Improving the integrity of 
public ancillary funds

Discussion paper
 November 2010

 Commonwealth of Australia 2010
ISBN 978‑0‑642‑74649‑8
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Consultation process
Request for feedback and comments
The Government is seeking feedback and comments on the issues outlined in this consultation paper. The information obtained through this process will inform the Government’s approach on the way forward. 
While submissions may be lodged electronically or by post, electronic lodgement is preferred. For accessibility reasons, please email responses in a Word or RTF format. An additional PDF version may also be submitted. 
All information (including name and address details) contained in submissions will be made available to the public on the Treasury website unless you indicate that you would like all or part of your submission to remain in confidence. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like part of their submission to remain in confidence should provide this information marked as such in a separate attachment. Legal requirements, such as those imposed by the Freedom of Information Act 1982 (Commonwealth), may affect the confidentiality of your submission.
Closing date for submissions: 17 December 2010
Address written submissions to: 
The Manager
Philanthropy and Exemptions Unit
Personal and Retirement Income Division
The Treasury
Langton Crescent
PARKES ACT 2600
Fax: 02 6263 3044
Email: pafreforms@treasury.gov.au
For enquiries, please call Robyn Vincent on 02 6263 2758.

Contents
Consultation process	iii
Foreword	v
Overview	vi
1.	Improving the integrity of public ancillary funds	1
1.1	Introduction	1
1.2	Public ancillary funds in context	2
1.3	Areas for improvement in the current arrangements for public ancillary funds	3
1.4	Principles underpinning the rules governing public ancillary funds	4
2.	Proposed amendments relating to the Principles	4
2.1	Principle 1 — public ancillary funds are philanthropic	4
2.2	Principle 2 — public ancillary funds are trusts that abide by all relevant laws and obligations, and are open, transparent and accountable	8
2.3	Principle 3 — public ancillary funds are public	13
2.4	Principle 4 — public ancillary funds are ancillary funds	13
Appendix A — Fit and proper person tests applying to registrable superannuation entity (RSE) licensees and tax agents	15

Foreword
I am very pleased to release this discussion paper on improving the integrity of public ancillary funds which aims to increase public confidence in the philanthropic sector.
The Government is committed to the continuing growth of the philanthropic sector and to supporting community‑based charitable initiatives. 
Last year we introduced a comprehensive new regime for private ancillary funds and now we are ensuring public ancillary funds meet similar minimum standards. 
The measures recognise that alongside a strong philanthropic sector must come proper accountability, particularly when it comes to organisations benefiting from taxpayer funded incentives. 
As outlined in the consultation paper, the proposed framework for public ancillary funds will allow for:
•	regular valuation of assets;
•	clarification of investment and distribution rules; and
•	a system of administrative penalties. 
The new framework for public ancillary funds will provide trustees with greater certainty as to their obligations and provide donors and the charitable sector with greater confidence that donations are being used effectively. The reforms will improve transparency and integrity in this important area. 
Consultation plays a valuable rule in developing changes to the tax law and I look forward to receiving the views of the community on these important issues.

Assistant Treasurer and Minister for Financial Services and Superannuation
The Hon Bill Shorten MP

Overview
The Government announced in the 2010‑11 Budget that it will support and improve public ancillary funds by introducing a new regulatory framework, similar to that introduced on 1 October 2009 for private ancillary funds, with effect from 1 July 2011.
In the Budget announcement, the Government gave a commitment to consult on the public ancillary fund changes.
This policy discussion paper provides a point of reference for consultation and submissions on the proposed regulatory framework. 
The discussion paper sets out the four principles that will form the basis of the new regulatory framework and raises issues and questions for consultation and consideration in developing these principles. 
The four principles are that:
•	the funds are philanthropic;
•	the funds are trusts that abide by all relevant laws and obligations, and are open, transparent and accountable;
•	the funds are public; and
•	the funds are ancillary funds. 
The discussion paper further considers transitional rules that may need to apply to facilitate transition into the new regime. 
Further consultation will take place on any legislative changes, including draft guidelines. 

