Federal Register of Legislation – Australian Government

Guides & Guidelines as amended, taking into account amendments up to Private Ancillary Fund and Public Ancillary Fund Amendment Guidelines 2016

Private Ancillary Fund and Public Ancillary Fund Amendment Guidelines 2016 – F2016L00651

made under section 426-103 in Schedule 1 to the

Includes amendments up to:Private Ancillary Fund and Public Ancillary Fund Amendment Guidelines 2016

This is a compilation of thePrivate Ancillary Fund Guidelines 2009as in force on the date of registration. It includes any commenced amendment affecting the legislation to that date.

This compilation was prepared on 29 April 2016.

The notes at the end of this compilation (theendnotes) include information about amending laws and the amendment history of each amended provision.

The effect of uncommenced amendments is not reflected in the text of the compiled law but the text of the amendments is included in the endnotes.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

If a provision of the compiled law is affected by a modification that is in force, details are included in the endnotes.

If a provision of the compiled law has expired or otherwise ceased to have effect in accordance with a provision of the law, details are included in the endnotes.

Part 2:  Rules for establishing and maintaining private ancillary funds as deductible gift recipients

Part 3:  Transitional rules for former prescribed private funds

Governing rules inconsistent with these             guidelines

These Guidelines are thePrivate Ancillary Fund Guidelines 2009.

These Guidelines commence the day after registration.

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

Note 1: To find definitions of asterisked terms: see section 995-1 of the Income Tax Assessment Act1997. However, some defined terms may not be asterisked: see section 2-15 of the Income Tax Assessment Act1997.

Note 2: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.

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

If a person is liable to an administrative penalty under section 426-120 in Schedule 1 to theTaxation Administration Act 1953because 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.

Note 2: An administrative penalty under section 426-120 in Schedule 1 to the Taxation Administration Act1953 cannot be reimbursed from the fund: see subsection 426-120(4).

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

Part 2 sets out the rules that a *private 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 October 2009

Part 3 sets out transitional rules modifying how Part 2 applies to a *private ancillary fund that was a *prescribed private fund at the end of 30 September 2009.

Part 2Rules for ESTABLISHing AND MAINTaiNing PRIVATE ANCILLARY FUNDS as deductible gift recipients

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

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

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

seeks to comply with all relevant laws and obligations; and

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).

Note: This does not affect either Commissioners obligations to protect the confidentiality of a *private ancillary funds information under privacy, and secrecy and disclosure laws.

9.A *private 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 theIncome 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 *private ancillary fund, its net assets must be provided as described inIncome Tax Assessment Act1997.

Note: Paragraph (a) of item 2 in the table in section 30-15 provides that the sole purpose of an ancillary fund must be to provide money, property or benefits: to a fund, authority or institution gifts to which are deductible under item1 of that table; and for any purposes set out in an item in a table in Subdivision 30-B of the Income Tax Assessment Act 1997 that covers the fund, authority or institution.

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.

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

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, at least one of the individualsinvolved in the decision-making of the fundmust be an

Note: This requirement is similar to (but less strict than) the requirement applying to public ancillary funds.[1]Those individuals with a degree of responsibility to the community as a whole are generally known as responsible persons.

Example: 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 and members of parliament. Generally, individuals who are accepted as having a degree of responsibility to the community as a whole are known to a broad section of the community because they perform a public function or they belong to a professional body (such as the Institute of Chartered Accountants, State Law Societies and Medical Registration Boards) which has a professional code of ethics and rules of conduct. Individuals who have received formal recognition from the Government for their services to the community (for example, an Order of Australia award) will also usually have the requisite degree of responsibility.

14.1.That individual must be an active director of the trustee and a member of any other controlling body of the fund.

14.2.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 before whom a statutory declaration may be made includes those who are licensed or registered to practise 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, a 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.

14.3.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 guideline14is not being complied with.

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

•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 theTaxation 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.

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

Note: Certain changes to the governing rules may require the fund to seek re-endorsement as a deductible gift recipient.

17.1.However, the trustee doesnotneed 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 theAustralian Charities and Not-for-profits Commission Act 2012.

18.The governing rules of a *private 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:

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

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

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

19.During each *financial year, a *private ancillary fund must distribute at least 5per cent (minimum annual distribution rate) of the *market value of the funds net assets (as at the end of the previous *financial year).

Note 1: While net assets are used to determine the funds minimum distribution, the amount of the distribution itself is not net of any amount (for example, expenses of the fund).

Note 2: The minimum annual distribution rate may be lowered under Guidelines 19.2 and 19.7 for a financial year.

19.1.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 any expenses of the fund in relation to that financial year are paid directly or indirectly from the funds assets or income.

Note: This means that if a funds expenses are met from outside the fund, its minimum annual distribution is the amount calculated under Guideline 19.  If any of a funds expenses are paid out of the funds assets or income, its minimum distribution is $11,000 or the amount calculated under Guideline 19, whichever is greater.

19.2.No distribution is required during the *financial year in which the fund is established.

