Passing on the giving gene – structuring family philanthropy to foster generosity for generations

This article was originally written for, and published in, Women’s Financial Outcomes (WFO) magazine in an article titled ‘Passing on the Giving Gene’.

The Australian value of ‘mateship’ and our willingness to help those in need is something that is often talked about as underpinning Australian society and culture.  

The CAF World Giving Index 2022 states that approximately 55% of Australian adults support others through donating money, aid or time.

But is this generous enough?

In announcing its review of Australian Philanthropy, the Australian Government stated that the charity sector is under pressure – with Australians becoming less likely to join community groups and to volunteer. The Government also stated that, while deductible donations have increased as a share of total income of Australians, the percentage of Australian taxpayers making donations has fallen.

On the back of these statistics, the Australian Government has tasked the Productivity Commission to review Australian philanthropy – with the goal of doubling philanthropic giving by 2030.

So, if a family wants to get involved in or increase its philanthropy – with the aim of passing down the giving gene – what are the structuring options?

Why structure your giving?

There is nothing wrong with donating on an ad hoc basis to a charity or providing monetary or other support to a disadvantaged individual. Anyone who reads about the origins of The Smith Family will be aware of the change that direct and uncomplicated support can provide to those in need.

However, having one generation of a family providing ad hoc support to charities or individuals does not give future generations a ‘ready-made’ philanthropic structure to take ownership of, grow and apply for benevolent purposes.

There are many ways to structure philanthropy in families, the most common one being to establish a family foundation. But what exactly is a family foundation?

Family foundations

From a legal perspective, a family foundation is not defined. However, it is commonly accepted to be a separate structure that a family utilises to hold funds that are set aside for philanthropic purposes.

Because it has no exact definition at law, the legal structure of a family foundation is flexible.

Commonly, the driver for the legal structure of a family foundation is the Australian tax laws.

Under the current tax regime, a family foundation can be established as a charitable trust, company or other structure and whether:

• the family foundation is itself exempt from paying tax on its income and
• donors to the family foundation can claim a tax deduction for money or goods donated to the foundation,

largely depends on the legal structure of the family foundation and what charities or individuals it is supporting.

Generally speaking, the most tax effective structure for family philanthropy – where the goal is to hold funds and donate those funds to other charities – is an ancillary fund.

Of course, a family can also establish its own charity with activities and purposes aligned with the values of the family. Such a charity may, by way of example, provide shelter for the homeless, advocate for the rights of disabled youth or provide for individuals in necessitous circumstances. However, for the purpose of this article, the focus is on family foundations that give to other charities.

Family philanthropy can sometimes also be achieved tax effectively via an existing or newly established family trust, with distributions being made to charities and income tax exempt entities (provided the trust deed permits such a distribution) and via a testamentary trust that comes into existence on the death of the testator.

Before deciding on a legal structure for philanthropy, a family should consider:

• whether they want to give to other charities or to individuals
• the duration of their philanthropy
• how engaged they wish to be with the beneficiaries of their philanthropy
• who in the family will be involved in the philanthropic giving
• how much will be contributed to the fund and over what period of time
• whether they want to engage in public fundraising
• whether an income tax exemption or deductible gift recipient status is essential to establishing a successful family foundation.

Private ancillary funds

Private ancillary funds, originally called prescribed private funds, were introduced under the Government of John Howard as a tax reform to improve philanthropy in Australia.

According to the Australian Centre for Philanthropy and Nonprofit Studies, there were, as of 2020, 1,819 private ancillary funds, with donations during the 2019-20 year of $805.79 million and distributing approximately $520.74 million to charities.

Private ancillary funds are an attractive structure for family philanthropy because they are a private fund that:

• is exempt from income tax
• can provide a receipt to donors, which enables them to claim a tax deduction for their donation
• generally, has the same tax status as registered charities.

A private ancillary fund is a channel by which money or property is distributed to other charitable bodies endorsed by the Australian Taxation Office or specified in the income tax legislation to be a deductible gift recipient.

Set out below are the main requirements for a private ancillary fund.

Sub-fund of a public ancillary funds

Public ancillary funds are not dissimilar to private ancillary funds – with the main differences being the requirement to engage in public fundraising and the fund needing to be governed by a committee with a majority of ‘responsible people’. The distribution requirements also differ from that of a private ancillary fund.

While a public ancillary fund may not be as suitable as a private ancillary fund for family philanthropy, a family could structure its giving via a sub-fund of a public ancillary fund. Many community foundations, large charitable trusts, financial advisers, banks and trustee companies operate public ancillary funds and operate sub-funds within such a structure.

As a sub-fund of a public ancillary fund, a family would not have the administration burden that comes with operating a private ancillary fund, but they would also not have control of the fund.

Further support for your family foundation

There is no ‘one size fits all’ when structuring a family foundation and there are numerous structuring options available. Because of this and the tax laws that such foundations are subject to, expert advice should be sought from a lawyer, accountant and financial planner before a structure is established.

For assistance in structuring, establishing or operating a family foundation, please contact Carly Ashwood or another member of our corporate advisory team.