Ready to make your charitable giving more strategic, impactful, and tax-effective? A private ancillary fund (PAF) is Australia’s leading philanthropic structure for families and businesses wanting to create a lasting legacy. It allows you to establish your own charitable foundation, claim an immediate tax deduction, and support the causes you care about for years to come.

This guide breaks down exactly what a PAF is, how it works, and the critical ATO and ACNC compliance rules you must follow.

Key Facts About a Private Ancillary Fund (PAF)

• What It Is: A PAF is a private trust that receives tax-deductible donations to be invested, with the earnings distributed to eligible charities (DGR1s).
• Immediate Tax Deduction: Donors get an immediate tax deduction for contributions of cash or assets, which can be spread over five years.
• Tax-Free Growth: The fund’s investments grow completely tax-free – no income tax or capital gains tax is payable.
• Annual Distribution: A PAF must distribute at least 5% of its net asset value to eligible DGR1 charities each year.
• Strict Governance: PAFs are regulated by both the ATO and the ACNC, requiring a compliant trust deed, investment strategy, and annual audit.
• Founder Control: The founders, through a corporate trustee, control all investment and distribution decisions.

What Is a Private Ancillary Fund?

A private ancillary fund (PAF) is a philanthropic trust that allows individuals, families and businesses in Australia to donate money, claim a tax deduction, and distribute funds to eligible DGR1 charities. PAFs must follow strict ATO and ACNC rules covering governance, minimum annual distributions and investment controls. Always check current regulator guidance.

According to the ATO, a PAF is a type of trust established and maintained solely for the purpose of providing money, property, or benefits to other charities that are Deductible Gift Recipients (DGRs) under Item 1 of the tax law.

Think of it as your own charitable foundation. You contribute capital to it, get an immediate tax deduction, and then the funds are invested to grow tax-free. Each year, you decide which eligible charities receive grants. This structure moves you from ad-hoc donations to organised, strategic, and impactful philanthropy.

How a PAF Works in Australia

The operation of a private ancillary fund follows a clear cycle: contribute, invest, and distribute. It’s a structured way to turn a single contribution into a sustainable source of funding for the causes you care about.

1. Contribution: It begins when the founder makes a tax-deductible donation to their PAF. This can be cash or other assets like shares. This initial gift forms the fund’s capital (or ‘corpus’).
2. Investment: The corpus is invested according to a formal investment strategy. All investment earnings and capital gains are completely tax-free, allowing the fund to compound and grow much faster.
3. Distribution: Each financial year, the PAF is required to grant a minimum percentage of its value to eligible charities that hold DGR1 status.

The founders, acting as directors of a corporate trustee, are in control. They oversee the investment strategy, research and select charities, and ensure the fund meets all its regulatory obligations with the ATO and the ACNC.

Key Features of a Private Ancillary Fund

For a quick overview, this table breaks down the core features of a PAF.

Feature	Description
Structure	A private trust established solely for charitable purposes. It is a form of ‘private foundation Australia’ is familiar with.
Donations	Donors receive an immediate tax deduction for contributions of cash or assets.
Tax Status	Income tax exempt. All investment earnings and capital gains are tax-free.
Distributions	Must distribute a minimum of 5% of its net assets’ value annually to eligible DGR1 charities.
Control	Founders (as trustees) control all investment and distribution decisions.
Legacy	Can be structured to continue across generations, creating a lasting philanthropic legacy.
Regulation	Governed by strict ATO PAF guidelines and ACNC Governance Standards.

Tax Benefits of a Private Ancillary Fund

The powerful PAF tax benefits are a significant reason why philanthropists establish a private ancillary fund. These incentives boost your giving capacity in two key ways.

First, you receive an immediate, upfront tax deduction in the financial year you contribute money or assets to the fund. This is excellent for strategic tax planning, particularly in high-income years. The ATO allows you to spread this deduction over five years for added flexibility.

A Tax-Free Growth Engine

The second major benefit is that the PAF itself operates in a completely tax-free environment. This is the secret to compounding your philanthropic capital.

• No Income Tax: All investment earnings, such as dividends and interest, are exempt from income tax.
• No Capital Gains Tax: When the fund sells an asset for a profit, zero capital gains tax (CGT) is payable.
• Franking Credit Refunds: The PAF can claim a full cash refund on franking credits attached to its Australian share dividends.

This tax-free status means every dollar of growth stays in the fund and gets reinvested, building a larger pool of funds for charitable giving over time.