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 private ancillary fund makes a gift of land to a public benevolent institution, it would include the market value of the land incalculating how much it has distributed.

Example 2: If a private 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 private 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 in the financial year by the deductible gift recipient from issuing the bond at a discounted rate of return.

Example 4: If a private 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 arms length, the fund is providing a benefit whose market value is equal to the discount.

Example 5: If a private 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 arms 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).

Note 1: The Commissioner may approve safe harbour valuation methodologies to assist trustees in calculating the market value of a benefit provided to a deductible gift recipient see Subdivision 960-M of theIncome Tax Assessment Act 1997.

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 guideline19.4.

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.

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:

•the general market conditions in Australia; and

•the past, current and expected levels of returns from the funds investments; and

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

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

•the investment strategy and distribution strategy of the fund; and

•the compliance history of the fund and the trustee; and

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

•any other matter the Commissioner considers relevant.

Note: Having regard to the general market conditions in Australia, could include reviewing the Reserve Bank of Australias target for the cash rate (which is the overnight money market interest rate), the *base interest rate, current returns of other ancillary funds, and the performance of *approved stock exchanges. It could also include examining changes in conditions over time.

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

Note: See section 2B of the Acts Interpretation Act 1901 for the meaning of land.

20.1.Subject to guideline22, the trustee may estimate the *market value itself or arrange for a qualified valuer or another appropriate entity to make the estimate.

Note 1: It is not intended that making or arranging for an estimate of market value be onerous or expensive.

Note 2: A trustee should consider using a qualified valuer if the value of an asset represents a significant proportion of the funds value or if the nature of the asset means that the valuation is likely to be difficult or complex.

Note 3: The trustee may ask the Commissioner to undertake a valuation. The Commissioner may charge the trustee for undertaking a valuation.

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 funds 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

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.

Note: A private ancillary fund will be required to lodge an income tax return whether or not it is exempt from income tax. The Commissioner will approve an appropriate income tax return form for private ancillary funds.

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.

Note: See also Subdivision 382-B in Schedule 1 to the Taxation Administration Act 1953 for rules about record keeping obligations of deductible gift recipients.

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

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.

Note: If a fund is required to prepare, and does prepare, a financial report in accordance with Subdivision 60-C of the Australian Charities and Not-for-profits Commission Act 2012, it will meet this requirement.

26.2.All transactions 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.

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.

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.

28.Each *financial year the trustee must arrange for an auditor to audit:

•compliance with these Guidelines by the fund and the trustee.

28.1.The auditor must be a registered company auditor (within the meaning of theCorporations 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.

28.1A.   Unless the Commissioner, by written notice, provides otherwise, a *private ancillary fund with both 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.

28.1A.1      A reviewer must be a registered company auditor (within the meaning of theCorporations Act 2001). However, an individual who is taken to be a registered company auditor under section 324BE of theCorporations Act 2001is taken to be a registered company auditor for the purpose of this guideline.

Note: This has the effect of widening the class of individuals who can undertake a review.

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

28.3.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.

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.

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):

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

•the composition of the funds 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

•the liquidity of the funds investments, having regard to its expected cash flow requirements (including distribution requirements); and

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

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

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

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

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

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

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.

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:

•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

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

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

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

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

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

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

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

33.3.Guideline33also does not apply to the acquisition of a financial instrument excluded by the Commissioner from that guideline.

34.The funds investments must be made and maintained on an *arms 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 guideline does not apply to:

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

•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

•by way of an arms length commercial transaction; or

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.

The penaltyin relation to each of guidelines33to38is 30 penalty units.

40.1A.   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.

Note: The holding of investments, such as shares or rental properties, for the purpose of deriving income that can be distributed to deductible gift recipients is not considered to be carrying on a business.

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

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

•with a *deductible gift recipient covered by item 1 in the table in section30-15 of the Income Tax Assessment Act 1997; and

•in the course or furtherance of the funds 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 arms length transaction.

42.The fund must not *provide any benefit (except as set out in guideline43), directly or indirectly, to:

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

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

PENALTY:           An amount equal to the amount or value of the benefitprovided.

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

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

•to pay fair and reasonable remuneration for the trustees services in administering the fund.

Note: A trustee incurs reasonable expenses on behalf of a fund when providing reasonable remuneration benefits to some of the individuals listed in guideline 42 (including providing benefits of a minor or incidental nature to an employee).

44.The fund must be private in nature. This characteristic implies that there must be a close relationship between those who establish the fund and those who donate to it.

Note: The features of a *private ancillary fund can be contrasted with those of a public ancillary fund, which can collect donations from the public.

45.The fund must not solicit donations from the public.

46.In any *financial year, the fund must not accept donations totalling more than 20percent (in total) of the *market value of its assets (determined at the end of the previous financial year) from entities other than:

47.The fund must issue a receipt for every gift it receives.

47.1.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.

48.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.

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

Note: In some states and territories, distributions cannot be lawfully made from a charitable fund to a non‑charitable deductible gift recipient.

50.If the fund winds up