Sector Call on Amendments to Private & Public Ancillary Funds

The Community Council for Australia is calling on the Not for Profit sector to provide feedback on critical changes to the private and public ancillary fund guidelines being proposed by the Federal Government.

The Federal Treasury is consulting on draft amendments to the private ancillary fund (PAF) and public ancillary fund (PuAF) guidelines and CCA said it has been asked to provide a submission.

CCA CEO, David Crosbie, said while his organisation welcomed many of the proposed changes, particularly those reflecting the role of the the charity regulator, the Australian Charities and Not-for-profits Commission (ACNC), there remained the critical issue around changes to annual distribution rates for private and public ancillary funds.

According to the consultation information provided by the Treasury “of particular significance is the proposed change to the minimum distribution requirement”.

The draft amendments would remove the current minimum distribution requirement of 5 per cent (for a PAF) and 4 per cent (for a PuAF) of the market value of the fund's net assets as valued at the end of the previous financial year.

The draft said this would be replaced by a minimum distribution requirement which would be calculated using either the average of the Reserve Bank of Australia’s target for the cash rate over the previous financial year (expressed as a percentage), or the fund’s net investment earnings or returns (according to accounting concepts) for the previous financial year less any reasonable expenses.

“As the Reserve Bank of Australia’s target for the cash rate has been at 2 per cent since the beginning of the current financial year, the proposed change would mean that the minimum distribution requirement for the financial year commencing in July 2016 would drop significantly,” the Treasury said.

Crosbie said PAFs and PuAFs are set up as a vehicle to provide funding to eligible charities.  

“It is the fastest growing way for people to establish their own charitable foundations and currently distributes significant amounts of funding to charities in Australia. The 5 per cent PAF and 4 per cent PuAF rule ensures all PAFs and PuAFs meet their charitable obligation,” Crosbie said.

However, he said there were two opposing schools of thought about these proposed changes.

“One position is that this proposed change reflects the reality of lower returns for foundations (PAFs and PuAFs) on their investments. If foundations are forced to distribute more than they earn on their investments by having to distribute 5 per cent each year, it may eat into the principle amount and the quality and effectiveness in administration of grants etc. If the principle is diminished it means lower payouts in the future and less money to the sector. Providing this leeway in terms of how much is redistributed to the sector may actually mean more will be distributed in the long term,” Crosbie said.

“An opposing view is that if PAFs and PuAFs are to meet their charitable purpose, they need to show they are distributing a reasonable amount each year to fulfilling their primary role – providing funding to eligible charities.  

“Equities and other markets will fluctuate and there may be times when foundations may need to use the principle to meet their charitable obligations. Over time, 5 per cent seems a reasonable return and is a fair minimum.   

“Allowing much smaller levels of payments to charities (as reflected in the Reserve Bank cash rate) may enable foundations to spend a lot more on administration and other internal costs, and distribute less to eligible charities.”

Crosbie said CCA understood and accepted there was some legitimacy to each argument and, for this reason, was consulting with the sector and some foundations and others directly impacted by these changes.

“Our current view is that the method of calculating the amount to be paid under the (status quo) may be reasonable, but the first (the Reserve Bank cash rate) seems to set the bar too low,” he said.

CCA members can provide feedback to leighw@communitycouncil.com.au.

Individual submissions can be made here.