1.	Improving the integrity of public ancillary funds 
1.1	Introduction
1.	The Government announced in the 2010‑11 Budget that it will legislate guidelines to improve the integrity of public ancillary funds and to provide the trustees of these funds with greater certainty as to their philanthropic obligations. 
2.	This commitment is to be achieved by providing a regulatory framework similar to that which has applied to private ancillary funds as from 1 October 2009. That is, the framework will:
•	provide the Treasurer with the power to make legislative guidelines about the establishment and maintenance of the funds; and
•	provide the Commissioner of Taxation with the power to impose administrative penalties on trustees for breaches of the guidelines. 
3.	The regulatory framework that has been applied to private ancillary funds has provided these funds with clear guidance on establishment and maintenance of these funds, has improved compliance and ensures that philanthropic donations reach the charitable sector. 
4.	It is expected that the guidelines for public ancillary funds will take a similar form to the Private Ancillary Fund Guidelines 2009 (Private Ancillary Fund Guidelines) but will also take into account the differences between the two types of fund. The main difference between the funds is that public ancillary funds solicit funds from the public and therefore should have a higher level of community accountability. 
5.	Similar to the Private Ancillary Fund Guidelines, it is envisaged that the guidelines for public ancillary funds will specify matters such as: the role and purpose of public ancillary funds; the class of entities that the fund may donate to; the fund must be not‑for‑profit in character; the individuals that may be trustee or directors of the fund’s trustee; the minimum distribution requirements of the fund; the permitted investment strategies of the fund; and any ongoing audit requirements. The guidelines will ensure that the funds have appropriate governance arrangements, are properly accountable and act in a manner consistent with an entity holding philanthropic funds for a broad public benefit.
6.	The guidelines will take into account the current Australian Taxation Office (ATO) administrative requirements that apply to public ancillary funds. A key ATO ruling is Taxation Ruling TR 95/27 which sets out the public fund requirements which are intended to ensure that moneys and property donated to the fund are applied for the purpose for which the fund has been established. 
7.	This Discussion Paper outlines these proposed changes, and provides a point of reference for public submissions on this measure. This measure will have effect from 1 July 2011. 
8.	As with the Private Ancillary Fund Guidelines, the Government intends that the new public ancillary fund guidelines will be drafted using a principled based approach. The principles will outline the Government’s views on the essential characteristics of a public ancillary fund.
9.	It is expected that a system of penalties will apply for breaches of the guidelines that is similar to the penalty regime that now applies to private ancillary funds.
10.	The Commissioner will also be provided with powers to remove or appoint trustees which, as proposed in this paper, will be required to be corporate trustees. 
11.	It remains a fundamental concept that a public ancillary fund is a fund to which the public can make tax deductible donations, for the purpose of disbursing funds to a range of non‑ancillary or ‘doing’ deductible gift recipients (DGRs). As such, a public ancillary fund cannot distribute to another public or private ancillary fund.
1.2	Public ancillary funds in context
12.	Public ancillary funds are a longstanding feature of the income tax law. These funds must be endorsed by the ATO as a DGR, and the fund is limited to either making distributions to other DGRs (that either have been endorsed by the ATO or are listed by name in the income tax law as a DGR) or establishing another DGR. 
13.	A public ancillary fund that is established for charitable purposes can be endorsed as income tax exempt under Division 50 of the Income Tax Assessment Act 1997  (ITAA 97). 
14.	A public ancillary fund is one of two types of ancillary trust fund that can qualify for DGR status, and income tax exempt status. The other type is a private ancillary fund, which allows businesses, families and individuals to establish and donate to a charitable trust of their own, without the need to seek contributions from the public, for the purposes of disbursing funds to a range of other DGRs.
15.	A public ancillary fund is distinct from a private ancillary fund in that it must be a public fund as described in ATO Taxation Ruling TR 95/27 and accordingly must comply with all the requirements of a public fund. Public ancillary funds are a common structure for community and fundraising foundations.
