Introduction

The Australian Taxation Office (ATO) from time-to-time releases public rulings to assist taxpayers in complying with their obligations. While not having the force of law, if a taxpayer correctly relies on it, the ATO will apply the law in the way set out in this Determination.  Thus, a taxpayer will not pay any more tax, penalties or interest in respect of the public ruling.

A new public ruling in the form of a Taxation Determination has been released about when a public or private ancillary fund (foundations)[1] provides a “benefit” to inappropriate persons or organisations (Taxation Determination 2026/3).

The object is to ensure that aggressive foundation tax planning that is often seen in the United States does not rear its ugly head in Australia to diminish the trust and reputation of foundations. That trust and reputation is important for many reasons, but particularly for those school and charity foundations that seek to fundraise from the public for their cause.

Public ancillary funds are governed by the Taxation Administration (Public Ancillary Fund) Guidelines 2022 (Guidelines).

The statutory Guidelines, as might be expected, prohibit any trust funds or benefits being used for other than the charitable purposes as outlined in the trust deed. This is also a community expectation that funds given for a purpose should be used for that purpose and none other.

For example, making a distribution from the public ancillary fund for funding cancer research to the founder’s wife for an all-expenses-paid holiday is not a public charitable purpose.

The public ruling clarifies when more complex and less obvious transactions are or are not regarded by the ATO as “benefits” and liable to sanction. There are complex rules about forgiveness of debts, assumptions of liability, valuations and many other convoluted transactions that only exist in the minds of taxation scheme organisers.

The crunch

It appears that the ATO may have tangled up some legitimate foundations in their anti-avoidance net.

Despite being warned through Law Society submissions when the ATO released a draft of the public ruling for comment, the ruling interpreted a charity that had established its own public ancillary foundation with itself as a beneficiary as being a “related party”. This means, according to the new public ruling, that the trustee of the foundation is prohibited from making a distribution to the charity that it was formed to benefit.

A surprising result which departs from the common practice to date.

Even more surprising is that the ATO’s Model Trust Deed for such foundations appears to allow such a payment. The ATO’s response to this raised issue was:

While model deeds are an important practical tool, they cannot override or qualify the requirements imposed by the Guidelines.[2]

Take this example:

XYZ Trustee Corporation (founded by the XYZ school) could not now make a distribution from its public ancillary fund to the XYZ school.  This is because XYZ school is a related party, as a founder or perhaps their associates, as determined by section 318 of the ITAA 1936.

The ATO claims in the public ruling that this is an “integrity provision”.

Wait, there is no more yet …

Given that there is a considerable number of such foundations with such “related parties”, the ATO has to date offered no guidance as to what course a trustee in this situation should take or whether or how such a fund might be wound up and distributed to the named beneficiary.

It was announced on 26 February 2026, that the Government will be updating the Guidelines. This is to incorporate the change to the name of ancillary funds to giving funds, the increase in the minimum annual distributions, and to introduce an ability to smooth distributions over 3 years. It may also present an opportunity for the Government to address the issue about benefits catching some existing foundations.

What to do

Trustees of ancillary funds need to examine their situation in the light of the new public ruling.

The ATO news sources should be monitored for any statements regarding clarification of these issues.

Paxton Hall Lawyers can provide trustees with an assessment of how the public ruling impacts their specific foundation.

 

 

[1] Private ancillary funds are usually charitable trusts created by wealthy individuals or families, and public ancillary funds are often community foundations or foundations created by schools or other Deductible Gift Recipient (DGR) charities

[2] ATO, TD 2026/3EC Compendium, page 8