Written by David Ward
PAF Guideline 43 allows reasonable operating expenses to be met from a private ancillary fund (PAF). The key word here is ‘reasonable’. I always apply this test in three ways.
Firstly, the expense must relate directly to the operation of the PAF – this includes payments for an administration service, audit fees and investment management fees, and, for larger PAFs, staff and premises. These expenses must be competitive or better relative to other providers. It can also include reimbursing Directors for expenses incurred in assessing or checking up on grant programs. The same ‘reasonable’ test applies: a field trip to inspect a $10,000 grant may not qualify whereas the same field trip to inspect a $100,000 p.a. 3-year grant with a written report to other Directors is generally acceptable. Of course, any payment to a Director needs to be approved by other Directors.
The second ‘reasonable’ test relates to the total expenses of the PAF relative to its size. The benchmark (excluding investment management fees) is that expenses should be below the maximum Trustee Company fee of 1.056% of the net value of the fund, which is also usually around 20% of the value of grants. However, because of fixed costs smaller foundations in their early years while building a corpus may push this level, whereas larger PAFs should be comfortably inside these percentages. Investment management fees need to also be within market parameters which range from 1 to 1.5% for smaller PAFs through to 0.5% for PAFs with greater than $10 million in assets.
Where a related party is involved in the transaction, greater care is needed to ensure it is on ‘arms length’ reasonable terms. For any such transaction Directors, other than the one that is the related party, are required to give their approval (this should be formally recorded in the Minutes) and it must be disclosed in the annual Financial Statements.
Lastly, it is important to remember that the funds in a PAF are community funds and that you are a custodian. One of the best tests of all, in addition to the technical requirements outlined above, is that Directors should also ask themselves the question “Would I be happy if a charity expended grant funds on this same kind of expense?” If the answer is no, then perhaps it should not be an expense of the PAF.
If you have any questions about what constitutes reasonable expenses for a PAF, please consult your APS adviser.