16.	As set out in ATO Taxation Ruling TR 95/27, public funds are bound by a number of requirements. A fund is a public fund where: it is the intention of the promoters or founders that the public will be invited to contribute to the fund; the public, or a significant part of it, does in fact contribute to the fund; and the public participates in the administration of the fund. These requirements are intended to ensure that moneys and property donated to the fund, and which attract a taxation concession, are used for the purpose for which the fund has been granted DGR status.
17.	With the exception that they must seek and receive contributions from the public and must comply with the requirements of a public fund as set out in ATO Taxation Ruling TR 95/27, public ancillary funds have the same characteristics as a private ancillary fund. Both types of fund can act only as intermediaries between donors and organisations that can receive tax deductible donations.
18.	The requirements set out in ATO Taxation Ruling TR 95/27 ensure a reasonable standard of governance for public funds as these rules are intended to ensure that moneys and property donated to the public ancillary fund are applied for the purpose for which the fund has been established.
1.3	Areas for improvement in the current arrangements for public ancillary funds
19.	The proposed Budget measure is intended to improve the standard of governance and integrity of public ancillary funds by:
•	providing legislative guidelines to, among other things, clarify the current administrative requirements including the amount of compulsory distributions; 
•	imposing new requirements such as the regular valuation of assets at market rates, the preparation of accounts and financial statements, audit requirements and investment rules; 
•	improving disclosure requirements; and
•	giving the ATO greater regulatory powers.
20.	As in the case of the Private Ancillary Fund Guidelines, the proposal provides an opportunity to provide guidelines on such matters as the ‘in Australia’ requirement and the requirement that the fund must be a not‑for‑profit entity. In addition, the current public fund requirements as set out in ATO Taxation Ruling TR 95/27 are binding to the extent that they reflect the current case law position as interpreted by the ATO. The provision of legislative guidelines provides an opportunity to clarify or codify the current judicial interpretations. 
21.	Similar to the previous regulatory arrangements that applied to private ancillary funds, an ‘all or nothing‘ penalty system applies to public ancillary funds that are misusing their funds (for example, by distributing their funds to non‑DGRs). This puts a fund’s DGR status at risk. The new regulatory framework will also include a tailored system of administrative penalties similar to those which currently apply to breaches of the Private Ancillary Fund Guidelines. This is a more balanced approach to enforcement. Similar to private ancillary funds, it is also proposed that the Commissioner be provided with a greater range of powers in respect of trustees who are in breach of the guidelines.
1.4	Principles underpinning the rules governing public ancillary funds
22.	The four principles below outline the Government’s views on what the essential characteristics of a public ancillary fund should be:
Principles	
1.	The funds are philanthropic	Public ancillary funds are vehicles for acts of philanthropy by donors, and benefit from significant tax concessions on that basis. The distributions of public ancillary funds should therefore be of a quantity and regularity such that the fund can be characterised as philanthropic. Donors to the funds, and their associates, should not benefit from these funds.
The rationale for a government providing a philanthropic concession is that donated funds are allocated more efficiently and effectively by the charitable sector rather than if a government had taken the revenue forgone (by way of tax concessions) and given it directly to the charitable sector.	
2.	The funds are trusts that abide by all relevant laws and obligations, and are open, transparent and accountable	Public ancillary funds provide money and other assets (that have been donated to the trust fund) to non‑ancillary DGRs, and public ancillary fund trustees/directors are bound by Commonwealth corporations law and/or state trust laws.
In setting out to achieve philanthropic goals, public ancillary funds must abide by all relevant laws. The Commissioner will take appropriate action against the trustees of public ancillary funds that do not abide by the rules.	
3.	The funds are public	Public ancillary funds have been established to collect donations from the public and therefore rules of governance should be of a high standard to protect these donations and ensure a high level of public confidence in the efficient and effective management of donated funds.	
4.	The funds are ancillary funds	The purpose of a public ancillary fund is to assist in the management of money as it is transferred from the donor to non‑ancillary DGRs. Public ancillary funds cannot  undertake charitable work in their own right.	

