“Together, these new ATO publications point to a clear theme: the ATO is reassessing whether the stated gift is a real gift once all the surrounding contractual rights and economic benefits are accounted for,” said Mills Oakley tax partner Craig Gibson.

“Deductions can be denied if a material benefit or advantage flows to anyone other than the private ancillary fund.

“That could involve donating property subject to a long-term occupancy right, gifting shares subject to a call option, or any arrangement that erodes the true value of the gift once you strip away the form and look at the substance.”

Private ancillary funds, soon to be renamed “giving funds”, allow wealthy patrons to stockpile their charitable donations in a tax-exempt trust to be invested, pooled and doled out to the charities over time, rather than in one hit.

“The ability to separate the timing of a tax deduction from the timing of the charitable grants is particularly valuable for those individuals experiencing liquidity events such as the sale of a business, asset disposal or an unusually high-income year,” said Gibson.

The ATO’s recent updates outline when a private ancillary fund will be considered to have “provided a benefit” to the wealthy benefactor or a related entity, in breach of the legislative guidelines that would allow the ATO to deny a deduction.

Related party transactions are a common feature of private ancillary funds as operators often employ family office staff, lend funds to charities or businesses well-known to the operator, or make donations to associated charities. Related party transactions are permitted as long as they do not “provide a benefit” to the founder or related party.

In one high-profile instance, Katmandu founder Jan Cameron lent $2.25 million to then-friend and now-bankrupt publican Jon Adgemis through her Elsie Cameron Foundation in 2014. That loan, which was listed as a related party transaction, was subsequently repaid and fell within private ancillary fund guidelines.

An investigation by The Australian Financial Review recently revealed that the value of donations locked in the country’s 100 largest private ancillary funds had doubled in the past five years to $6 billion.

Assistant Minister for Charities and Treasury Andrew Leigh said in June that the government would adopt a Productivity Commission plan requiring the country’s 2200 private foundations to distribute more than 5 per cent of their net assets each year. Leigh has yet to hand down its final decision.

However, Chris Wilson, a partner in Koda Capital’s philanthropy and social capital division, warned pushing those rates too high could discourage new philanthropists from establishing foundations.

“Given most private ancillary funds already distribute well above the 5 per cent minimum on a voluntary basis, it is worth questioning whether a mandatory increase is actually necessary,” he said.

“When someone sets up a private ancillary fund, the money donated is irrevocably committed to charity, and, over time, investment returns on that capital help deliver materially greater benefit to the community.”

Financial Review analysis finds that, of the 100 largest private funds to have reported their 2024 financial activity to the charity regulator, fewer than a third gave more than 5.5 per cent, and the majority held closely to the 5 per cent minimum.

The figures align with the Productivity Commission report last year, which found that half of private ancillary funds had distributed between 5 per cent and 6 per cent of their net assets to charities in 2021.

Additional reporting by Lucy King and Daniel Reti