When establishing a non-profit organisation, founders can choose from a large range of legal forms, including registering a charitable trust. Your organisation’s legal structure will determine the types of activities you can legally carry out and which law you will need to comply with. In this case, your organisation must follow the rules set out in the Charitable Trust Act. Find out more about other types of legal structures by reading our legal structure factsheet.
What are charitable trusts?
Charitable trusts are legal organisational structures established to hold and distribute funds as charities. Trusts registered as charities must meet certain legal requirements for registration with the Australian Charities and Not-for-profits Commission (ACNC). This includes being a not-for-profit organisation, having only charitable purposes intended for the benefit of the public, not having a disqualifying purpose, and not being an individual, political party, or government entity.
The Charities Act 2013 (Cth) and the Charities Consequential and Transitional Act define a charity as having a charitable purpose “such as the protection of human rights, the promotion of reconciliation and tolerance, and by recognising that many modern charities advance causes by preventing, educating, researching and raising awareness”. Examples of charitable trust are grant-making foundations. Unlike some other forms of non-profit organisations, charitable trusts are not established to specifically undertake action to fulfil a purpose, but to distribute funds in a considered way that enables other organisations to pursue their purpose.
Charitable trusts are often set up through a bequest in a will, but do not have to be. A trust is established with an initial investment in the organisation or ‘corpus of money’ that may be held in perpetuity. A certain percentage of the interest on this sum is granted periodically to particular causes, organisations, winners of scholarships or other grant-seekers. In some cases, a trust’s deed or other benefits such as retaining a tax exemption status may be available but will require that the trust only make grants to non-profit organisations or to charities.
How to register a charitable trust?
Before you register your charitable trust, you should conduct some background research on any existing charities or not-for-profit organisations that already do what you want to do. The ACNC Charity Register will help you find registered charities that your charity trust could support or work with. The next step is to outline your purpose and describe what you want your organisation to achieve and what activities it will be conducting. You should ask yourself who your audience is, who will benefit from your programs, and why there is a need for what you do.
There are several possibilities for a charitable purpose. For instance, advancing education, social welfare, religion, health, or culture are all valid reasons for registering a charitable trust. You may also be interested in advancing human or animal rights, protecting the environment, or ensuring public safety. Before completing the registration, your organisational leaders should develop a purpose statement that describes why the organisation was (will be) established, where the activities will take place, and what activities, services, or programs it will provide. Here is an example:
The [organisation] is established to be a charity with the purpose of advancing the education industry in Australian, particularly in [City] by working with the government to ensure that the interests of students and teachers are represented in regard to the decision-making process, providing a forum for parents, teachers, and students to discuss best practices, educational and mental health needs in the classroom, and enhancing the way the industry responds to global crises such as pandemics and public health emergencies.
In this case, the charitable trust intends to invest its resources into addressing gaps in the education system such as poor learning outcomes and mental health needs. In particular, the founders want to design better responses to public health emergencies like the Covid-19 pandemic. Your trust could also choose to raise and invest funds into other charities advancing mental health initiatives in schools by holding fundraising events and managing grant calls for proposals.
Charitable trust vs foundation: What is the difference?
Foundations are another form of charitable trust. There are a number of different types of entities that fall under this category. They include private charitable funds, ancillary funds, family foundations, and community foundations. An alternative to establishing a foundation is to set up a sub-fund in an already established charitable trust (see public ancillary funds below). Two foundations that have chosen this option are The Australian Communities Foundation and the State Trustees Australia Foundation.
While charitable trusts and foundations have many things in common, there is one key difference between the two. A foundation is usually created by an entity and funded by one primary private donor. A charitable trust relies on the government and on the public as financial contributors. In a trust, assets are transferred by the legal owner to individuals or corporations for the benefit of families and friends. Foundations, on the other hand, are hybrid organisations that take on the characteristics of a trust and a company.
Private and public ancillary funds are a fairly new type of charitable trust. Like other non-profit trusts and foundations, they distribute funds to other organisations for a chosen charitable cause or purpose. Private ancillary funds (PAFs) are intended for families or private individuals who wish to have more control over their philanthropy. Like charitable trusts, PAFs continue in perpetuity and provide a sustainable way of supporting a particular cause. PAFs must be managed by corporate trustees and usually require a minimum initial investment of $500,000. More information on private ancillary funds is available on the Australia Taxation Office webpage.
