow appropriate distributions in every financial year?

    Yes. Private AF guideline 30.2 requires that the investment strategy of the fund reflect the purpose and circumstances and have particular regard to (but not limited to) the liquidity of the fund's investments.

    Where can you find out the minimum annual distribution obligations for private AFs?

    You can find out the minimum annual distribution obligations in private AF guideline 19.

    What may happen to a private AF that distributes under private AF guideline 19 if at the end of a financial year it holds a non-distributed amount that should have been distributed during that year?

    Private AF guideline 19.2, which allows for a private AF to not distribute during the financial year in which the fund is established, does not apply to a private AF that was formerly a PPF.

    If the trustee holds an amount that should have been distributed, we may consider that the fund is not being applied for the purpose for which it was established. We may review the income tax exemption held by the fund.

    We may also review the DGR status of the fund.

    Private AF guideline 19.4 allows the Commissioner to impose a penalty for a contravention of the distribution rules if the shortfall is greater than $1000.

    Private AF guideline 19.5 allows the Commissioner to impose a penalty if the Commissioner requests a trustee to rectify a distribution shortfall and the trustee does not comply with the request.

    Can current year's expenses be deducted from the minimum annual distribution required under private AF guideline 19?

    No. The requirement is that an amount equal to at least 5% of the market value of the fund's net assets as at the end of the previous financial year must be distributed.

    What is the minimum distribution allowed under private AF guideline 19?

    Private AF guideline 19 says during each financial year, a private AF must distribute at least 5% of the market value of the fund's net assets as at the end of the previous financial year.

    Private AF guideline 19.1 says 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.

    Where the market value of a fund's assets must be estimated at least annually, will the ATO accept an estimation by the trustee of the market value of shares in a private company?

    Yes. Private AF guideline 20 requires that the market value of the fund's assets (other than land) be estimated at least annually and guideline 20.1 allows the trustee to estimate the market value itself or to arrange for a qualified valuer or another appropriate entity to make the estimation.

    Any estimation must be based on reasonably objective and supportable data, and the methodology and data used for the estimate should be documented in the fund's records.

    If the Commissioner considers an estimation to be unreasonable, the Commissioner may request the trustee to arrange for another valuation to be undertaken.

    During the current financial year the value of the fund's assets has fallen and the return is lower than expected. Does the fund still have to distribute 5% of the market value of the fund's net assets as of 30 June of the previous financial year?

    Yes. In determining net assets the expenses, returns or losses for the current financial year cannot be used to determine an applicable new value.

    The fund is established to provide to DGRs. The Guidelines requires distribution of at least 5% of the market value of the fund's net assets as at 30 June of the previous financial year.

    However Private AF guideline 19.7 provides that, upon application by a private AF, the Commissioner of Taxation can lower the minimum distribution rate for a financial year (but not to zero).

    Does Taxation Ruling TR 2005/13 Income tax: tax deductible gifts – what is a gift apply to a distribution from the private AF?

    No. The money, property or benefits applied, provided, transferred or distributed from a private AF are not gifts.

    Prescribed private funds

    Does a former PPF with individual trustees need to replace individual trustees with corporate trustees? Can an individual trustee be suspended and removed?

    The answer is no to both questions.

    Can information about the trust or trustee be given to the Attorney-General in a state or territory?

    Yes, if the information relates to non-compliance by the trust or a trustee with a law for that jurisdiction.

    If you were a trustee of a PPF as of 30 September 2009, are you now required to comply with the private AF guidelines?

    Yes. Each trustee was taken to have agreed to comply with the rules in the private AF guidelines as of 1 October 2009.

    Is your PPF now a private AF?

    Yes. If your fund was approved for prescription, declaration or was prescribed as a PPF in the Income Tax Assessment Regulations 1997 before 1 October 2009, it was taken to be endorsed as a private AF as of 1 October 2009.

    Winding up

    Does a private AF, including one that was a former PPF, have to continue to operate?

    No. Where the trustee of a former PPF does not wish to continue to be a private AF, it may wind-up and distribute to DGRs.

    What are the steps you have to take to wind-up and stop being a private AF deductible gift recipient (DGR)?

    The trustee must undertake all of the following:

    • take steps as necessary under state or territory trust or charity laws, including having written evidence of the trustee's decision
    • pay all liabilities and distribute all of the remaining assets
    • ensure there are completed accounts, financial statements, an audit report, the annual return for a private AF for the current year, and an investment strategy
    • provide the ATO with   
    • cancel the ABN of the trust.