How to Set Up a Private Ancillary Fund

Establishing a private ancillary fund is a structured process that requires careful planning and professional guidance to ensure compliance from day one. Here’s how to set up a private ancillary fund correctly:

1. Appoint a Corporate Trustee: The first step is to set up a proprietary limited company to act as the trustee. The directors of this company (usually the founders) will manage the fund. Directors will need a Director ID from the ABRS.
2. Draft a Compliant Trust Deed: This is the fund’s rulebook. You must engage a solicitor to draft a trust deed that strictly complies with the Private Ancillary Fund Guidelines 2019. This legal document outlines the PAF deed requirements, purpose, and operational rules.
3. Settle the Trust: The fund officially comes into existence when the founder makes the first donation to the trustee. This “settlement” legally establishes the fund’s capital.
4. Register with Regulators: With the trust established, you must complete several key registrations:
   • Obtain an Australian Business Number (ABN).
   • Register the PAF as a charity with the ACNC. Our guide on how to register a charity in Australia explains this in more detail.
   • Apply to the ATO for endorsement as a Deductible Gift Recipient (DGR) and as an income tax exempt fund.

Getting professional help for your trust setup is crucial to avoid costly mistakes.

Tax Deduction and Distribution Requirements

Let’s illustrate how the tax deduction and PAF minimum distribution rate work with a practical example.

• Donation: In June 2025, Sarah donates $1,000,000 to her newly established PAF.
• Tax Deduction: She can claim a $1,000,000 tax deduction in her 2024-25 tax return, reducing her taxable income significantly.
• Asset Base: On 30 June 2025, the PAF’s net asset market value is $1,000,000.
• Distribution for 2025-26: For the next financial year (2025-26), the PAF must distribute at least 5% of its 30 June 2025 value.
  • Calculation: $1,000,000 x 5% = $50,000.
• Action: By 30 June 2026, the PAF trustee must distribute at least $50,000 to one or more eligible DGR1 charities.

Meanwhile, the remaining $950,000 (plus any investment returns) continues to grow tax-free within the fund, forming the base for the following year’s distribution calculation.

PAF Trustee & Governance Requirements

Running a private ancillary fund carries significant legal and fiduciary responsibilities. As a trustee, you operate within a strict framework set by the ATO and ACNC to protect the fund’s charitable purpose. Failure to meet these PAF governance standards can jeopardise your fund’s tax status.

Trust Deed Requirements

Your trust deed is the fund’s constitution. You must manage the PAF strictly in line with its rules. This includes acting with care and diligence, avoiding conflicts of interest, and ensuring every decision serves the fund’s charitable purpose.

Investment Rules

You cannot invest randomly. The law requires you to create, maintain, and regularly review a written PAF investment strategy. This strategy must be prudent, considering risk, diversification, and the need to make annual distributions. The ATO PAF guidelines prohibit certain activities, such as borrowing money or acquiring assets from related parties, with very few exceptions.

Distribution Rate

Meeting the PAF minimum distribution rate is a critical trustee obligation. Each year, your PAF must distribute at least 5% of its net assets’ market value (as calculated at the end of the previous financial year) to eligible DGR1 charities. Always check current ATO guidance as rates can change.

PAF Reporting, Audit & Compliance Obligations

To maintain its special tax status, a private ancillary fund must meet annual compliance duties. These legal requirements protect your fund and ensure its integrity.

Your yearly compliance cycle includes:

• Prepare Financial Statements: You must prepare annual financial statements that provide a true and fair view of the fund’s financial position and performance.
• Lodge PAF Annual Return: Every year, you must lodge a Private Ancillary Fund return with the ATO, detailing donations, grants, and financial activities.
• Submit ACNC Annual Information Statement (AIS): As a registered charity, your PAF must submit an AIS to the ACNC. Our guide on the ACNC Annual Information Statement covers this in detail.
• Conduct an Annual Audit: The fund’s financial statements must be audited each year by a registered company auditor. This PAF audit requirement is non-negotiable.

Who Can Donate to a PAF?

A private ancillary fund is designed to receive donations primarily from its founders, their family members, and their associated entities. It is not permitted to solicit donations from the general public. This is a key feature that distinguishes it from a public ancillary fund (PubAF).

Donors can be individuals, companies, or trusts. Any contribution they make is generally tax-deductible, providing a powerful incentive for building the fund’s corpus.

