By Grant Hooper, Senior Grants Manager, Equity Trustees
It makes sense to give to charities: it’s a tax-effective way to support the community and direct help to where it’s needed the most. But when and how we choose to give – often spontaneously towards the end of the financial year – doesn’t make as much sense.
As June 30 approaches, we place far greater value on tax deductions even though those benefits can be locked in at any time. It’s a type of intuitive mental accounting, just as we might create ‘buckets’ for general spending, emergencies and entertainment.
But this behavioural bias can also cause people to save for a child’s education while carrying credit card debts or to blow an unexpected windfall while carefully spending their monthly salary.
Ad-hoc giving also raises other issues. Most people who contribute to charities do so in response to being asked, whether that be by a charming collector on the street, a compelling letter received in the mail, or by a persuasive phone caller – even though they strongly dislike it – according to a recent Giving Australia survey.
It means people may not always be supporting the charities that mean the most to them or effectively keeping track of their available deductions.
There is a better way.
Charitable structures can empower change by helping people direct their donations to the causes they are passionate about and, in some cases, crystallise tax benefits more efficiently.
Spontaneous versus planned giving
Opportunistic giving comprises the bulk of the $2.62 billion that individuals donated to charities in 2013-14. Almost two-thirds of people who gave to charities did so impulsively according to Giving Australia, but almost one in five said they would also consider becoming a regular donor.
Regular donations make a significant difference to charities by enabling them to increase their focus on core activities rather than fundraising and administration, which are common supporter concerns.
A regular direct debit is a good starting point but can risk becoming a set-and-forget exercise. A formalised structure such as a perpetual charitable fund, set up under an existing Public Ancillary Fund (PuAF), can offer the best of both worlds for many people.
These structured vehicles, which require an initial minimum of just $20,000, are one of the best ways to turbocharge effective philanthropy. Contributions to a PuAF account are tax deductible and can be spread over five years. This makes it a highly effective giving structure for the 45,000-plus individuals who contributed at least $5001 to charities, based on ATO data for 2013-14.
PuAFs, which must distribute 4 per cent of the fund’s value to charities each year, tend to grow over time because both earnings and capital gains are tax-free. The initial investment can effectively keep generating money for charities over many years.
This makes it a highly efficient way to support the not for profit sector while fostering a stronger connection between individuals, charities and the community.
Many people name their PuAF accounts in memory of someone special or after their own family to encourage a greater interest in philanthropy among the next generation.
A number of employers are now also setting up their own PuAF accounts as a way to encourage a greater sense of workplace community. Employee donations are taken directly from pre-tax salary allowing them to enjoy an upfront tax deduction.
Private ancillary funds (PAFs) are another similar structure aimed at high net worth individuals and families with at least $500,000 in investible assets to donate. PAFs offer the same tax advantages as PuAFs but are required to distribute 5 per cent of their market value each year.
Structured giving targets concerns
While Australians are generous supporters of charities, many still hold concerns about administrative costs and whether their money will reach those in need.
Those who engage in structured giving have a different view. They contribute six times more dollars than those who donate spontaneously (including those who make ad-hoc donations several times a year).
This suggests that those who give with a structured approach are more confident that their donations will be effective and feel a greater sense of involvement in the charities they support.
A PuAF account set up within an overarching umbrella fund encapsulates both of these elements. It can take advantage of economies of scale such as lower fees and efficient administrative processes, as well as provide help finding charitable organisations that match donor interests.
There are now more than 1,550 PuAFs holding $1.73 billion in assets, which generate more than $300 million in charitable distributions every year, according to the ATO. Similarly, PAFs generated more than $300 million in charitable distributions.
The end of the financial year is traditionally a time when we make last minute tax-deductible donations. But this could be the year you make an impact that lasts a lifetime by setting up a charitable foundation that empowers change across society while lowering your tax bill.
If you would like to speak to us about structured giving, and setting up a philanthropic fund for yourself or your clients before 30 June (or any time) call 1300 133 472 and one of our Philanthropy team will be in touch or click here for more information
Equity Trustees is one of the largest distributors of philanthropic funds in Australia, managing over 500 charitable trusts and foundations. In 2016, it distributed more than $70 million to a range of charities and causes.
An edited version of this article was published in The Australian on Monday 16 May 2017. You can read the version on The Australian website if you are a subscriber, by clicking here.
Disclaimer: Philanthropy services are provided by Equity Trustees Limited (ABN 46 004 031 298) AFSL 240975 and Equity Trustee Wealth Services Limited (ABN 33 006 132 332) AFSL 234528, both companies are part of EQT Holdings Limited (ABN 22 607 797 615), a public company listed on the Australian Securities Exchange (ASX: EQT). In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. This information is provided for general information purposes only and does not contain investment recommendations nor provide investment advice. Before making an investment decision, you should consider whether this information is appropriate to your investment objectives, financial situation, needs and circumstances.