Ancillary funds are trusts established to provide a link between donors and organisations which are able to receive tax deductible donations. Ancillary funds cannot operate programs or deliver services but are instead used to support eligible entities endorsed as deductible gift recipients (DGRs) through the provision of money, property or benefits. They are known as 'vehicles' to drive charitable giving, acting as a conduit between the public and charitable organisations. While not all ancillary funds are registered as charities, most are as a matter of practice.

Deductible gift recipients

One of the primary appeals of an ancillary fund is its eligibility to be endorsed as a DGR.

A DGR is a not-for-profit which has been endorsed to receive tax deductible gifts. There are two types of DGRs, known as Item 1 DGRs and Item 2 DGRs. In general terms, Item 1 DGRs conduct charitable activities, whereas Item 2 DGRs are entities operating for the purpose of donating to Item 1 DGRs without undertaking any activities themselves. Ancillary funds fall under the latter category, as a trust established solely for the purpose of providing money, property or benefits to DGRs or the establishment of DGRs. This can provide a trusted collection point for donations from the public or members of a community.

Ancillary funds and giving

While ancillary funds arguably enable donors to make a donation directly to a DGR, without the need to actively research and consider which charitable entities are endorsed to receive tax deductible gifts, all donors should undertake their own research to verify the recipient of their donation and the purpose or cause their donation will support. Ultimately the purpose of the ancillary fund and the charitable DGR entities it supports will be determined by the governing document and its trustees, creating a more 'hands off' approach for the donor.

Ancillary funds are often a preferred structure for grant giving activities, with the Australian Charities Report 9th Edition (Charities Report) noting that 74.2% of grant-making charities were either ancillary funds or other trusts. There are two types of ancillary funds, being public ancillary funds and private ancillary funds. As of February 2023, there were 2,035 private ancillary funds and 1,172 public ancillary funds reported in Australia.

Public ancillary funds

Public ancillary funds are established by a trust deed and overseen by a corporate trustee. The trust deed will typically outline the purpose(s) the fund is intended to support. Once established, the trust will need its own ABN and will then be eligible for registration as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and endorsement as a DGR by the Australian Taxation Office (ATO).

This type of ancillary fund is a common structure for corporate foundations, community foundations or fundraising for individual charities such as hospitals or schools. 

Guidelines for Public Ancillary Funds

All public ancillary funds must adhere to the requirements under the Taxation Administration (Public Ancillary Fund) Guidelines 2022. These guidelines include requirements such as:

• The fund must be established and operated on a not-for-profit basis.
• The fund must distribute at least 4% of the market value of the fund’s net assets to a deductible gift recipient each year.
• A majority of the individuals involved in the governance of the fund must be a ‘responsible person’, being an active director of the trustee or an active member of any other controlling body of the fund.
• The public must be invited to make donations to the fund.
• Have and maintain an investment strategy which details the investment objectives and investment methods of the fund.
• On winding up or ceasing to be a public ancillary fund, the fund must transfer any gifts, deductible contributions or funds to an eligible DGR. 

Private ancillary funds

Private ancillary funds are established by a trust deed and overseen by a trustee or trustees. The trust deed will typically outline the purpose(s) the fund is intended to support. Once established and an ABN is obtained, a private ancillary fund will be eligible for registration as a charity with the ACNC and endorsement as a DGR by the ATO.

Private ancillary funds are restricted to fundraising within a certain group, often between members of families or corporate groups. This structure is often used for closed groups of individuals who have accumulated wealth and seek to make donations held within one source.  

Guidelines for Private Ancillary Funds

All private ancillary funds must adhere to the Taxation Administration (Private Ancillary Fund) Guidelines 2019. These guidelines include requirements such as:

• The fund must be established and operated on a not-for-profit basis.
• The fund must distribute at least 5% of the market value of the fund’s net assets to a deductible gift recipient each year.
• At least one individual involved in the fund must be a ‘responsible person’, being an active director and member of the fund who is not a founder, a donor of $10,000 or more or an associate of a founder or donor who has contributed over $10,000.
• The fund must not seek donations from the public or accept donations totaling more than 20% of the value of the fund from individuals other than the founder, relatives, associates or employees of the founder, in addition to their estates.
• On winding up or ceasing to be a private ancillary fund, the fund must transfer any gifts, deductible contributions or funds to an eligible DGR. 

Responsible persons

Ancillary funds are required by the ATO to meet the “responsible person requirement” to ensure a level of public control of a fund.  Responsible persons are people who, because of their tenure of some public office or their position in the community, have a degree of responsibility to the community as a whole. Examples provided by the ATO include:

• Church authorities and clergy
• Teachers
• Judges, solicitors, doctors and other professional people
• Mayors, councillors and members of parliament
• Members of a professional body which has a professional code of ethics and rules of conduct, e.g. chartered accountants, health practitioners, engineers.

It is important not to confuse the responsible person requirement with those who the ACNC calls “Responsible People” of a charity. A registered charity’s responsible people are those who are responsible for governing a charity (i.e. its directors or committee members) and have duties and obligations to the charity. For more information on the responsible people of a charity, read the ACNC Responsible People Factsheet.

Ongoing compliance

Both public and private ancillary funds are subject to ongoing compliance and reporting obligations under the respective guidelines, in addition to obligations to the ACNC as registered charities. Failure to comply may result in penalties and the ancillary fund’s loss of DGR endorsement.

You can find out more about public ancillary funds and private ancillary funds on the ATO’s website. 

How can we help?

If you would like to find out more about ancillary funds or DGR endorsement more broadly, please get in touch with our specialist Charities + Social Sector lawyers.