We have briefly outlined below the amendments made to the Guidelines.
The Guidelines have been amended to reflect the introduction of the Australian Charities and Not-for-profits Commission (“ACNC”) and the current role it plays in the establishment and on-going compliance of registered charities. This is on the basis that ancillary funds were automatically registered with the ACNC from 1 January 2014 and are therefore now required to report to the ACNC.
Broadly, the amendments remove the current requirement placed on ancillary funds to report to the Australian Taxation Office (“ATO”) where they are already required to report to the ACNC.
Investment strategy rules
The current investment strategy rules have been updated to ensure that ancillary funds specifically consider:
- Their status as a registered charity.
- Perceived or actual conflicts of interest in holding particular investments.
- Any terms or circumstances relating to gifts received by the fund under a will.
It is therefore imperative that ancillary funds continually review their investment strategy ensuring that it remains up to date and that it continues to satisfy their charitable endorsement. This emphasises the importance for the investment strategy to be specifically tailored to the fund’s objects and purposes.
Loan guarantees for deductible gift recipients
Broadly, the introduction of this Guideline will allow ancillary funds to provide loan guarantees over borrowings of Deductible Gift Recipients (“DGR”).
This fits within the legislated purpose of ancillary funds and enables them to utilise their assets for the benefit of DGR’s without having to divest or transfer assets they hold.
Commissioner discretion to lower minimum distribution rate
The Guidelines now provide the Commissioner with the discretion to lower the annual minimum distribution rate of a fund in certain circumstances.
The amendments include a detailed list of factors which the Commissioner will consider when assessing an application. Some of these factors include; the general market conditions, the past, current and expected levels of returns from the fund’s investments, the investment strategy, and the level of distributions made by the fund in previous financial years.
This is a welcome amendment that will provide ancillary funds with the ability to protect the value of their investments where the return on their investments have reduced during a financial year.
Portability for Private Ancillary Funds (“PAF”)
PAF’s will now have the ability to transfer all of their net assets to another ancillary fund where it has complied with its minimum annual distribution requirements and has not received assets from another ancillary fund during the previous two financial years. This will allow PAF’s to consolidate assets with other ancillary funds, to increase the asset base available or to avoid divesting and will provide an avenue to wind up smaller PAFs.
Reduced audit requirements for small PAF’s
PAF’s with revenue and assets under $1 million now have the option, unless otherwise notified by the Commissioner, to have their accounts reviewed by a registered auditor as opposed to a full audit each year. This amendment reduces annual compliance costs for small PAFs and accordingly will allow them to improve their annual distributions by reducing their expenses and ultimately increase their capital.
The changes to the Guidelines are welcomed as not only do they reduce compliance costs and compliance obligations associated with the ongoing operation of ancillary funds, it provides ancillary funds with the ability to grow their investments. Ultimately it is Australia’s existing DGR entities who benefit from ancillary funds that will enjoy these amendments.
Please ask either your regular Pitcher Partners tax contact or any of the contacts in the Pitcher Partners firms below for further details on the issues raised in this Tax Bulletin.