The tax incentives introduced in 1999 to increase philanthropic giving in Australia seem to be slowly paying off. Even better, the pundits are forecasting a boom in generosity among Australia’s ultra rich. 
 
Story Melissa Wilkinson  
 
Australia has faced a barrage of criticism in the past for its apparent lack of philanthropic culture. Our apparent tightfistedness in relation to giving gets regularly compared with the high profile philanthropic activities of mega-rich entrepreneurs such as Warren Buffet and Bill Gates. 
 
The reality is that Australia’s philanthropic culture is still slowly maturing and evolving. The latest research on giving undertaken by The Australian Centre for Philanthropy and Nonprofit Studies at Queensland University of Technology found that affluent Australians are, on average, giving at a lower level than their counterparts in comparable countries such as the UK, Canada and the US. This is despite the evidence showing that they are enjoying similar levels of wealth. Affluent or high net worth individuals are those individuals who have investible assets (excluding the family home) of at least $1.2 million or a taxable income of at least $100,000. 
 
Released in March this year and entitled, Good Times and Philanthropy: Giving by Australia’s Affluent, the QUT study found that affluent Australians are giving more than the average Australian, but in general not that much more. It’s interesting to note that the level of personal wealth held by Australia’s ultra rich has grown at a much faster rate than their actual level of charitable giving. Substantial donations to philanthropic causes still seem to be the exception rather than the norm in Australia. 
 
While there is definitely scope for wealthy individuals to give more to charity, the good news is that Australia’s wealthy are giving more than they were a decade ago. Importantly, the study has confirmed that changes in the tax system over the last eight years are definitely encouraging greater philanthropy by individuals. 
 
BACKGROUND TO CHANGES 
The Howard Government announced a number of tax incentives in 1999 to stimulate growth in philanthropy in Australia. In the late 1990s, roundtable discussions were held with the former prime minister John Howard and representatives from the community, business and philanthropic sectors. 
 
This consultative working group grew into the Prime Minister’s Community Business Partnership and included a taxation subcommittee chaired by businessman and philanthropist David Gonski AO. 
 
Gonski presented a report to the Prime Minister with a range of recommended tax reforms to encourage and facilitate greater philanthropic giving by individuals. The $51 million package of taxation measures was accepted by Parliament between 1999 and 2002 and the measures are now part of Australia’s taxation law. 
 
The tax reforms included: 
> the establishment of prescribed private funds (PPFs) 
> deductions for workplace giving 
> capital gains tax exemptions under the Cultural Gifts Program 
> tax deductibility for gifts of property worth more than $5000 
> the ability to spread deductions for donations over a 5-year period 
> partial tax deductions for charity dinners 
> conservation covenants 
> health promotion charities. 
 
THE BUSINESS CASE FOR PPFs 
Described as a way of using the tax system to lubricate giving, PPFs probably have the most potential to make a difference in the individual giving stakes in Australia. The research shows that donations from individuals currently make a big difference to the non-profit sector and, to date, they have far exceeded donations from the corporate sector. 
 
PPFs are a new form of charitable trust or private foundation and are intended to encourage individuals, families and businesses to start their own philanthropic trusts. They’re marketed as a vehicle for larger and more sustained giving by individuals wishing to support their pet notfor- profit causes. 
 
While the spirit of giving certainly encourages a nice warm feeling, PPFs offer a number of tax exemptions and useful ways of redirecting tax liabilities. PPFs have deductible gift recipient (DGR) status which means that you can claim a tax deduction for any donations you contribute. Plus, income earned by the fund is generally tax exempt. 
 
In the past, these types of funds needed to seek and receive donations from the public which was a major barrier to their growth. As living gifts, PPFs are much more attractive from a tax perspective than simply leaving money to a range of different charities in your will. 
 
Since the introduction of PPFs in March 2001, more than 600 have been approved by the taxation office and now the funds hold more than $1 billion in total. According to the QUT research, a total of $342.6 million was donated to PPFs in the year ending 30 June 2006. In the same financial year, a total of $73.7 million was distributed by PPFs to other DGRs. Although most PPFs are still in the capital accumulation phase, QUT forecasts that the amount donated to DGRs should rise in the future as PPFs reach their accumulation targets. 
 
Interest in PPFs is growing as the more successful baby boomers start to think about giving back to the social sector. It used to be women who survived their husbands who were the key donors, but the philanthropic landscape is changing as wealthier Australians start to explore their options. David Knowles, head of philanthropic services at Perpetual, says that there is certainly a change in the tide in relation to giving. 
 
“Before 2001, most giving was done by older Australians who left part of their estate to charities. Things have changed radically since PPFs were introduced as donors who have established a PPF can now receive a tax deductible receipt which is used to reduce any assessable income,” says Knowles. 
 
PPFs can be likened to DIY superfunds and are proving popular among the wealthy because they provide greater control over donations to favourite causes. They’re typically being set up by people who want a more hands-on approach to giving. This represents a noticeable shift away from the traditional form of cheque-book giving practised in the past. 
 
This new breed of philanthropists is much more businesslike about the way their money is used and how it is performing. They’re used to being active in creating and managing their own wealth so donating money through a structured vehicle like a PPF is not an unfamiliar proposition. Francis Tan, practice manager at Macquarie Private Bank, says that the tax changes have raised awareness about PPFs and the bank’s ultra high net worth clients are certainly getting smarter about how they give. 
 
“Many clients are already involved in the not-for-profit sector and they see PPFs as a way of enhancing their support for a particular cause. The PPFs provide a simple platform to advance that cause,” he says. 
 
