Philanthropic options

The two most commonly used approaches for charitable giving in Australia are direct grants and endowment funds.

Direct grants, where donors provide monetary support directly to charitable organisations on a case-by-case basis, continues to be the most common method for making a charitable grant. Donors are able to claim a tax  deduction if grants are made to charitable organisations with Deductible Gift Recipient (DGR) status. Donors can claim the tax deduction at the time each grant is made. Making direct grants is a popular approach that most people are already familiar with; however the concept of endowment funds is gaining momentum.

Endowment funds

Endowments provide more control to donors, a feature many donors find attractive. Endowment funds enable donors to have separately identifiable capital and income and personalised grant-making in addition to the exemption from income tax.

There are two main types of endowment funds - Prescribed Private Funds (PPFs) and the more recently utilised arrangement of an account (sometimes called a subfund)within an ancillary fund referred to as a Charitable Endowment Fund (CEF).

Prescribed Private Funds (PPFs)

PPFs were introduced by the previous Federal Government in 1999 to encourage greater individual and family philanthropy in Australia. The first PPF was set up in 2001 with grants made from PPFs totalling $184 million between 2001 and 2006. As at November 2007, there were 610 approved PPFs and donations to them totalled in excess of $1 billion. PPFs are exempt from income tax and allow individuals and families to claim full tax deductibility for donations, without needing wider public participation. The Australian Taxation Office (ATO) provides a model trust deed to simplify the process of establishing a PPF. It should be noted that government approval is required to establish a PPF, which can take up to three months. Additionally, most donors find that a significant commitment to philanthropy is desirable to set up a PPF. Due to the establishment and ongoing costs associated with PPFs, Goldman Sachs JBWere Philanthropic Services estimates that donors (individuals, families or corporations) would need to commit a minimum endowment of $400,000 in order for the PPF to be cost effective. PPFs have grown in popularity since they were established; partly because the donor has full control over investment management and grant making.

However, there are ongoing donor responsibilities, such as annual audits and information returns due to the ATO.

Charitable Endowment Funds (CEFs)

A CEF account is a simple and effective structure for establishing and giving via an endowment fund and is gaining popularity in Australia.CEFs, like PPFs, are exempt from income tax and enable donors to set up separate, Identifiable accounts to contain capital and earned income.

A CEF account is different from a PPF in that it is a simpler structure to administer without start up or ongoing requirements from the donor. The CEF is controlled by external Trustees, who are responsible for all administrative and reporting requirements. Whilst the final decision about which charitable organisations receive grants from the CEF rests with the Trustee, donors to the CEF recommend charitable organisations of their choice at the time of application to the CEF and can change those recommendations at any time. CEF account holders receive reports on donations made from their account, commentary on investment performance, grant details and a summary of fees charged.

This simple, hassle-free structure for giving via an endowment can be established rapidly and allows donors to provide an enduring gift to charitable organisations while reducing the administrative responsibilities of establishing and managing a PPF. For details on how to establish an endowment fund, please call your financial planner.

Source: Goldman Sachs JB Were