Public ancillary funds (PuAFs), unlike PAFs, are not directed by a specific group or individual. They encourage the public to contribute to the foundation through a smaller sub-fund. The creation of a sub-fund allows the organisation to accept donations towards the case cause and combine funding to have a greater effect. These entities can also avoid the complex process of establishing a charitable trust or foundation. Too learn more about private and public ancillary funds visit Philanthropy Australia.
Who is responsible for governing the charitable trust?
The governance of a trust is the responsibility of its trustee or trustees; their role is similar to that of a board director. Beyond that and in the case of administration breakdown or if the trust’s deed becomes impossible to fulfil, the Attorney-General may have the authority to adjust the trust’s purpose to make it more meaningful or to close it. Many trusts are managed by a trust administrator working for an external ‘third-party’ company. Companies like Australian Unity Wealth and other administrators enable trusts to be maintained in perpetuity beyond the lives of the person or people who established the trusts, the initial trustees or indeed anyone who ever knew them. Administrators are requirements to follow the Australian Securities & Investments Commission guidelines and must obtain ministerial consent from the Australian Treasury.
What resources will I need to start a charitable trust?
As you go through the process of registering your charitable trust, you should consider which resources your charity will need in the beginning and as it establishes ongoing activities. This could include conducting initial fundraising to collect start-up money and other resources and making a list of assets you’ll need such as securing a physical location for your office or purchasing equipment. You should also ask yourself what kind of fundraising activities you will be conducting and consider what costs they will incur your organisation, including salaries, insurance, rent, travel, and utilities. If you plan to hire, you should discuss how many staff and/or volunteers will be needed to accomplish your organisational goals and lead your charitable activities
Can a charitable trust take a loan from a bank?
Some trusts can borrow money from a financial institution. These entities are usually family trusts, property investment trusts, service trusts, or self-managed superannuation fund trusts rather than charitable trusts. If you fit into one of these categories, you may be eligible to apply for a home loan, but many banks will be reticent to lend you money. Even so, many individuals use trusts to purchase a property because the organisational structure provides tax advantages and asset protection. You may find that your bank has little experience structuring a trust loan, which can reduce these advantages. When approving a loan, most banks will want to know what type of trust you have, who the beneficiaries and trustees are, and how you want to structure the loan and whose name it will be under. In Australia, banks see trust loan applications as complex and may not have clear policies around the process
What is a charitable remainder trust?
A charitable remainder trust (CRT) allows donors to receive income from the trust for the remainder of their life. When a donor dies, the trust assets are transferred to a charity or charities. This form of organisational structure is popular in the U.S. and provides donors with tax benefits related to their income, estate taxes, and capital gains. Philanthropic writer and trustee, Ben Clark, states that introducing CRTs in Australia would help address structural barriers in the country’s philanthropic sector and would allow advisers and trustees to better understand how giving can benefit their clients. These benefits could include preserving, transferring, and growing wealth.
Charitable trust and income tax: how does it work?
Your charitable trust will have several tax benefits. The Income Tax Assessment Act 1997 (Cth) states that a charitable entity is exempt from having to pay income tax and can make tax deductions for gifts to other organisations. Charitable discretionary trusts are not required to file tax returns. There are also a few disadvantages to choosing the charitable trust structure. Your activities will be limited to charitable purposes and a charitable discretionary trust must be supervised. Trust income is considered taxable and is determined based on the deed. Net income is calculated according to normal tax laws and is usually taxed when it reaches the hands of beneficiaries (or their trustee).
Which Australian authority regulates charitable trusts?
According to the Australian National Audit Office's website, 'The Australian Charities and Not-for-profits Commission (ACNC) is the principal regulator of charities at the Commonwealth level.' When creating your charitable trust, you will need to seek registration from the Australian Charities and Not-for-profits Commission (ACNC). You will also be asked to regularly submit reports. The ACNC is responsible for registering charity trusts and maintains a register with a list of registered entities. In 2018-2019, the standard for processing applications was 15 business days, but registration may take longer. The purpose of the ACNC rules is to promote good governance practices and collect data for the charitable sector. Australia’s approach to regulations has been to use a ‘light touch’ and streamline reporting for charities.
This fact sheet is intended as a simple overview. Non-profit law is incredibly complex and there are many components, allowances, restrictions, exceptions and important qualifications that are not described above. Dedicated legal advice should be sought from a legal practitioner before taking action.