2.	Proposed amendments relating to the Principles
23.	The Government will legislate guidelines for the establishment and maintenance of public ancillary funds. The following section is a more detailed outline of the Government’s proposed guidelines. 
24.	The proposed guidelines will consider the current administrative arrangements that apply to public ancillary funds, in particular ATO Taxation Ruling TR 95/27, and also the Private Ancillary Fund Guidelines.
2.1	Principle 1 — Public ancillary funds are philanthropic
25.	The changes proposed under this principle relate to: required distributions; regular valuation of assets at market rates; and increased public accountability.
2.1.1	Required distributions
26.	Public ancillary funds should be philanthropic. Transfers by public ancillary funds should therefore be of a regularity and quantity such that the fund is characterised as philanthropic. Public ancillary funds should neither be prolonged accumulators of funds, nor sparse distributors of funds. 
27.	The ATO currently interprets the law in a manner which requires a high level of distribution of gifts or income earned by public ancillary funds. The ATO considers that while there is no express requirement in the law that the funds must distribute on an annual basis, it is inherent under the provisions in the relevant law that they should be distributing on a regular basis unless there is a specific reason for accumulation.  
28.	For instance, in relation to DGR endorsement, the ATO view in relation to gifts as expressed in paragraph 30 of ATO Taxation Ruling 95/27, is ‘the essence of the ancillary funds referred to in subsection 78(5) is that they collect money, property, etc., which is passed on, less any property and reasonable administrative expenses, to subsection 78(4) funds, authorities or institutions. Ancillary funds may be likened to a conduit or temporary repository for moneys’ which are to be channelled to particular DGR funds. Accordingly, a public ancillary fund cannot accumulate gifts without jeopardising their entitlement to DGR endorsement.
29.	Also, ATO Taxation Ruling TR 2000/11 sets out the ATO's interpretation and its basis of ‘applied for the purpose for which it was established,’ used in sections 50‑60 and 50‑72 of the ITAA 1997. These provisions set out special conditions that certain funds, including public ancillary funds, are required to meet. It states that investment in a manner to benefit private entities or excessive accumulation of investment income is not the applying of a fund for its purposes. In practice, the ATO has allowed public ancillary funds (and had previously allowed prescribed private funds) to accumulate a CPI based amount of income to maintain the real value of their capital base. In addition, the ATO may allow trustees to propose a plan of accumulation in some situations if there is a good reason and so long as a target figure, rationale and time‑frame are provided. The ATO treats these requests with caution and takes into account the ability of the fund to meet its target within a stipulated timeframe. The ATO allows these requests in limited circumstances. Existing situations and circumstances in which accumulation is permitted is unclear and is not consistent across sectors. It is expected that the Guidelines will provide the sector with additional clarity on this issue.   
30.	These ATO administrative guidelines and practices will be replaced by legislative guidelines, clarifying the appropriate standard of philanthropic behaviour among public ancillary funds. In doing so, the Government will give certainty to public ancillary fund trustees as to their minimum philanthropic obligations, and also to members of the public that public ancillary funds are distributing adequate amounts for them to be characterised as philanthropic. 
31.	The Private Ancillary Fund Guidelines take this approach. Under these Guidelines, private ancillary funds must value their assets annually, and this ‘closing value’ is used to calculate a minimum amount that must be distributed over the following 12 months (to the end of the following financial year). The minimum amount that must be distributed is generally at least 5 per cent of the market value of the fund’s net assets in each financial year which is calculated based upon the value of the private ancillary fund’s net assets at the close of the previous financial year. The fund is not required to make a distribution in the first year the fund is established.  
32.	A similar approach, if applied to public ancillary funds, would provide certainty to trustees on their distribution requirements, simplify compliance and remove any uncertainties that exist with the current approach. A distribution rate needs to be set that is of an adequate amount such that a public ancillary fund can be characterised as philanthropic. The Government intends to consider the following in determining the rate:
•	the current ATO interpretation which requires a high level of distribution and ATO practices which allow public ancillary funds to accumulate gifts and income in limited circumstances and for limited amounts; 
•	the Private Ancillary Fund Guidelines which require private ancillary funds to distribute at least 5 per cent of the market value of the fund’s net assets in each financial year which is calculated based upon the value of the private ancillary fund’s net assets at the close of the previous financial year; 
–	it is anticipated that a higher distribution rate would be imposed on public ancillary funds because of the higher accountability standard that applies to these funds, stemming from their public nature and their receipt of public donations; and
•	public ancillary funds should benefit the charitable sector more than if the Government had taken the revenue forgone (by way of public ancillary fund tax concessions) and given it directly to the sector.
33.	The majority of donors to public ancillary funds are mostly private individuals so the value of the tax deduction will be based on the individual’s marginal rate. As the Government subsidises each dollar donated to a public ancillary fund, the Government would expect that, in the absence of a trustee providing a good reason for a period of accumulation (along with a time‑frame and target figure), donations made through public ancillary funds will be directed to the charitable sector in a relatively short period of time. 
34.	Imposing a distribution rate means that public ancillary funds not continuing to receive donations are eventually wound down. This will prevent the erosion of the fund through negative investments, management fees and the like.
Consultation question
•	What is an appropriate minimum distribution rate for a public ancillary fund and why? 	

