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Private Ancillary Fund Guidelines 2009
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Private Ancillary Fund Guidelines 2009
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Turn the raw legal text into a practical explanation grounded in Private Ancillary Fund Guidelines 2009.
PART 1 PRELIMINARY
These Guidelines are the Private Ancillary Fund Guidelines 2009.
These Guidelines commence the day after registration.
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.
Note 1: To find definitions of asterisked terms: see section 995-1 of the Income Tax Assessment Act 1997. However, some defined terms may not be asterisked: see section 2-15 of the Income Tax Assessment Act 1997.
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, trustee means 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 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.
Note 1: The Commissioner may remit all or part of an administrative penalty: see section 298-20 in Schedule 1 to the Taxation Administration Act 1953.
Note 2: An administrative penalty under section 426-120 in Schedule 1 to the Taxation Administration Act 1953 cannot be reimbursed from the fund: see subsection 426-120(4).
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.
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 2 Rules for ESTABLISHing AND MAINTaiNing PRIVATE ANCILLARY FUNDS as deductible gift recipients
• it is an ancillary fund, it is philanthropic in character and it is a vehicle for private philanthropy; and
• it is a trust that:
– 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 Commissioner’s obligations to protect the confidentiality of a *private ancillary fund’s information under privacy, and secrecy and disclosure laws.
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.
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 *private 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.
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 item 1 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.
11.1. Its governing rules must clearly set out and reflect that it is established and operated as a not-for-profit entity.
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.
At all times, at least one of the individuals involved in the decision-making of the fund must be an individual with a degree of responsibility to the Australian community as a whole. However, that 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.
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’.
Note: 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.
Note: 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.
15.1. However, the trustee or other controlling body may exercise a discretion or power:
• to appoint a new trustee; or
• to protect the property of the fund; or
• to deal with an urgent matter that cannot be postponed.
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.
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 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.
• 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.
Note: An administrative penalty under section 426-120 in Schedule 1 to the Taxation Administration Act 1953 cannot be reimbursed from the fund, see subsection 426-120(4).
Note 1: While net assets are used to determine the fund’s 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 fund’s assets or income.
Note: This means that if a fund’s expenses are met from outside the fund, its minimum annual distribution is the amount calculated under Guideline 19. If any of a fund’s expenses are paid out of the fund’s 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.
Note: 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 in calculating how much it has distributed.
Note: 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.
Note: 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.
Note: 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 arm’s length, the fund is providing a benefit whose market value is equal to the discount.
Note: 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 arm’s length unsecured loan sourced from that financial institution.
Note: 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 the Income 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 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.
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 fund’s 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 size of the fund; and
• the compliance history of the fund and the trustee; and
• the fees and expenses of the fund; 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 Australia’s 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.
Note: See section 2B of the Acts Interpretation Act 1901 for the meaning of ‘land’.
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.
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 fund’s 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 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.
21.1. 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.
Note: The trustee may ask the Commissioner to undertake the valuation. The Commissioner may charge the trustee for undertaking a valuation.
21.2. The trustee may use the estimate as the *market value of the land for the next 3 *financial years.
Note: The Commissioner may seek the trustee’s agreement to undertake the valuation or the trustee may ask the Commissioner to undertake the valuation. The Commissioner may charge the trustee for undertaking a valuation.
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.
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.
PENALTY: 10 penalty units.
PENALTY: 10 penalty units.
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.
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.
PENALTY: 10 penalty units.
• the financial statements of the fund; and
• 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.
28.1A. 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 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.
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 it’s *income tax return for the relevant *financial year.
PENALTY: 10 penalty units.
PENALTY: 10 penalty units.
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 fund’s investments, having regard to the fund’s objects and its expected cash flow requirements (including distribution requirements); and
• 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
• the liquidity of the fund’s 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.
PENALTY: 10 penalty units.
PENALTY: 15 penalty units.
PENALTY: 10 penalty units.
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 fund’s 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 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.
The fund’s investments must be made and maintained on an *arm’s length, unless another guideline allows otherwise.
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.
• by way of an arms’ length commercial transaction; or
• on terms more favourable to the fund than would otherwise be expected under an arms’ length transaction.
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.
38.1. 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 penalty in relation to each of guidelines 33 to 38 is 30 penalty units.
The fund must not *carry on a *business.
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 25 per cent of the net profits of the business for each *financial year during all or part of which the contravention continues.
• with a *deductible gift recipient covered by item 1 in the table in section 30-15 of the Income Tax Assessment Act 1997; and
• 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 arms’ length transaction.
PENALTY: 30 penalty units.
• the trustee; or
• a *member, director, employee, *agent or officer of the trustee; or
• a donor to the fund; or
• a founder of the fund; 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 benefit provided.
• to reimburse the trustee for reasonable expenses incurred on behalf of the fund; and
• to pay fair and reasonable remuneration for the trustee’s 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).
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.
PENALTY: 30 penalty units.
• a founder of the fund; or
• *associates of the founder; or
• employees of the founder; or
• a deceased estate of any of those entities.
PENALTY: 10 penalty units.
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.
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.
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.
Note: In some states and territories, distributions cannot be lawfully made from a charitable fund to a non‑charitable deductible gift recipient.
Note: see note to guideline 10.
51.1. Nothing in these Guidelines prevents a conversion agreed to by the Commissioner.
Note 1: This means that after receiving the agreement of the Commissioner, the trustee may ignore any guideline to the extent that it would prevent the conversion of the private ancillary fund into a public ancillary fund.
Note 2: After the conversion, the rules applying to public ancillary funds apply to the converted fund.
51A. With the agreement of the Commissioner, a *private ancillary fund may transfer assets to another * ancillary fund if:
• it transfers all of its net assets to that ancillary fund; and
• it has already complied with guidelines 19 to 19.6 for that financial year (about minimum annual distributions); and
• the net assets of the fund have not been received from another ancillary fund during the 2 previous financial years.
PART 3 TRANSITIONAL RULES FOR FORMER PRESCRIBED PRIVATE FUNDS
59. If a fund does not have a trustee that is a *constitutional corporation, then guideline 14.1 does not apply to the fund. Instead, at least one individual with a degree of responsibility to the Australian community as a whole must be a trustee of the fund.
60. If a fund has an existing borrowing as at 30 September 2009, 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.