PAF distribution boost sparks friction between charity and legacy, accountants say

Private ancillary funds (PAFs) are charitable donation vehicles typically used by wealthy families to further their philanthropic endeavours.

Funds are currently required to donate 5 per cent of their value annually. However, the government is considering a proposal to lift the annual distribution rate to as high as 8 per cent.

Accounting professionals have said that boosting the PAF distribution rate would have positive immediate impacts on charitable organisations in Australia, but raised further questions regarding legacy and ongoing charitable giving.

“I wouldn't necessarily consider that it is a bad thing. There is, however, some concern that the increase may be a little bit too drastic in terms of the amount that is being proposed,” Peter Revelas, partner at RSM, told Accounting Times.

“What I think a lot of people are concerned about is that you potentially end up reducing or eating into the capital base that is creating the revenues that ultimately would have been contributed to a charitable organisation.”

According to the Productivity Commission, approximately $11.6 billion was held in PAFs in 2020–21. Approximately half (49 per cent) of PAFs distributed between 5-6 per cent of their net assets, hovering just above the minimum distribution rate.

This means that lifting the distribution rate would have immediate impacts on the amount of money flowing to Australian charities on an annual basis.

BDO private wealth partner Oliver Straker told Accounting Times that, for many clients, PAFs were a form of legacy-building that ensured their wealth paid community dividends for generations to come.

He warned that lifting the distribution rate from 5 per cent to 8 per cent would make it difficult for funds to grow over time, meaning family legacies would likely wane faster than intended.

“If the PAF has to distribute 8 per cent, it means the capital over time will erode. And most of these PAFs are set up to be legacy charities,” Straker said.

He noted that the policy marked a trade-off between current and future giving. By increasing the donation rate, charities would see immediate upfront benefits, however, at the cost of their ability to sustain themselves over time.

If the distribution rate were to be boosted, the money would likely run out at some point.

“To be honest, [lifting the distribution rate would] have great, immediate impacts to the community, because more money will be distributed to charities,” Straker said.

“But in the long term, [for] families who have put away a huge chunk of their family wealth to go to charity, … their legacy won't be able to continue on for as long as they thought it would.”