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Charitable giving and tax deductions

With the impending Stage 3 tax cuts incentivising taxpayers to bring forward future tax deductions while tax rates are higher, it’s a good time to explore a more strategic way to bolster your tax savings, and your community impact, through structured giving. Tax time in Australia is not just about crunching numbers; it's also an opportune moment to amplify your generosity and fortify your future giving.

How to structure charitable giving

There are many ways to make a charitable gift, but structured giving via a sub-fund in a public ancillary fund is becoming the method of choice for donors looking for flexibility and longevity from their giving. A sub-fund can be used to frontload multiple years of tax deductions from charitable donations into a single tax year to maximise tax deductions when a donor needs it most. The fund then allows donors the flexibility to distribute gifts to their favourite charities over time.

It’s a strategy as popular for its simplicity as it is for its tax efficiency. A sub-fund can be easily set up in one day, offers flexibility for donors to support their favourite charities on their own timeline and extends the pleasure of giving well into the future.

You receive an immediate tax deduction for the amount that you contribute to your sub-fund. For example, a donation of $50,000 comes with a $50,000 deduction that you can claim in full in the year in which you make your donation or spread over a period of up to 5 years. This flexibility in claiming the deduction is helpful for donors unsure of their exact income position ahead of 30 June. In the event you have overestimated your assessable income, you can carry forward the unused portion of the tax deduction into future tax years.

Your donation is allocated to your own named sub-fund, your charitable giving account, within the broader umbrella of the public fund. From your sub-fund balance, you recommend gifts to charities over time, with a requirement to distribute at least 4% of the balance annually. The trustee of the public fund takes care of processing and paying your recommendations, along with overseeing all operations of the fund. This allows you to focus solely on selecting the charities you want to support, and with over 22,000 eligible recipients, flexibility of choice is not likely a problem.

There are several scenarios where frontloading your giving into a sub-fund might make sense:

You’re a beneficiary of the Stage 3 tax cuts

If you're among the majority of taxpayers set to benefit from the Stage 3 tax cuts, consider bringing forward future years of charitable giving and make a lump sum donation into a sub-fund before 30 June. You will secure a larger tax deduction now while your marginal tax rate is higher, but the flexibility to gradually distribute the balance to charity over time and on a schedule that suits you.

A windfall of income such as selling a business or investment property

If you've recently sold an asset with a significant capital gain or received a substantial bonus, your accountant might advise considering a substantial charitable donation to help offset some of that income. While the notion of using philanthropy to minimise taxes is appealing, the prospect of making a large lump sum donation to any single charity can be daunting, especially if pressed for time in the dying days of June. In situations such as business exits or bonuses, using a sub fund for charitable donations can effectively help mitigate your tax liabilities while offering the flexibility to allocate gifts to charity thoughtfully over time.

Business exits are a particularly smart time to think about making charitable contributions. The year a business owner sells their business is typically the biggest tax event of their lifetime. They can fund charitable giving potentially for the rest of their lifetime by establishing a sub fund.

Prefund to sustain your giving through retirement

Just as you've wisely prefunded your retirement with superannuation savings, consider extending this principle to prefund your charitable giving. If your intention is to support charities throughout your retirement, consolidate several years of future giving into a single lump sum contribution now. This enables you to receive a tax deduction while you're still earning taxable income. Then you can enjoy the pleasure of supporting your preferred charities gradually throughout retirement from the balance of your sub-fund.

Streamline tax reporting

A giving fund simplifies donors' charitable contributions by consolidating them into a single account. If you typically donate to 5-10 different charities annually, managing these donations can be hassle. At the end of the year, you're tasked with tracking down each gift and locating receipts for your accountant.

A sub-fund creates a more efficient way for donors to do all their charitable giving in one place. You receive one receipt for your donation to the sub-fund, while enjoying the flexibility to support multiple charities from your fund every year without the additional administration.

While donors consider the charities they want to support from their fund, the trustee invests the balance for growth. The investment returns are tax-free and eligible for full franking credit refunds.  With solid investment expertise supporting the public fund, the potential to grow the fund while giving can significantly amplify the impact of the initial donation. Chris Cuffe AO, founder of Australian Philanthropic Services and portfolio manager for its flagship public ancillary fund, the APS Foundation, says the structure’s ‘give and grow’ model has garnered significant popularity among donors attracted to creating an enduring source of income for the community. As Cuffe points out, “Donors who set up a giving fund with $50,000 in the APS Foundation a decade ago have distributed nearly half of their initial donation to charity, and yet the fund’s balance has grown to over $76,000 ready to be distributed to the community”.

With options for structured giving starting from $40,000, it’s a strategy accessible to a wide range of individuals, not just ultra-high-net-worth donors. Providers range from not for profit to corporate so donors should pay close attention to fees, post-fee investment returns, timeliness of reporting, and the ability to transfer the balance of your fund between providers.

For those looking for added control over investment decisions, private ancillary funds offer similar tax and giving advantages. However, they require more active management than a public ancillary fund and are recommended for donors with at least $1.5 million to contribute. Establishments of a private ancillary fund also take time, so if you are thinking of a deduction this financial year, it is time to get moving.


Rachael Rofe is Head of the APS Foundation, a Public Ancillary Fund offered by Australian Philanthropic Services.



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