Introduction
Following consultation on changes to philanthropic and charitable fund regulation, the federal Government has announced reforms to Australia’s ancillary fund legislation. These changes aim to foster local giving and collaboration by supporting community charities.
The reforms followed the recommendations of the Australian Government Productivity Commission’s ‘Future foundations for giving’ inquiry report and the ‘Not-for-profit Sector Development Blueprint’.
The Government’s reforms include:
- amending the minimum annual distribution rate for public and private ancillary funds to 6% of net assets to be distributed each year from the previous rates of 5% for private funds and 4% for public funds
- renaming ancillary funds to ‘giving funds’ to highlight their purpose as an avenue for charitable causes
- amending distribution requirements to allow funds to ‘smooth’ their distributions for three years to offer flexibility in the timing of distributions
- adding 34 new organisations to the Ministerial Declaration for Community Charities to allow additional organisations to access deductible gift recipient status once endorsed by the Australian Taxation Office.
A list of the impacted organisations is available at Boosting support for Australian charities | Treasury Ministers.
It is important to be aware that the reform to annual distribution rates will only take effect from the first financial year after the amendments to the Private Ancillary Fund Guidelines 2019 and Public Ancillary Fund Guidelines 2022 are made. In addition to this, existing giving funds will have a two-year grace period after the amendments are enacted before they must comply with the new distribution rate.
Changes to the annual distribution rate
The distribution rate for both public and private giving funds sets out the minimum percentage of fund assets that must be distributed annually. Following the amendments these funds will be required to distribute 6% of their net assets each year to Australian charities, while still allowing them to retain some donations to support investment in their future.
Recent Treasury data has shown that over two-thirds of Australia’s public giving funds and about half of the private giving funds distributed more than 6% of their assets in a financial year. The Productivity Commission’s inquiry supported these findings, concluding that public giving funds would likely be able to meet distribution rates similar to those of private giving funds.
What does it mean to ‘smooth’ distributions?
In its inquiry, the Productivity Commission recommended allowing giving funds to smooth their distribution rate over a period of up to three years to provide greater flexibility in fund management.
By smoothing their distributions, giving funds can manage their resources more sustainably, maintain regulatory compliance and provide consistent support to the community. This allows funds to spread distributions over three years instead of making large, irregular one-off payments.
Funds will not need approval from the Commissioner of Taxation to smooth their distributions. Instead, they must notify the Commissioner in or before their first year of intending to smooth distributions over three years and explain their reasons.
Risks to consider
While the new regulation is intended to increase support for Australian charities, giving funds and donors should be aware of the following risks:
- Increased compliance burden: the introduction of the new distribution rate and smoothing options will likely require more rigorous reporting and administrative processes.
- Review of investment strategies: with increased annual distribution rates, investment strategies may require amendments to manage how funds are allocated to Australian charities.
- Risks of non-compliance: if funds fail to adapt to new requirements of public and private giving funds, they may be subject to penalties or a loss of charitable status.
- Impact on beneficiaries: with changes to distribution rules, the timing and amount of support that is provided to charities and community organisations may be affected.
There is some uncertainty surrounding when these reforms will be introduced, as the Government has only stated that the new distribution rates ‘will not come into effect until the first financial year after the amendments to the giving fund guidelines are made’.
Conclusion
As a giving fund, it is important to stay informed about regulatory reforms to effectively manage the new legislative requirements, engage stakeholders and prepare to meet your obligations.
For further details on the giving fund reforms, please contact Carly Ashwood.
