Private Ancillary Fund (PAF) regulations have recently changed.
The billions of dollars within PAFs are now more accessible to charities and investment houses.
The way that charities talk to PAFs has changed. Previously, charities would approach the director of a PAF about a grant/donation. Now, they ask “How would you like to support us – grant, investment, or a combination of the two?”
There are many reasons why these changes have happened:
- A change in tax rules that allows PAFs to loan to and to invest in non-profit organisations with DGR Item 1 status
- A trend for philanthropists to make a difference through investments and wisdom, not just distributions
- Charities recognising that they have activities or intellectual property that could be developed to provide a commercial return to both charities and investors
- PAF contributions can now change from an investment to a donation depending upon the outcome of the commercial development
- Investment is now included in the minimum 5% of capital required for distributions to non-profit organisations each year
- Greater attention is being given to the specialist needs and opportunities of non-profits’ investments.
Two key developments have been reported in the media.
First, Will Hamilton reported on the AUSiMED innovation:
“The venture, AUSiMED, is a medical research charity with deductible gift recipient (DGR) status that supports and facilitates medical research collaborations between Australia and Israel.
Its purpose is to advance the prevention and treatment of some of the world’s most prevalent medical conditions.
AUSiMED recently secured its own tax ruling approving an innovative way for public and private ancillary funds (PAFs) to invest in their venture philanthropy fund (VPF). This takes the form of an interest-paying loan — one which pays a minimum 14 per cent interest for three years.
Indeed, the tax ruling stipulates an interest rate of the RBA cash rate plus 14 per cent.
The VPF has a portfolio of medical research projects and if a research project is commercialised, the loan principal and interest is either repaid in cash to the PAF or repaid by an offer of shares in the commercialised project vehicle.
If the research can’t be commercialised, both the loan and interest (effectively forgone) converts to a tax-deductible donation for the PAF.
It forms part of the annual distribution of the PAF, as opposed to being a loss of capital and interest forgone.”
AskRIGHT has previously suggested that clients consider loans from investors. These loans could become investments or donations depending on the long-term outcomes. The PAF changes recently announced suggest that PAFs are likely to be early participants in these arrangements.
Organisations like AUSiMED have used the The Complete Guide to Australia’s Private Ancillary Funds™ (PAF Guide) to identify Funds with an interest their cause.
Health is the obvious winner from the PAF changes. Nearly 400 of Australia’s 1,450 active PAFs have an interest in donating to health-related causes.
This is not the only area that might benefit, however. Non-profits with innovative solutions in bookings, warehousing, database development, client records, and service delivery are also likely to gain investments from for-profit investors, and from PAFs.
AUSiMED was right to get a tax ruling on its arrangement, and this would be good practice for any organisation that is early into this market.
Again, in The Australian, Damon Kitney reported on a new fund launched by Social Ventures Australia. This fund will be a diversified portfolio with social impact investments. The fund will also provide protection for investors from “at least eight leading private ancillary funds and foundations”.
In the future, we can expect to see further financial innovations taking advantage of the changes in PAF regulations. The big winners are going to be those charities that are most financially literate.
New PAFs are being created every month throughout Australia.
Interested in the Private Ancillary Fund opportunity? Register for a free webinar on How to Raise Money from PAFs.
To find out how Daniel can help your organisation, contact d.mcdiarmid@AskRIGHT.com.
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