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An increasing number of Australians are discovering the benefit of giving to charities through their own endowment funds.
An endowment fund is either set up as a private prescribed fund or as an account within an ancillary fund. Private prescribed funds, which have auditing and reporting requirements, are growing in popularity in Australia with more than $1.5 billion deposited in 769 approved funds since 2001.
Endowment funds allow a foundation’s principle donation to be invested and left to grow while a portion of the investment return is donated to organisations like Plan. The deposits and the interest earned on both funds are income tax exempt and donations are fully tax deductible.
About Endowment Funds
An endowment fund is a sum of money that is invested and a portion of the investment return of the fund is used to make charitable grants. The remainder of the fund remains invested to ensure the fund continues to grow for future grant-making over an extended period. Endowments allow a philanthropic mission to be pursued over time or in perpetuity. A tax deduction is received for the entire amount donated at the time the endowment fund is established and for all subsequent donations.
Endowments provide more control to donors, a feature many such donors find attractive. The government’s decision to utilise a $5 billion endowment for higher education as announced in the 2007 budget has increased the awareness of this particular means of structuring giving. There are two main types of endowment funds —Prescribed Private Funds (PPFs) and an account within an ancillary fund.
Prescribed private funds
PPFs were introduced by the Federal Government in 1999 to encourage greater individual and family philanthropy in Australia. The first PPF was set up in 2001 and grants made from PPFs totalled $301 million between 2001 and 2007. By July 2008, there were 769 approved PPFs and donations into them totalled in excess of $1.5 billion. PPFs are exempt from income tax and allow individuals and families to gain full tax deductibility for donations to the PPF, without needing wider public participation. The Australian Taxation Office (ATO) provides a model trust deed to simplify the process of establishing a PPF. However, government approval required to establish a PPF can take up to three months and there is currently a Treasury discussion paper to examine some of the rules around PPF operations. There are some ongoing donor responsibilities such as an annual audit and ATO information return.
An account within an ancillary fund
An account within an ancillary fund is a simple and effective structure for establishing and giving via an endowment fund and is also gaining popularity in Australia.
Ancillary funds, like PPFs, are exempt from income tax and while they are established to receive tax deductible donations from the public, they still enable donors to have individually identifiable and personalised grant-making. An account within an ancillary fund is different from a PPF in that it is a simpler structure to administer without ongoing requirements from the donor and is controlled by external Trustees; all administrative and reporting requirements are managed by the Trustees. Account holders receive consolidated reports on donations made to their account, commentary on the performance of investments, grant details and a summary of fees charged.
Comparing Endowment Options
Depending on the need for tax deductions and the timing for charitable giving, other structures donors can consider include Testamentary Foundations, Private Charitable Trusts or Community Foundations.
Further information
More detailed information on these options and other philanthropic issues can be found at www.gsjbw.com/philanthropy.
To discuss giving to Plan through an endowment fund, talk to your financial advisor or contact us on 13 PLAN (13 7526) or send us a message.