    See also:

    When does the private AF have to transfer the trust fund in total?

    Any private AF, whether or not it was a PPF, must, on revocation of endorsement and after settlement of debts, transfer any surplus gifts of money or property, deductible contributions, and money received because of such gifts or contributions (that is, gift-related assets) to eligible entities.

    Compliance

    What administrative penalties can be applied for non-compliance with the private AF guidelines?

    Administrative penalties specified in the private AF guidelines applicable where a private AF has not complied with the private AF guidelines are:

    • an amount equal to the amount or value of any benefit (except as set out in private AF guideline 43) provided directly or indirectly to the trustee or a member, director or employee of the trustee, to a donor or founder, or to an associate of any of these entities
    • an amount equal to 25% of the net profits of the business for each financial year during all or part of which the trust carries on a business
    • five penalty units for not notifying the Commissioner in the approved form within 21 days of any change to the fund's will or deed of trust unless the trustee is not required to notify the Commissioner in accordance with Private AF guideline 17.1.
    • 10 penalty units in relation to: accounts, financial statements, audit, the investment strategy
    • 15 penalty units in relation to implementation of the investment strategy
    • 10 penalty units for accepting in a financial year donations greater than 20% of the market value of the fund's assets from entities other than a founder or an associate or employee of the founder, or the deceased estate of any of these entities
    • 30 penalty units in relation to the distribution if the shortfall is greater than $1,000, and 10% of the shortfall (reduced by the 30 penalty units but not below nil) in relation to not rectifying the shortfall
    • 30 penalty units in relation to investment limitations, uncommercial transactions and soliciting from the public.

    Does a private AF have to keep more accounts than other DGRs?

    Yes, because a private AF is a DGR it must keep records that record and explain all transactions and other acts the DGR engages in that are relevant to their status as a DGR.

    Private AF guideline 24 requires more in that it requires the trust to keep proper accounts in respect of all receipts and payments of the fund and all financial dealings connected with the fund.

    Is it only the financial statements that must be audited or reviewed?

    No. Private AF guideline 28 requires that the trustee must arrange for an auditor to audit or, in certain circumstances, review the financial statements of the trust, and compliance with the private AF guidelines by the trust and the trustee.

    Do the private AF guidelines have any requirements regarding specific information on the timing and the availability of information to us?

    Yes. A private AF is required to lodge an annual information return (return) whether or not it is exempt from income tax, and we will approve an appropriate return form for private AFs. That form will be available when we require it.

    Voluntary disclosure

    When do I need to make a voluntary disclosure?

    If at the end of the financial year you realise that your private ancillary fund is not compliant with the guidelines.

    How do I make a voluntary disclosure in writing?

    You can make a voluntary disclosure by writing us a letter. In the letter include the following information:

    • the fund's name
    • the fund's tax file number (TFN)
    • the fund's ABN
    • your name as an authorised person
    • your phone number and address
    • tax agent's phone number and address (if represented)
    • the relevant accounting period(s)
    • an explanation of the disclosure to be made
    • a description of the amount(s) affected
    • a signed and dated declaration.

    You are not required by law to provide the fund's TFN or ABN, but providing it will speed up the processing of your voluntary disclosure letter.

    What information do I need to include in the declaration?

    Include the following signed and dated declaration on your voluntary disclosure:

    I declare that the information I have given in the document (including any attachments) is true and correct and that I am authorised to disclose this information.

    Voluntary disclosures made in writing may be lodged with the Commissioner:

    • at an ATO site
    • by handing it to a tax officer conducting a review or audit on your entity
    • by posting it to:

    Australian Taxation Office
    PO Box 3004
    PENRITH NSW 2740

    Can I make a voluntary disclosure electronically?

    You can make a voluntary disclosure online via the Business Portal. To use the Business Portal you will need to register for a free digital certificate.

    Your tax agent can make a voluntary disclosure on your behalf via the Tax Agent Portal. The tax agent will need to ensure that their tax agent number is recorded against the fund's records.

    If we have informed you that we are going to conduct a review or audit you cannot use the above methods to correct any errors. You will need to disclose any errors to the tax officer conducting the review or audit.

    Next step:

    Does a voluntary disclosure affect the information return?

    Yes. The information return should reflect all distributions made during the financial year including those made to organisations that are not endorsed DGRs.

    If the private AF retrieves the distribution from the organisation or the trustee reimburses the private AF there should be a negative distribution recorded at the time the funds are returned.

      Last modified: 28 Sep 2017QC 24109