2.1.2	Regular valuation of assets at market rates
35.	Public ancillary funds are not currently bound to value their assets. The failure of public ancillary funds to value assets leads to reduced distributions as the funds do not determine the value of unrealised capital gains. It is proposed that public ancillary funds should be required to regularly value their assets at market rates. It is expected that the valuation rules will mirror those contained in the Private Ancillary Fund Guidelines. Under these Guidelines the market value of a private ancillary fund’s assets must be valued at least annually and the market value of land at least once every three years by an appropriately qualified valuer. 
Consultation question
•	Are there any issues that the Government needs to consider in implementing the requirement to ensure public ancillary funds regularly value their assets at market rates?
•	Are the valuation rules that apply to private ancillary funds also appropriate for public ancillary funds? If not, why not?  	

2.1.3	Increased accountability
36.	As public ancillary funds solicit funds from the public, the public should be able to identify the fund and be satisfied that the fund is operating in an acceptable and transparent manner. 
37.	While the requirement to operate in an acceptable and transparent manner is addressed in other parts of this paper, the Government proposes at a minimum that public ancillary funds be recorded on the Australian Business Register as a public ancillary fund. This is a requirement that has been imposed on private ancillary funds as part of the 2009 measures. 
38.	At a minimum, public ancillary funds should be required to lodge an annual income tax return with the Commissioner of Taxation who would consult on the form of the return.   
39.	Requiring public ancillary funds to lodge an annual income tax return is consistent with the approach taken with private ancillary funds which have been required to lodge an annual income tax return from the 2009‑10 income year.
40.	Furthermore, the Government considers that as these funds are able to solicit donations from the public it would be desirable for a higher standard of disclosure be applied. Additional disclosure requirements will improve the transparency and accountability of these funds and increase public confidence. This approach is consistent with the recommendations of the 2010 Productivity Commission report, Contribution of the Not‑for‑Profit Sector (the PC review), which recommends a higher standard of reporting in relation to fundraising activities of charities. 
41.	The PC review noted the variability and inconsistency in the way charities communicate key information to donors. If unaddressed, this concern could potentially erode public confidence and trust in fundraising and hence the public’s willingness to participate in or donate to fundraising activities. These considerations are especially important in the case of public ancillary funds and higher standards may encourage increased philanthropic donations to these funds. 
42.	The Government considers that the issue of public ancillary funds and the level of public accountability required should be part of the broader question of improving and standardising the public accountability of charities and DGRs in general. 
Consultation question
•	Are there any issues with requiring public ancillary funds to lodge a return?
•	Are there any issues with imposing greater public disclosure requirements on public ancillary funds? What information should remain confidential and what information should be disclosed and why? 	

