Getting a tax deduction for a charity donation is very much appreciated by all, but what if you could get a better deal?
A new venture dramatically cuts the entry threshold for tax-sheltered charity foundation investing.
Until recently only the wealthiest people in Australia could afford the expenses of a private ancillary fund – where the funds from which a charity donation is made is operated tax free. More recently a range of organisations have created so-called sub-funds, where investors could effectively set up a mini foundation for a minimum of $20,000.
The advantage of these sub-funds is that the investor gets to accumulate investments inside a tax-free shelter instead of drawing funds from what is most likely tax-exposed private wealth.
Now Equity Trustees have given the philanthropy sector a spark of market competition with a sub-fund package where the minimum is $5000 – a move that could attract investors who want to access the full tax breaks available in charity but did not have sufficient funds.
Certainly, the move is likely to be widely copied if it gains traction.
The ASX-listed group is offering a sub-fund to anyone willing to abide by the rules of the Equity Trustees Charitable Foundation sub-fund – decisions are made by Equity Trustees and charitable distribution decisions are made by the investor.
In common with self-funded pensions, the sub-fund also has an annual “must distribute” clause where 4 per cent of the fund’s net market value must be distributed annually to charity.
Older Australians familiar with the benefits of franked dividend – which are most valuable to tax-free investors such as retirees – will appreciate how the tax-free status of sub-funds optimise the dividend imputation system.
That is, franked dividends earned by the sub-fund will boost returns, typically increasing a 4 per cent dividend yield to a 6 per cent dividend yield.
The investment target of sub-funds, such as the Equity Trustees sub-fund vehicle, is 4.75 per cent above the inflation rate. For investors, especially those self-directed, the drawback of the sub-fund tax structure is that you do not get to control the investments – only the distributions.
So how did Equity Trustees manage to cut the threshold?
The new package depends on investors willing to use a low-touch portal system where much of the work traditionally carried out by others will be carried out by the investor. Fees range from 1.1 per cent of funds under management for a self-service package to higher fees for strategies that require more services.
Every organisation that offers sub-funds – including the best known operator in the space, Australian Philanthropic Services – hopes that people and families who create funds aim to build them over time into more substantial operations of $20,000-plus. However, there is no rule that says the sub-funds need ever receive extra donations.
The seed money for sub-funds typically come from lump sums such as inheritance or other so-called liquidity events that create fresh access to significant funds.
Investors can use any money to start a fund as long as it is not from super (such as a self-managed super fund), as super must maximise returns.
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