With the uncertainty in the world economy, it is easy to look at seemingly insurmountable problems in Australia and abroad and think that there is nothing we can do. However giving to make a difference in other peoples lives, does not have to be costly to be effective. Philanthropy is defined as the planned and structured giving of money, time, information, goods and services, voice and influence to improve the wellbeing of humanity and the community.
It has the power to do immeasurable good both locally and in the wider worldwide community. But it can also be an empowering financial planning tool. Done wisely and thoughtfully, philanthropy can reduce your tax liability, affect your community, and empower your family to realise their ambitions and make meaningful contributions to society.
In terms of financial giving, we outline some of the most tax effective ways to implement effective philanthropy.
Giving to DGRs
The simplest method of giving in a tax effective manner is to make a donation of $2 or more to a Deductible Gift Recipient (DGR). Donations are generally tax deductible in the year it is paid however, provided certain conditions are met, deductions can be claimed over a period of up to 5 years.
Not all charities and non-profit entities are DGRs. For an entity to be a DGR, it needs to be endorsed by the Taxation Office. You can check whether an entity is endorsed as a DGR by going to www.abr.business.gov.au.
Employees can donate regularly to DGRs through a Workplace Giving Program. A regular fixed amount can be deducted from aftertax salary. Therefore it does not affect your gross salary, superannuation guarantee payments or reportable fringe benefits. The deduction can then be claimed in your tax return.
Workplace Giving is simpler for the DGR because it is not required to issue receipts to each individual donor. It may also be simpler for you.
For some taxpayers, it may be possible to give by distributing pre-tax income from a discretionary trust to income tax exempt entities. This provides the same tax benefit as a tax deductible donation to a DGR. However trusts are not limited to distributing only to DGRs. Provided the deed allows, the trust can give to various tax exempt non-DGR entities such as churches and charities.
Private Ancillary Funds (PAF)
A PAF is a trust fund set up solely for the purpose of providing money, property or benefits to DGRs or to establish DGRs. A PAF must be endorsed by the ATO.
Donations made to a PAF are tax deductible in the current year, however funds can be retained in the PAF over a number of years subject to a minimum annual distribution requirement. Income generated in the PAF is tax free.
A PAF can be costly to maintain as it is subject to onerous compliance requirements. However if you have substantial amount that you would like to give and would like to play a key role in its distribution, a PAF may be worthwhile.
This is becoming and increasingly popular way for families to set up and on-going philanthropic fund that can be run by on-going generations.
A charitable fund exists to manage resources for charitable purposes. It is established by a deed of trust and does not itself carry on charitable activities. Donations to charitable funds are not tax deductible but pre-tax distributions from a discretionary trust remain tax effective.
Charitable funds can give to a wider range of organisations and are less regulated than PAFs.
Bequests and Testamentary Trusts
A bequest is a gift made available upon the death of an individual by the provision in their will. This can be in the form of a sum of money, an asset or a percentage of the estate. Alternatively, a testamentary trust can be established to donate all or part of the estate to a philanthropic cause. It ensures that the benefit can exist in perpetuity but it requires careful planning to ensure the donor’s intention is properly carried out after death.
Both options mean the funds remain unrestricted during the person’s lifetime. However there is no tax benefit to the donor.
You may even consider setting up a tax exempt charitable institution to carry out charitable works. A charitable institution is an entity that is instituted to advance or promote charitable purposes. Unlike a charitable fund which is a conduit of funds, a charitable institution actually carries on charitable activities.
There are many other ways you can give besides financial giving, such as volunteering your time to a charity, pro bono services, etc.