2.2	Principle 2 — Public ancillary funds are trusts that abide by all relevant laws and obligations, and are open, transparent and accountable
43.	The changes proposed under this principle relate to giving the ATO greater regulatory powers and strengthening the requirements for trustees in a similar manner as for private ancillary funds. 
2.2.1	Current regulatory powers
44.	Public ancillary funds are regulated at both the state and Commonwealth level.
•	At the Commonwealth level, the ATO must make an initial assessment before a public ancillary fund can be endorsed as a DGR (including whether it meets the public fund requirements) or if it is also seeking endorsement to access certain tax concessions as a charitable entity.  
•	Public ancillary funds must also comply with state trust law and other important rules and legislation. 
•	As outlined above, the ATO does not require trustees of public ancillary funds to provide the ATO with an income tax return or an annual information statement. The ATO has annually exempted these entities from being required to submit an income tax return on the basis that they are an income tax exempt charity or ancillary fund. The funds are subject to the normal record keeping requirements to verify amounts of tax deductible gifts or contributions and to verify that these are used only for the principle purposes of the fund.  
•	The ATO also monitors public ancillary funds on an ongoing basis to ensure that they continue to meet the requirements of the income tax, fringe benefits tax and GST laws as apply to DGRs and to charities. These funds must also meet ATO administrative requirements, in particular, the public fund requirements as set out in ATO Taxation Ruling 95/27. 
2.2.2	Increasing regulatory powers
Reporting
45.	The Private Ancillary Fund Guidelines require private ancillary funds to keep proper accounts, prepare financial statements, arrange for the audit of the financial statements of the fund and advise the Commissioner of Taxation if there is a change to the governing rules of the fund. It would be appropriate to extend these requirements to public ancillary funds. 
46.	As part of the 2009 measures, private ancillary funds are now required to lodge an income tax return. If a fund fails to lodge its return by the relevant date, it will be subject to the general penalty regime that applies to all taxpayers who do not provide their income tax return to the Commissioner by the due date. To increase the accountability of public ancillary funds, the requirement to lodge an income tax return should also be extended to these funds. 
47.	As a result of private ancillary funds being required to lodge an income tax return, the ATO issues annual statistics in relation to these funds. Once public ancillary funds are required to lodge a return, the ATO will also be able to publish annual statistics for these funds. As for private ancillary funds, the statistics will provide information on the number of funds, the amount of donations made to the fund, the value of assets of funds and a breakdown of the distributions made by funds according to the recipient DGR category. The statistics will complement the information available on private ancillary funds and will be an important source of information on the philanthropic sector. 
Breaches by Trustee 
48.	A number of public ancillary funds have been found to have breached the requirements in the income tax law and ATO administrative requirements. These breaches include: providing benefits to non‑DGRs located in Australia; making distributions directly to entities located offshore; and making distributions to other ancillary funds.
49.	There are limited remedial responses available to the ATO if a trustee of a public ancillary fund fails to meet the ongoing legal and administrative requirements. 
50.	The ATO may revoke a public ancillary fund’s endorsement as an income tax exempt charity if: (1) the ATO considers that the fund is no longer charitable; or (2) the fund has not provided information or a relevant document within a time specified by the ATO. Alternatively, the ATO may revoke a fund’s DGR status. The ATO is also able to refer more serious breaches to State Attorneys‑General for remedial action. 
51.	Similar to the regime that existed for private ancillary funds prior to the changes in 2009, the current ‘all or nothing’ approach means that the ATO is unable to apply appropriately scaled penalties that suit the nature of these breaches. In some cases this may mean that the ATO does not take action against a public ancillary fund because the remedy would be considered too harsh. Further, the ATO is unable to take any action against trustees who inappropriately manage public ancillary funds. Importantly, in the case of trustees mismanaging a public ancillary fund’s assets, the ATO is unable to remedy the loss of funds. 
52.	As for private ancillary funds, it is proposed to introduce a system to deal with breaches by the trustee of a fund including a system of administrative penalties which will provide the ATO with the ability to impose a penalty on trustees or directors of public ancillary funds that do not comply with the guidelines. While the Taxation Administration Act 1953 will impose the penalty, the persons liable for the penalty and other matters related to the penalty, the amount of penalty will be stipulated by the guidelines so that the penalty can be appropriately tailored to the nature and size of the breach, account for the trustee’s level of culpability and the particular requirement that the public ancillary fund has not complied with. It is expected that the penalties will broadly mirror those that apply to private ancillary funds. 
53.	The Private Ancillary Fund Guidelines contain a rule which prevents a fund from paying certain tax administrative penalties incurred by a director. This ensures that charitable funds are not used to cover penalties for the breaches made by directors. A similar rule is proposed for the new public ancillary fund guidelines. 
Consultation question
•	Is the administrative penalty regime (including magnitude of penalties) that applies to private ancillary funds suitable for public ancillary funds?	

Corporate trustees and their suspension or removal
54.	There may be constitutional limitations on giving the ATO power to further regulate public ancillary funds. For private ancillary funds, these limitations were overcome by requiring the fund to have a corporate trustee. This requirement could similarly be imposed on public ancillary funds. 
55.	A corporation established and operated solely as a trustee of a public ancillary fund would usually be considered a constitutional corporation.  Imposing a requirement for public ancillary funds to have a corporate trustee also ensures that directors meet a minimum standard of behaviour. The Corporations Act 2001 details the circumstances under which an individual will be automatically disqualified from managing corporations. 
56.	If public ancillary funds are also required to have a corporate trustee, then similar to private ancillary funds, it is proposed to provide a set of rules dealing with the suspension or removal of trustees that are in breach of the guidelines or other relevant laws. It is expected that the Commissioner would only take such action in situations that involve serious non‑compliance by a public ancillary fund. These rules include providing the Commissioner with the power to remove or disqualify a trustee in breach of the guidelines, the power to appoint an acting trustee and the power to give directions to an acting trustee. 
57.	As for private ancillary funds, it is proposed to provide for transitional arrangements for existing funds. 
Consultation question
•	Are there any difficulties in requiring public ancillary funds to have a corporate trustee? 
•	Are the rules for suspension or removal of trustees of private ancillary funds suitable for public ancillary funds? 	

