Private Ancillary Funds: Proposed Changes Every Trustee Should Know

The Federal Government has announced reforms to Australia’s Private Ancillary Fund (PAF) framework as part of its broader philanthropy agenda. While the reforms are not yet fully operational, trustees should be aware of the proposed changes and begin considering how they may affect their fund’s long-term strategy.

Key Proposed Changes

The key changes currently proposed include:

• Increase in the minimum annual distribution requirement from 5% to 6% of the fund’s net assets. 
• Introduction of a three-year distribution smoothing mechanism, allowing trustees greater flexibility in meeting distribution requirements over multiple years. 
• Alignment of rules between private and public ancillary funds as part of the broader “Giving Fund” reforms. 
• Expected transition arrangements for existing funds before the higher distribution rate becomes mandatory. 

Understanding the Proposed Smoothing Mechanism

One of the more significant and welcome changes is the proposed introduction of a three-year rolling average distribution requirement.

Under the current rules, trustees are required to satisfy the minimum distribution requirement each year based on the fund’s net assets. This can create challenges where markets are volatile, investment returns are lower than expected, or trustees wish to make larger grants in a particular year.  The proposed smoothing mechanism would allow distributions to be averaged over a three-year period, providing greater flexibility in how and when charitable grants are made. 

For example, assuming a fund has net assets of $2 million and a required annual distribution of 6%, the annual target distribution would be $120,000 while a three-year target distribution would be $360,000. Rather than distributing exactly $120,000 each year, trustees may elect to distribute $200,000 in year 1 and $80,000 in years 2 and 3. While the timing differs, the overall three-year distribution requirement would still be met. 

The smoothing mechanism will allow trustees to:

• Fund major charitable projects with larger one-off grants.
• Better manage distributions during periods of market volatility.
• Avoid selling growth assets at unfavourable times purely to satisfy annual requirements.
• Align giving with the needs and timing of recipient charities.
• Take a more strategic, long-term approach to managing the fund’s capital and charitable impact. 

For many trustees, this added flexibility may ultimately prove more valuable than the increase in the minimum distribution rate itself, as it provides greater control over how and when philanthropic objectives are achieved.

Commencement Date

At this stage, the exact commencement date remains dependent on the finalisation and registration of the amended guidelines. Although the legislative framework has advanced, the practical operation of the reforms will not commence until the updated guidelines are formally introduced. The Government’s broader Giving Fund reform framework were intended to commence from the 1 July 2026; however, the amended Private Ancillary Fund Guidelines are yet to be released.  

We anticipate the proposed commencement of the new operational rules, including the smoothing mechanism to be the first financial year following the guideline amendments being released. Existing PAFs are expected to continue under the current distribution requirements during the transition period and may be required to move to the higher 6% minimum distribution rate following the transitional period with the potential start date of the 1 July 2028.

There is no need for immediate action; however, this is an appropriate opportunity to review your fund’s investment strategy, distribution policy and long-term philanthropic objectives.

We will continue to monitor developments and provide a further update once the amended guidelines and commencement dates are confirmed. 

Need assistance reviewing your Private Ancillary Fund? Contact the WLF team to discuss how these proposed changes may affect your circumstances – HERE