Private ruling: Private Ancillary Fund grants
Date of advice: 4 April 2016
Published: May 2016
Ruling period: 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the total amount of a grant in year 1, payable over 3 years, a distribution that meets the 5% distribution rule in year 1? | A1: Yes

Relevant facts and circumstances: • The Foundation is a Private Ancillary Fund (PAF) • The PAF was registered in 200X • The PAF reports on an accruals basis • The PAF approved a grant to provide housing • There was an agreement to fund the project progressively based on expected outlays. The PAF committed funds for payment over three financial years; • Year ending 30 June 2014 • Year ending 30 June 2015, and • Year ending 30 June 2016 • The committed funds were paid over the 20XX financial year; • The PAF had already distributed 5% of its assets in the 20XX financial year when the funds committed for distribution in the 20YY financial year were paid as part of the 1 April 20XX payment • The PAF treated the early 20YY distribution as a loan

Relevant legislative provisions: Income Tax Assessment Act 1997 | Taxation Administration Act 1953

Reasons for decision: Detailed Reasoning - Issue 1: Private Ancillary Fund grants committed over several financial years | Detailed Reasoning - Question 1: Is the total amount of a grant in year 1, payable over 3 years, a distribution that meets the 5% distribution rule in year 1? | Detailed Reasoning - Answer: Yes | Summary: The annual distribution made by a private ancillary fund accounts for its minimum distribution in accordance with the accounting standards as required by the Guidelines made under section 426-110 in Schedule 1 to the TAA. Distributions must be made in accordance with the accounting standards. | Detailed Reasoning - Detailed reasoning: A Private Ancillary Fund (PAF) is a private charitable trust for individuals or family groups that invest money and property then distribute earnings to charities that are endorsed as Deductible Gift Recipients (DGR). A PAF does not operate as a charity. It only distributes funds. It does not directly provide services. Section 426-110 in Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the Minister the power to set out rules in relation to PFs and their Trustees. These rules are contained in guidelines made by legislative instrument. The Private Ancillary Fund Guidelines 2009 (the Guidelines) commenced on 1 October 2009. The purpose of the Guidelines is to set minimum standards for the governance and conduct of a private ancillary fund and its trustee. These include, amongst other requirements, that the PAF: • be a trust • have a corporate trustee • is a private fund (meaning it does not invite the public to contribute to the fund but it is accountable to the public) • only distribute funds to other DGRs • have governing rules that require remaining money or property on winding up to be provided to another DGR • distribute at least 5% of the market value of the fund's net assets or $11,000 (whichever is the greater) in each financial year, and • ensure at least one of the Directors is an individual with a degree of responsibility to the Australian community who cannot be the founder or a large donor (i.e. a donor of >$10,000) or an associate of either the founder or such a donor Compliance with the guidelines is a requirement for a private ancillary fund's continued endorsement as a DGR under s30-125(1) Income Tax Assessment Act 1997 (ITAA 1997). Guideline 19 of the Guidelines states that a PAF must make a minimum distribution each financial year: | Detailed Reasoning - Minimum Annual Distribution: 19. During each *financial year, a *private ancillary fund must distribute at least 5 per cent of the *market value of the fund's net assets (as at the end of the previous *financial year). Note: 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). 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: • the 5 per cent is less than $11,000; and • any of the 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 5 per cent of the market value of the fund's net assets. If a fund's expenses are paid out of the fund's assets or income, its minimum distribution is $11,000 or 5 per cent, whichever is greater. PAF financial statements must be prepared in accordance to Guideline 26 of the Guidelines, which state; | Detailed Reasoning - Financial statements: 26. The trustee must prepare, or cause to be prepared, financial statements showing the financial position of the fund at the end of each *financial year. 26.1. The financial statements must be prepared in accordance with the *accounting standards. 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. Therefore, in preparing financial reports during the relevant year, the entity must comply with Australian Accounting standards issued by the Australian Accounting Standards Board (AASB). The Explanatory Statement to the Guidelines states: A fund must be careful not to double-count a later year grant when calculating its minimum annual distribution. That is a committed grant or grants in later years cannot both reduce the calculation of the fund's net assets and be counted towards the fund's distribution in those years. You agreed to fund the project progressively based on expected outlays. You committed funds for payment over three financial years; Year ending 30 June 2014 Year ending 30 June 2015, and Year ending 30 June 2016 The commitment year is therefore the 2014 financial year. Payments were made over the 20XX financial year; The annual distribution made by a private ancillary fund accounts for its minimum distribution in accordance with the accounting standards as required by the Guidelines made under section 426-110 in Schedule 1 to the TAA. You must, therefore, account for the distributions in accordance with the accounting standards. For our purposes distribution occurs when payments are made therefore the distribution year is the 20XX financial year. It is important to note that committed funds paid earlier than anticipated may mean that the 5% distribution rule may not be met in subsequent years. Care must be taken to ensure committed grants are only counted once.