February 2009

Private charitable giving - proposed changes to the rules for Prescribed Private Funds

Prescribed Private Funds (PPFs) were introduced by the Howard Government in 2001 to encourage private philanthropy in Australia. PPFs have been very successful in achieving that objective.

In the May 2008 Federal Budget, the Rudd Government announced it would legislate guidelines to improve the integrity of PPFs and provide the trustees of PPFs with greater certainty as to their philanthropic obligations. The new guidelines will take effect from 1 July 2009.

Present Operation of PPFs

The term "Prescribed Private Fund" is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). A PPF is essentially a private charitable trust established by trust instrument or in a Will with deductible gift recipient status and in most cases with income tax exempt charity status.

The current PPF Guidelines were formulated by the Government and are available on the Australia Taxation Office (ATO) website. The Guidelines outline the process to be followed, and the requirements to be met, in order to establish a PPF. The Guidelines include a requirement to establish a trust in accordance with a model trust deed which is also available on the ATO website.

PPF statistics from the ATO website indicate that the number of PPFs that have been approved each year since 2001 has generally been increasing. In the 2008 financial year, the total number of approved PPFs was 769. In the period from 2001 to 2007, PPFs distributed over $300 million to operating charities.

Government Discussion Paper November 2008

In late November 2008, the Treasury released a Discussion Paper titled "Improving the Integrity of Prescribed Private Funds" where it outlined proposed changes to the rules for PPFs and invited the public to comment on those proposed changes.

The Government believes four principles outline what should be the essential characteristics of a PPF. They are that PPFs are philanthropic and that they are trusts that abide by all relevant laws and obligations, and are open, transparent and accountable. PPFs are also private and they are ancillary funds.

It was these principles that formed the basis for the government's proposals for change, some of which are set out below.

(a) PPFs are philanthropic.

Required minimum distributions of say 15% each year with the Commissioner of Taxation to have the ability to modify the minimum distribution amount according to market conditions.

Regular valuation of assets at market rates annually on 30 June each year.

Minimum PPF size the proposal of a minimum PPF size of say $500,000.

Increased public accountability make contact details of PPFs public to allow charities seeking funding to make representations to PPFs.

(b) PPFs are trusts.

Give the ATO greater regulatory powers and PPFs to have a corporate trustee.

Introduce a fit and proper person test for trustees.

Move relevant provisions from the existing Model Trust Deed into the Guidelines.

(c) PPFs are private.

Limit the number of PPF donors to say 20 with a mechanism to convert the PPF to a public ancillary fund.

(d) PPFs are ancillary funds.

Restrict PPF investment to only liquid assets with a requirement to convert to a liquid form as soon as practical.

There were also other general proposals that included the possible renaming of PPFs as Private Ancillary Funds and giving existing PPFs a two year transitional period to comply fully with the new Guidelines.

Business and Community Response to Government Discussion Paper

The consultation process required submissions and comments to the Government's Discussion Paper to be made by 14 January 2009. There were about 137 submissions received in response to the Discussion Paper. Submissions were received from a range of organisations including charities, statutory trustee companies, the Trustee Corporations Association and Philanthropy Australia.

The general theme of the submissions was obviously very strong support for PPFs and strong opposition to many of the Government's proposed changes.

The most strongly opposed proposals included the minimum distribution rate of 15% (with many submissions supporting a fixed 5%). Also strongly opposed, was making PPF contact details public.

The Future

There will be further consultation on the proposed new Guidelines in April/May 2009. A draft of the Guidelines will be issued to the public and there will be a period of one month for further submissions.

Unless there is a complete change in direction, the primary legislation being the ITAA 1997 will be amended to give the Commissioner of Taxation power to deal with PPFs.The ITAA 1997 will also be amended to give the Treasurer power to make Guidelines in a subordinate legislative instrument.

Bartier Perry will continue to monitor and report on these important changes which have the potential to have a significant impact on the culture of philanthropy and community support in Australia.

Author: Gerard Basha