Introduce fit and proper person test for trustees
58.	The ATO has found that not‑for‑profit organisations generally show a strong desire to ‘get it right,’ but often have a low level of knowledge about how the tax and superannuation systems work. Where compliance issues arise, they are mainly due to mistakes or a lack of knowledge.
59.	The qualifications and skills of a public ancillary fund’s trustees affect not only whether a public ancillary fund meets its legal obligations, but also the essential philanthropic character of a public ancillary fund. 
60.	The Private Ancillary Fund Guidelines contain minimum standards of conduct for trustees. The rules are broadly as follows.
•	The trustee must exercise the same degree of care, diligence and skill that a prudent individual would exercise in managing the affairs of others.
•	At least one of the individuals involved in the decision‑making of the fund must be an individual with a degree of responsibility to the Australian community.
•	The individual as specified cannot be a founder, a donor to the fund who has contributed more than $10,000, or an associate of a founder or such a donor.
•	The individual must be an active director of the trustee and a member of any other controlling body of the fund.
•	An individual must not be a director of a trustee or a member of any other controlling body of the fund if he or she has been convicted of a taxation offence that is an indictable offence. 
61.	It is also necessary for individuals to meet any qualifications to be a director of a company as contained in the Corporations Act 2001.
62.	ATO Taxation Ruling 95/27 currently states that a public fund must be managed by members of a Committee, a majority of whom have a degree of responsibility to the general community (paragraph 9(f)). It states that even though a public ancillary fund is required to be controlled by an executive committee made up of a majority of responsible persons (described in paragraph 21), the day‑to‑day running of the organisation need not be carried out by those persons. The fund must, however, be set up in such a way that it is not possible for public control to lapse for any period (paragraph 23). The ATO has taken a similar approach on the interpretation of the Private Ancillary Fund Guidelines.
63.	An issue is whether the Government should impose tighter requirements on trustees of public ancillary funds, such as minimum training or other qualification standards required. However, imposing such requirements may restrict the number of people eligible and/or willing to take on the role of trustee.
64.	Certain trustees are already required to meet stricter requirements, such as trustees covered by the Superannuation Industry (Supervision) Act 1993. In addition, tax agents must meet certain criteria to be considered a fit and proper person. The respective criteria for these fit and proper person tests are outlined in Appendix A.
Consultation question
•	What fit and proper person requirements should be imposed on trustees of public ancillary funds? 	

2.2.3	Transitional rules
65.	As for private ancillary funds, it is proposed that transitional rules be used to bring existing public ancillary funds under the new proposed Guidelines. 
66.	For example, as provided for private ancillary funds, transitional rules could provide that if a public ancillary fund’s governing rules prevent compliance with the rules in the guidelines for establishing and maintaining public ancillary funds as DGRs then a period of exemption could be provided for strictly complying with these requirements.
Consultation question
•	What transitional arrangements are required for existing public ancillary funds to conform to the new arrangements?	

2.3	Principle 3 — public ancillary funds are public
67.	The change proposed under this principle relates to what rules may be required to ensure that a public ancillary fund is ‘public’ in nature. 
2.3.1	Public Fund
68.	The current public fund requirements as set out in ATO Taxation Ruling 95/27 are not only relevant for public ancillary funds but more generally for other DGRs that are required to maintain a public fund. These requirements are binding to the extent that they reflect the current case law position as interpreted by the Tax Office.
69.	Some  factors set out in ATO Taxation Ruling TR 95/27 that are indicative as to whether a fund is ‘public’ and that could be specified in the guidelines are: 
•	It is the intention of the promoters or founders that the public will contribute to the funds and that the public participates in the administration of the fund.
•	The public, or a significant part of it, does in fact contribute to the fund.
•	The public must be invited to contribute to the fund; and
•	The public participates in the administration of the fund.
70.	An issue is whether some of the factors that determine whether a fund is a public fund could be clarified in the guidelines. 
Consultation question
•	Should the term ‘public fund’ be codified in the guidelines in accordance with the principles set out in ATO Taxation Ruling TR 95/27?   	