Common Mistakes & How to Avoid Them

Even with the best intentions, trustees can make mistakes. Here are common pitfalls and how to steer clear of them:

1. Mistake: Distributing to a non-DGR1 charity.
   • Fix: Always verify a charity’s status on the Australian Business Register before making a grant.
2. Mistake: Missing the minimum annual distribution deadline.
   • Fix: Calculate the required distribution amount early in the financial year and plan your grants well before 30 June.
3. Mistake: A poorly documented or non-existent investment strategy.
   • Fix: Formally draft a PAF investment strategy, have it approved by the trustee board, and review it at least annually.
4. Mistake: Breaching related-party transaction rules.
   • Fix: Understand the strict rules prohibiting the fund from providing financial benefits to founders or their associates. Seek professional advice before any transaction involving a related party.

Private Ancillary Fund Checklist

Use this checklist to ensure your PAF stays compliant.

Setup Phase:

•  Set up a corporate trustee (Pty Ltd company).
•  Appoint at least one responsible person as a director.
•  Engage a solicitor to draft a compliant trust deed.
•  Settle the trust with an initial donation.
•  Apply for an ABN.
•  Register with the ACNC.
•  Apply to the ATO for DGR and income tax exempt status.

Annual Compliance:

•  Hold an annual trustee meeting.
•  Review and update the investment strategy.
•  Calculate the minimum distribution amount for the year.
•  Distribute at least 5% of net assets to eligible DGR1 charities.
•  Prepare annual financial statements.
•  Arrange for an independent annual audit.
•  Lodge the ACNC Annual Information Statement.
•  Lodge the ATO PAF Annual Return.

FAQs

What’s the minimum amount needed to start a PAF?

While there is no official minimum, advisors generally recommend a starting corpus of at least $500,000 to $1 million. Below this, the annual administration, accounting, and audit costs can be disproportionately high compared to the amount distributed to charity.

Can a PAF donate to any charity?

No. A private ancillary fund can only donate to charities endorsed by the ATO as a Deductible Gift Recipient (DGR) under Item 1. You must verify a charity’s status on the Australian Business Register before making a grant. Donations to individuals or non-DGRs are prohibited.

What are the annual running costs of a PAF?

Ongoing costs include accounting and bookkeeping fees, mandatory audit fees, ASIC company secretarial fees for the corporate trustee, and potential investment management fees. These typically range from a few thousand to tens of thousands of dollars per year, depending on the fund’s size and complexity.

How is a PAF different from a public ancillary fund (PubAF)?

A PAF is a private structure funded by a small group of founders and cannot solicit public donations. A PubAF, however, is a public foundation that can and does fundraise from the general public. Governance rules also differ slightly between the two structures.

What happens to a PAF when the founder passes away?

A PAF is designed for longevity. The trust deed should include a clear succession plan for appointing new directors to the corporate trustee. This allows control to be passed to the next generation or other chosen individuals, ensuring the founder’s philanthropic legacy continues.

Can I donate property or shares to a private ancillary fund?

Yes. You can donate assets like listed shares or real estate to a PAF. The value of the donation for tax deduction purposes is typically the market value of the asset at the time of the gift. Gifting assets can be a tax-effective strategy, but you should seek professional advice regarding potential capital gains tax implications.

Does a PAF have to be registered with the ACNC?

Yes. All PAFs must be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC). This registration subjects them to the ACNC Governance Standards and annual reporting obligations, ensuring transparency and accountability.

What are the penalties for not meeting PAF rules?

Breaching PAF rules Australia enforces can have serious consequences. The ATO can impose financial penalties on trustees, remove the responsible person, or, in severe cases, revoke the fund’s DGR and tax-exempt status. This would make future donations non-deductible and subject the fund’s income to tax.

Conclusion

A private ancillary fund is the premier structure for strategic, long-term philanthropy in Australia. It provides significant tax advantages, allows your charitable capital to grow in a tax-free environment, and gives you full control over your giving decisions.

However, setting up and managing a PAF involves strict compliance with ATO PAF guidelines and ACNC standards. Getting the right advice from the beginning is critical to building a successful and sustainable philanthropic legacy.

Book a consult with Nanak Accountants & Associates -1300 NANAK TAX (626 258).

This article provides general information only for Australia. It doesn’t consider your objectives, financial situation or needs. Rules, thresholds and fees change check current ATO/ASIC/ACNC/ABR guidance and seek professional advice before acting.