Corporate foundations

It is increasingly acknowledged that some form of philanthropy and corporate social responsibility is a necessary component of modern corporate activity. As well as being for the good of the broader community, such activity can benefit the company itself by increasing good will and reputation, improving employee engagement and building client / customer loyalty.

When considering avenues for increased philanthropy and corporate social responsibility it is important to remember that company directors need to comply with their directors duties. A decision relating to the giving of philanthropy must:

• be well informed, made in good faith and with due care;
• be properly considered in the light of any conflicts of interest;
• not involve the misuse of information or position; and
• not result in the company falling into financial difficulty (including insolvency).

One method often utilised by companies to facilitate or increase their level of philanthropy and corporate social responsibility is the establishment of what is commonly referred to as a corporate foundation.

A corporate foundation is a separately identifiable fund established by a commercial for-profit company or business through which the company can direct money, property and other benefits towards community, social and/or environmental outcomes.

A corporate foundation can take one of a number of forms, each with its advantages and disadvantages. The three main structures used are:

• internal fund;
• stand-alone entity; and
• private or public ancillary fund.

The decision about which form is best suited for the company will be informed by a number of considerations, including:

• the purpose for establishing the fund;
• scope of activities;
• resources available;
• who/what the foundation is to benefit;
• where the funds are expected to come from; and
• how much public involvement and control is wanted.

Regardless of the structure chosen, a company will usually have at least some degree of control over its corporate foundation and will provide it with support, for example through providing:

• money;
• administrative support;
• offices or premises; and/or
• dedicated employees or employee work hours.

An internal fund is not a separate legal entity but is nevertheless usually treated as being distinct from the company. It is a lot like trading under a separate business name. The fund will commonly be distinguished from the company through specific marketing materials, the use of a separate name, a separate bank account and one or more specific web pages. There may also be one or more dedicated staff and a fund-specific telephone number.

Slightly more sophisticated funds may be guided by an advisory committee and operated in accordance with specific guidelines, policies and procedures. However, directors of the company must remember that the fund is still part of the company itself and must not mislead, intentionally or otherwise, others into thinking the fund is somehow divorced from or separate to the company.

An internal fund is attractive because:

• it is relatively simple and inexpensive to establish;
• it is permitted to undertake activities and deliver projects as well as provide money and support to others;
• unlike some other foundation structures, it is not confined to giving to or supporting just charities, and can therefore reach a broader cross-section of the community including individuals, sporting clubs, unincorporated groups, profit- making social enterprises and overseas entities; and
• it is reasonably straightforward to wind back or even cease completely.

For these reasons an internal fund can be a first step towards formalising a company's philanthropy strategy and goals.

• Internal funds do have their disadvantages though, including:
  they depend almost exclusively on funds provided from the company itself and usually find it difficult to attract funds from other sources such as employees, clients, suppliers, the general public and other companies and business;
• gifts to an internal fund are not tax deductible; and
• they are not exempt from the requirement to pay income tax.

A stand-alone foundation commonly takes the form of a company limited by guarantee or a proprietary limited company, though sometimes a trust structure is used.

While foundations of this type are commonly established for a charitable purpose, this is not always the case. That is, because of the legal definition of 'charity', it is possible for a foundation to be established as a not-for-profit without it actually pursuing a charitable purpose. For example, a stand-alone foundation established to promote sport or sporting clubs purely for the sake of or to advance sport would not be charitable at law.

It is also possible for a stand-alone foundation entity to be endorsed as a deductible gift recipient (DGR), though this is fairly uncommon. It is uncommon because a corporate foundation set up under this structure will typically want to conduct its own projects and activities and will therefore also want a broad mandate to work from DGR endorsed entities on the other hand are somewhat restricted in what they can do.

The stand-alone foundation option will involve incorporating a separate entity or, in the case of a trust, preparing a trust deed and establishing the trust.

With each of these options the company will usually be the sole member, shareholder or trustee (as the case may be) and as such will maintain a good deal of control over the foundation, including the ability to appoint and remove directors, amend the constitution or trust deed and to wind up the foundation. Similarly, the directors of the foundation almost always have a close connection with the company, for instance being drawn from the company's own directors and senior employees or those of its subsidiaries or other group companies.

We have outlined some of the advantages and disadvantages of a stand-alone foundation below.

Advantages of a stand-alone foundation include:

• if it is not-for-profit and established for charitable purposes, it is eligible to be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC), and therefore permits the foundation to access income tax, fringe benefits tax and GST concessions and to claim cash refunds of franking credits on any dividends it receives (provided it meets the relevant requirements of the Australian Taxation Office (ATO) (including compliance with the 'in Australia' test);
• if it is endorsed as a DGR, it can receive tax deductible gifts and contributions;
• it is free to undertake its own activities and projects, as well as giving grants and donations to other organisations; and
• being a separate not-for-profit entity that by its nature is not permitted to distribute funds to its own members/shareholders can make it easier to attract donations, sponsorship and other support from employees, customer/clients, suppliers, the general public and other companies and business, despite the fact the foundation is closely aligned with and controlled by the company.

Disadvantages of a stand-alone foundation include:

• gifts to the foundation will generally not be tax deductible because corporate foundations of this nature are unlikely to be eligible for DGR endorsement (for the reasons described above);
• there is a higher degree of administration and regulatory compliance including preparation of financial accounts, the holding of directors meetings and the keeping of minutes and the requirement to report to the ACNC and/or Australian Securities and Investments Commission; and
• the process of winding up or closing down the foundation requires certain steps to be followed, which can take a number of months to complete in some circumstances.

Public ancillary funds and private ancillary funds are straightforward and relatively inexpensive to establish and can be endorsed by the ATO to receive tax deductible gifts.

These two features make ancillary funds an attractive option for many companies wishing to establish a foundation. However, ancillary funds are rather heavily regulated and cannot give money or other benefit to organisations unless such recipient organisations have DGR status, which can result in a reasonable amount of administration.

Private ancillary funds and public ancillary funds are similar in nature with the key difference being a public ancillary fund must actively seek gifts from the public and must be administered by a number of persons with a connection to the community, which the ATO call 'responsible persons'.

Both types of ancillary funds:

• need to be established under a model trust deed;
• must have at least one corporate trustee (commonly the company establishing the foundation);
• must follow a set of binding guidelines that require, for example, the fund to have an investment strategy and to distribute a designated minimum amount each year based on a percentage of its net assets;
• can receive tax deductible gifts;
• are exempt from the requirement to pay income tax and are entitled to receive refunds on franking credits;
• generally speaking, cannot undertake their own activities and projects beyond fundraising and potentially some capacity building of current and/or potential funding recipients;
• can provide money, property or other benefit but only to other DGRs (excluding other ancillary funds in most circumstances); and
• are required to lodge additional forms/information with the ACNC in addition to the general reporting obligations imposed upon registered charities.

You can find out more about public ancillary funds and private ancillary funds on the ATO's website, from which you can also find copies of the model trust deeds.