2.4	Principle 4 — public ancillary funds are ancillary funds
71.	The change proposed under this principle relates to restrictions that should apply to investment and other transactions that may be entered into by public ancillary funds.
2.4.1	Public Ancillary Fund investment rules should ensure liquidity and low risk 
72.	The Private Ancillary Fund Guidelines contain rules for an investment strategy which ensures that private ancillary funds have sufficient liquid assets and also rules which seek to minimise risks involved with managing a fund’s assets and thus protect those assets. 
73.	As for private ancillary funds, public ancillary funds should have an investment strategy that requires them to hold sufficient liquid assets to meet their philanthropic obligations. This strategy ensures that donations can be quickly distributed. Furthermore, the value of liquid assets is generally easier (and therefore cheaper) to determine and verify. However, it should be noted there may be circumstances where public ancillary funds hold illiquid assets such as a building which is provided to a DGR for a low rent which is a benefit in accordance with the ancillary fund purpose of providing ‘money, property or benefits’. This would be a strategy that is consistent with proper ancillary fund administration as long it is not used as a way of accumulating income in the form of capital gains. 
74.	The Private Ancillary Fund rules include:
•	a requirement for an investment strategy that has regard to the risk of investments and the liquidity of investments; 
•	borrowing restrictions; 
•	rules to ensure transactions of the fund are at arms‑length; and
•	other rules to protect the assets of the fund.
75.	The rules that apply to private ancillary funds for investment and protection of a private ancillary fund’s assets may be suitably applied to public ancillary funds. 
Consultation question
•	Can the investment and risk minimisation rules that apply to private ancillary funds be suitably applied to public ancillary funds?	

Appendix A — Fit and proper person tests applying to registrable superannuation entity (RSE) licensees and tax agents
Test applying to RSE licensees (which may be a constitutional corporation, body corporate, or group of individual trustees) — extract from the Superannuation Industry (Supervision) Regulations 1994 (Part 4, Division 4.2, regulation 4.14 Operating standard — fitness and propriety of RSE licensees):
(3)	Subject to subregulations (5) and (6), an RSE licensee meets the fit and proper standard if the RSE licensee possesses relevant attributes that enable the RSE licensee to properly discharge the duties and responsibilities of an RSE licensee in a prudent manner.
(4)	The attributes include, but are not limited to:
•	character, competence, diligence, experience, honesty, integrity and judgement; and
•	educational or technical qualifications, knowledge and skills relevant to the duties and responsibilities of an RSE licensee.
(5)	An RSE licensee that is a body corporate does not meet the fit and proper standard if:
the body corporate is a disqualified person; or
•	a director of the body corporate is a disqualified person, and the body corporate does not, within 14 days after the body corporate becomes aware that the director is a disqualified person:
–	notify APRA of that fact; and
–	remove the director.
(6)	An RSE licensee that is a group of individual trustees does not meet the fit and proper standard if:
an individual trustee who is a member of the group of individual trustees (the member) is a disqualified person; and
•	the group of individual trustees does not, within 14 days after the group becomes aware that the member is a disqualified person:
–	notify APRA of that fact; and
–	remove the member from the group.
(7)	An RSE licensee must meet the fit and proper standard for all the period during which the RSE licence continues in force.
Test applying to Tax Agents — the Tax Agents Boards, which register tax agents, declare that to be considered a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters one must meet certain criteria. The criteria are that an individual must:
•	have the appropriate qualifications and experience;
–	Qualifications — regulation 156 of the Income Tax Regulations 1936 sets out the prescribed qualifications as:  an accounting degree at a university or another educational institution of an equivalent standard; a law degree with eligibility for admission as a legal practitioner; a diploma/certificate in accounting at a TAFE college; or no formal qualifications (8 years experience required).
–	Experience — relevant employment is dependent on qualifications (1‑8 years required experience).
•	be at least 18 years of age;
•	be of good fame, integrity and character, with consideration given to: character references and convictions (in particular those relating to fraud, theft or deception);
•	not have been convicted of a serious taxation offence during the previous five years; and
•	not be under sentence of imprisonment, including being released on parole or good behaviour for a serious taxation offence.