The 2016 Federal Budget announced a raft of changes that reduced the options available for individuals to maximise their accumulated super benefits, previously designed to fund retirement and to ease the burden on the age pension system.

The mechanics of these changes, which take effect from 1 July 2017, limit the amount of annual concessional super contributions that a person can claim as a tax deduction. They also reduce the non-concessional super contribution amount to $100,000 per annum, with the ability to claim up to $300,000 in any one year through the three year ‘bring forward rule’.

In addition, there are further restrictions, such as the inability for people with more than $1.6 million in super to make any further non-concessional contributions.

How will the changes impact high net worth individuals with large super balances?

The impact on Australians who are accumulating wealth will be significant, particularly for those who experience a windfall gain on the sale of an asset (such as property). Where the proceeds would have previously been contributed to super, this option may no longer be available.

As a result, investment returns would then be included as personal income and be taxed at their prevailing marginal tax rate, rather than at the concessional rate available through super. For high-net-worth individuals this represents a significant reduction in tax concessions.

Where clients realise a substantial ‘one-off’ taxable gain, it may be worth raising philanthropy as an effective option to reduce tax. This can be done through discussing the merits of establishing a structured charitable giving program, such as through a private ancillary fund (PAF) or a donor-advised account under a public ancillary fund (PuAF).

A philanthropic alternative - support your foundation not the ATO!

In this way, ‘structured’ giving can be an attractive option for clients who are looking to make an initial irrevocable donation of as little as $50,000. This is because the value of the donation can be offset against taxable income in the financial year the donation is made, or apportioned over a five year period (including the financial year the donation is made).

Once the PAF or donor-advised account is established, the donor is required to distribute a small percentage of the value of their PAF or donor-advised account to charity (five per cent per annum for a PAF or four per cent for a donor-advised account) to eligible charitable entities.

In contrast to making one-off donations to charities, PAFs and PuAFs enable donors to create their own personalised giving program, be more effective and focused in their philanthropy, build a legacy and engage with others in the power of giving.

What philanthropic structure is best for your client?

There are many options to explore when establishing a philanthropic structure for a client. As an adviser, it is important that you initially provide clients with a range of options as the motivation behind an individual’s decision to structure their giving may not be immediately apparent.

When providing advice on structured giving, you should consider the following questions:

  • Does the client understand their donation is irrevocable?
  • Does the client wish to receive a tax deduction for their donation? If so, do they require it in the current financial year?
  • What amount does the client wish to contribute to commence their structured giving program?
  • What level of control or involvement does the client require in running or managing the charitable trust?
  • Does the client understand that, by giving through an ancillary fund, they can only support charities endorsed as an Item 1 Deductible Gift Recipient?

The answers to these questions will guide your recommendation as to the most suitable philanthropic structure for your client.

Typically, these include a private ancillary fund, a donor-adviser account or a testamentary charitable trust.

Private ancillary fund

Donor-advised account (established under a public ancillary fund)

Testamentary charitable trust

Are your clients’ contributions tax-deductible?

Yes, your clients can offset 100% of the value of their donation against their taxable income.

Under certain conditions, your clients can elect to spread the tax deduction over a period of up to five income years (in any proportion).

Yes, your clients can offset 100% of the value of their donation against their taxable income.

Under certain conditions, your clients can elect to spread the tax deduction over a period of up to five income years (in any proportion).

Your client’s estate cannot claim a tax deduction for contributions into a testamentary charitable trust.

What is the minimum amount your client needs to establish an account or foundation?

$500,000

$50,000

$500,000

How much does your client have to distribute to charity each year?

5% of the net value of the PAF (at 30 June of the preceding financial year) or $11,000 – whichever is greater.

4% of the net value of your client’s account annually.

At the discretion of the testator/founding donor.

Which charities can your client support?

Eligible charities 1.

Eligible charities 1.

A private charitable trust can support organisations or individuals meeting charitable purpose definitions.

How are the underlying assets invested?

The PAF’s assets need to be invested prudently.

The adviser, in line with the trustee and their clients, will determine an appropriate strategy and underlying investments.

The account’s assets need to be invested prudently.

The trustee or their appointed adviser will usually select a low-cost managed fund aligned to the foundation’s investment strategy.

The trust’s assets need to be invested prudently.

The adviser, in line with the trustee, will determine an appropriate strategy and underlying investments.

When looking for assistance in providing philanthropic services to your clients, advisers should look for a trusted provider who works in partnership with you, and who provides access to a broad range of specialist services.

For further information on AET’s philanthropic services or for advice on how to incorporate philanthropy into your range of advisory services, please contact Ben Clark, Head of Philanthropy, Australian Executor Trustees on (03) 8614 4458 or ben.clark@aetlimited.com.au

1 Charities must be registered as a ‘Deductible Gift Recipient Item 1’ entity as defined in section 30-15 of the Income Tax Assessment Act 1997.

This article was originally published in SelfManagedSuper magazine – May 2017 edition.

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