The conversation around financial advice has, for years, focused on the accumulation and preservation of wealth. But advisers are being asked to help clients answer a different question: what is this wealth for?
When looking at high net worth families, the answer is rarely binary. They don’t want to choose between funding a comfortable retirement and leaving a meaningful legacy. They want to do both.
This is where the interplay between Australia’s most popular private wealth vehicle and its most powerful philanthropic structure comes into play. Although they serve different purposes, an SMSF being to provide retirement benefits to its members and a private ancillary fund (PAF) to distribute charitable donations to deductible gift recipients, they don’t have to be siloed. Instead, they can become two halves of a unified financial and legacy strategy.
For accountants and advisers talking to clients who want to save for retirement as well as engage in tax-effective giving, the opportunity lies in recognising how these two structures can be used in tandem.
Let’s say a client has built significant wealth inside their SMSF, but they also have a desire to give back in a structured, tax-effective way. It is a good problem to have, but it comes with a challenge. An SMSF cannot simply write a cheque to a charity because it exists to provide retirement benefits, not to fund social causes.
Trying to force a square peg into a round hole by pushing an SMSF toward impact investing can land trustees, and their advisers, in hot water. The regulatory guardrails exist for good reason.
This is where a PAF can become a logical counterpart.
By establishing a PAF alongside an SMSF, clients can effectively run two parallel strategies. The SMSF remains the engine room, accumulating capital, generating investment returns and funding retirement income streams. The PAF, meanwhile, acts as the legacy vessel receiving deductible donations that will be growing tax-free and have the ability to be distributed to charities in perpetuity.
Rather than competing for capital, the two structures complement each other. A liquidity event, say the sale of a business or a significant realised capital gain, can trigger a contribution into the PAF. The client receives a tax deduction, which can be spread over five years, the SMSF continues unimpeded and a new pool of philanthropic capital is created. That capital, once inside the PAF, benefits from the same tax exemptions and franking credits as the SMSF in pension phase, allowing it to sustain giving for decades.
A solution to the ‘timing’ problem
Advisers know clients rarely arrive with perfect timing. The call often comes in late May or early June regarding a large capital gain, a sudden inheritance and a looming tax bill. In the past, the default solution might have been a hurried one-off donation to a charity the client barely knows.
Structured giving changes that equation. A PAF can be established in around five weeks, or via a public ancillary fund giving account, in as little as one day. The tax outcome is secured, but more importantly, the client buys themselves time. They are no longer pressured to identify the ‘perfect’ charity by 30 June. They can give thoughtfully, involve their family and build a giving strategy that mirrors the discipline they applied to building their superannuation.
This is where the SMSF and PAF relationship becomes powerful. The same client who meticulously reviews their SMSF investment strategy each year can now apply that same muscle to their philanthropy. They understand the concept of minimum annual distributions, investment committees and fiduciary duty and can transfer that knowledge from the retirement context to the philanthropic one.
The next generation hook
There is another dimension to this integration advisers and accountants are capitalising on, that is, engagement.
The intergenerational wealth transfer is on our doorstep and SMSFs, by design, have a limited membership pool. Bringing the next generation onto the trustee board is often impractical or premature.
PAFs offer a lower-stakes entry point.
A PAF can accommodate multiple generations as trustees or advisers without the same regulatory intensity as an SMSF. Younger family members can be involved in grant-making discussions, investment allocation and site visits to charities. They learn about governance and capital preservation in an environment focused on purpose rather than personal benefit.
This creates a bridge for the adviser. A conversation that begins with the PAF can evolve into a broader discussion about the family’s overall wealth strategy, including, eventually, the SMSF. It transforms the adviser from a technical service provider into a steward of family legacy.
None of this happens by accident. It requires practitioners who are literate in both superannuation and philanthropy and who recognise the two are not mutually exclusive.
Rather than waiting for a client to mention charity, advisers can initiate the conversation as part of the annual planning cycle. They can recognise a client with a $1.5 million SMSF balance and a desire to give might be well suited to a PAF.
Better together
SMSFs and PAFs serve different purposes. SMSFs will remain a cornerstone of private retirement planning, particularly for business owners and professionals who value control and flexibility, and PAFs will continue to stand as vehicles for structured, strategic philanthropy. But for the families using them, they can both be expressions of the same values.
By helping clients provide for themselves and to give to others, advisers do more than optimise tax outcomes. They can position themselves as the architect of a total wealth strategy that encompasses both retirement and legacy and help families build a story about their wealth that spans generations.
And in an era of unprecedented wealth transfer, that might just be the most valuable advice of all.
Judith Fiander is chief executive of Australian Philanthropic Services.