WHAT’S IN IT FOR DONORS? 
Tim Hardy, director of specialist philanthropy services consultancy Enrich Australia, believes that individuals are choosing to set up PPFs and donate money to the social sector because they want to leave a positive footprint or legacy behind. 
 
“People want to move beyond being successful to being significant. Often the tax benefits do trigger an initial conversation about philanthropy but then people start to see the potential leverage that can be gained from having money in a taxfree environment. PPFs are one way for individuals to express their values and have control over where the distributions are going,” he says. 
 
The research suggests that baby boomers are already predisposed to philanthropy and, as they give up work, many of them are likely to turn to charitable projects to seek out avenues of personal satisfaction. Philanthropic projects allow donors to involve children and grandchildren and sometimes also act as an invisible hand in binding families together. Ross Stephens, a director in the tax practice at KPMG, says that one of his clients is very satisfied with the kind of role his PPF is playing in his family. 
 
“He sees the PPF as a good way to encourage an interest in philanthropy among his children while he is still alive. He likes the idea of getting his kids involved and working together as a team. Once the PPF was set up, his children were appointed to the board and they were given training in how to make decisions regarding the running of the fund,” he says. 
 
THE NUTS AND BOLTS 
Perpetual’s David Knowles recommends that for a PPF to be viable you need to have at least $500,000 in the kitty. “Set up costs range from $2000 to $5000 depending on the complexity of the fund and whether professional trustees are involved. Running costs are about 1 to 1.5 per cent of funds under management. Individuals can choose two ways to establish and run a PPF. They can unbundle everything and take a piecemeal approach with different advisers or they can put it all in one place by using a trustee service,” he says. 
 
Set-up costs include the creation of a trust deed and the costs of getting approval from the ATO. Like self managed super, a PPF must lodge returns and be audited each year. It takes about four to six months to set one up because you must apply to the Tax Office for approval. The application must include the PPF’s accumulation strategy and your plan for using the PPF’s funds. This application then needs to be sent to the Minister for Revenue and Assistant Treasurer for the final tick. 
 
PPFs AND COMPLIANCE 
The rules relating to PPFs are strict due to their tax-deductible status. Vanessa Meachen from Philanthropy Australia stresses it’s important to understand the limitations of PPFs as a philanthropic vehicle. “PPFs are not appropriate for everyone. There’s no room for changing your mind as once the money is in the PPF you can’t get it back. You shouldn’t underestimate what’s involved and the level of expertise required to get good outcomes from the vehicle,” she says. 
 
Once the money is in the fund it must be used for philanthropic purposes. This means that its sole purpose must be to give away money and it can only make grants. It is not allowed to actually run any charitable programs like counselling or research. 
 
As a PPF can only donate to causes which are registered as tax deductible, this does limit the number of causes that can be supported. PPFs are not permitted to donate to other PPFs or ancillary funds which are another type of vehicle commonly used by community organisations and political funds. 
 
They also cannot make grants to individuals. There are also restrictions relating to the growth of capital inside a PPF. It is not allowed to accumulate capital indefinitely and must stick to the amount nominated in its ATO-approved accumulation plan. After reaching its target accumulation figure, a PPF is limited to growing in line with CPI in order to maintain the real value of the capital. The target can be increased with the permission of the ATO. 
 
According to John King, a tax partner at Mallesons, even though the legislative wrinkles associated with PPFs have all been ironed out, care still needs to be taken when drafting a trust deed in order to take advantage of all the new changes. “The model deed that used to be on the Tax Office’s website has not yet been updated with changes and the tax law in the not-for-profit area is still very complex. People need to carefully navigate their way so they don’t end up with any troubles from the ATO. 
 
“There are still issues with the timing rules for capital gains and when you get a deduction for making a gift – the deduction can end up in the wrong tax year. The restrictions on the amount you can accumulate also need to be closely managed,” he says. 
 
THE ROLE OF ADVISERS 
More financial planners and accountants are seeing the importance of philanthropy in wealth management. To address the lack of understanding about PPFs, specialist philanthropy services consultancy Enrich Australia has partnered with the Financial Planning Association to offer an online FPA accredited training program in philanthropic giving. The program teaches advisers how to create and implement effective giving strategies. It also provides information on which charities support certain causes. Enrich Australia’s Hardy is a firm believer that philanthropy should be on the radar in a client’s wealth plan. 
 
“Accountants are perfectly placed to talk about how philanthropy can work from a tax perspective. It makes such sense on an economic, business and personal basis. Plus, it can also enhance an adviser’s total service proposition for clients. It can lead to closer adviser-client relationships and ultimately more business due to the greater level of contact with other family members, especially the next generation,” he says. He’s certain that the role for advisers such as accountants, auditors, lawyers and trustees in the PPF process will expand as donors have more time, money and interest in being involved in the not-for-profit sector. 
 
LOOKING FORWARD 
Over the next 30 years, a significant increase in the transfer of intergenerational wealth is forecast. According to QUT and Goldman Sachs JBWere, the current annual transfer in Australia is $9 billion and this is forecast to rise to $70 billion per year by 2030. Michael Traill, chief executive of Social Ventures Australia, says that although we have a long way to go on the giving stakes, he’s optimistic. 
 
“There are about 1200 ultra high net worth families in Australia with assets worth more than $US30 million. They only need to give just 1 or 2 per cent to start making a big difference. I think more people really want to do something and they want to connect to the not-for-profit sector with both their heads and their hearts. What we need in Australia is a poster child for philanthropy like Bill Gates to help dramatically change the culture here.” Further changes in the tax laws will continue to make giving attractive. With more hard-nosed donors experienced in wealth creation and management getting involved in giving through PPFs, the level of accountability and quality of outcomes in the not-for-profit sector can only rise.