Charitable Trusts vs Foundations: Benefits and Differences

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Steam rises from the hot cup in Michelle’s hand, the morning news playing out on the TV in the background. The news is a stark contrast to the calm of her luxurious kitchen—kids stealing cars, arson attacks, gang shootouts.

Michelle and her husband have worked hard to get where they are, growing a substantial wealth portfolio with returns that far exceed what they require, but she would be remiss to deny the privileges and opportunities that helped them along the way.

Michelle begins to wonder:

Is there a better way to pass their good fortune forward?

What is the best structure to make the most impact?

And how can she ensure her investments will achieve their objective?


How can I make a positive impact on the world?

The first question to ask yourself is – what would you like to achieve?

Different people have different capacities to which they are able or willing to help.
For Michelle and her husband, providing financial aid would be their way to achieve the greatest impact.

Therefore they have two options: pay the money directly to the person in need (this can be a grant to cover expenses) or pay for a service or product that is needed (pay wages for staff that are able to assist a person in need).

Visual representation between giving money directly and indirectly to those in need.


How to give money for charitable purposes

The Australian Charities and Not-for-profits Commission (ACNC) defines ‘charitable purpose’ as one of the following according to the Charities Act 2013 (Cth):

  • the purpose of advancing health;
  • the purpose of advancing education;
  • the purpose of protecting human rights or social welfare;
  • preventing or relieving the suffering of animals
  • the purpose of advancing culture or religion; and
  • the purpose of advancing the security or safety of Australia or the Australian public.

Depending on the issue you have chosen to address and how, your philanthropy may fall into multiple categories. If Michelle decides to develop an after-school program for at-risk youth, she could claim it advances education, security, and safety.

To do this, Michelle can either start a Foundation to fund the program or open a Charitable Trust for it.

What is the difference between a foundation and a charitable trust?


Foundation for charity:

A foundation is typically a legal entity established by an individual, a family, or a company with the primary purpose of making grants to charities or for social purposes.

In Australia, foundations can be structured in various ways, including as a company limited by guarantee or as a trust. They often have a broad philanthropic purpose and can be public (receiving funds from the public) or private (funded by an individual or a family). As a legal entity, the foundation is managed by a board of directors.

Imagine a giant nest egg of money with its own legal identity that can be wielded by a small group of caring individuals. These funds could be allocated directly to the person in need or to services that would assist them.

Charitable Trust:

On the other hand, a charitable trust is a trust set up to hold and manage assets used exclusively for charitable purposes. Unlike foundations, charitable trusts do not have a separate legal identity; they operate through trustees who manage the trust’s assets and operations based on the trust deed’s stipulations.

Charitable trusts are usually private, funded by an individual or an entity, and focus on specific charitable causes. This could hold the ownership of property for the use mentioned above or donate the rent generated by these properties to other already established not-for-profit charities.

Table displaying the differences between a Foundation and a Charitable Trust

What are the tax benefits of setting up a charitable trust or foundation?

Both charitable trusts and foundations in Australia can enjoy significant tax benefits, provided they are endorsed by the Australian Taxation Office (ATO) as deductible gift recipients (DGRs). Here are some of the tax benefits associated with these entities:

Income Tax Exemption:

Both charitable trusts and foundations can be exempt from income tax once they are recognised as charitable and comply with the requirements for tax exemption under the Income Tax Assessment Act 1997. This would mostly affect the staff employed by an organisation providing a service or when government grants have been received.

Deductible Gifts:

Donations made to DGR-endorsed entities are tax-deductible for the donor. This not only provides an incentive for more substantial and more frequent donations but also allows the charitable entity to attract more contributions from individuals and corporations seeking tax-efficient ways to support good causes.

GST Concessions:

Charitable entities may be eligible for concessions on goods and services tax (GST), reducing the amount of GST they need to pay on purchases related to their charitable activities. These could be the resources needed for the activities in the after-school program, for example.

FBT Rebates or Exemption:

Charitable organisations may qualify for rebates or exemption from fringe benefits tax (FBT), which can be particularly beneficial if the organisation provides benefits to employees or volunteers.

What are the legal obligations of foundations and charitable trusts:

Trustees who manage charitable trusts and board members who manage foundations have significant legal responsibilities whilst meeting their charitable purposes:

Duty of Care:

Trustees and board members must act with a high level of care and diligence, ensuring that their decisions are informed and in the best interests of the charitable entity.

Duty to Act in Good Faith:

They must act honestly and in good faith for the charity’s benefit, putting the charity’s interests above their personal interests.

Compliance with Governing Documents and Laws:

Trustees and board members must ensure that the charity complies with its governing documents (such as a trust deed or constitution) and all relevant laws and regulations. This includes compliance with the Australian Charities and Not-for-profits Commission (ACNC) standards if registered with the ACNC.

Proper Management of Assets:

They are responsible for the proper management of the charity’s assets, ensuring that they are used appropriately for the charity’s purposes and protected from misuse.

Financial Management:

They must manage the charity’s finances responsibly, including keeping accurate records, preparing financial reports, and ensuring that the charity remains financially viable.

These responsibilities underscore the importance of competent, ethical leadership in the management of charitable entities and highlight the need for trustees and board members to be well-informed about their roles and obligations.

How much control can I retain over a foundation or charitable trust?

As a founder of a charitable trust or foundation, you can retain significant control over the assets and decision-making processes, especially if you are actively involved as a trustee or board member. However, it is essential to balance control with the need for effective governance and compliance with legal obligations.

Here are some key points to consider when determining your level of control:

1. What does the Trust Deed or Constitution say?

These documents can specify the roles and powers of the founder, including how decisions are made and who can control the assets.

2.What is the composition of the board?

Including trusted individuals as board members or trustees can ensure that the founder’s vision is maintained while also complying with governance standards.

3.Are you taking part in the strategic planning?

Active involvement in strategic planning and major decision-making can help founders guide the organisation according to their vision while allowing operational decisions to be handled by other trustees or staff.

Using Profits for Good

Michelle may never meet the people she helps directly, but the impact on their circumstances could forever change their lives. While Michelle may not get to see the difference her giving makes in each and every life touched, there are many great testimonies of people breaking cycles, setting themselves up for better and finally being in a position where they too can pay forward the kindness shown to them.

Are you ready to take the next step in your giving? There are a few more details to know, namely how much continuous cash flow would be needed, how much time the founder would be required to devote, how long it would take to set up a charity or a foundation, and more.

If you have the same questions and want to learn more about how you can structure your giving, contact Rispin Group today. Our extensive experience means we are positioned to provide advice on establishing registered charitable organisations and clearly explain the various structures available.

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