As an Australian observer, I have watched with interest the debate playing out in Alliance Magazine on whether UK foundations should have a minimum payout. The debate about minimum payouts for foundations is an important one because it relates directly to the legitimacy of philanthropy.

Philanthropy’s legitimacy is derived from the community – it depends on whether it’s accepted and supported by the community. It cannot be taken for granted, but must be cultivated. Philanthropy’s legitimacy will depend on a variety of factors including how it engages with charities and end-users, as well as how open and transparent it is.

Foundation payouts are also a source of philanthropy’s legitimacy.

Foundations are established to benefit the community, by providing support to charities so that they can further their purposes. This is recognised and supported by government, through the provision of various tax concessions. In return, there is an understandable expectation from both the community and government that foundations will provide regular and ongoing support for charities.

Such giving is a major source of philanthropy’s legitimacy within the community and is one reason why a minimum foundation payout is desirable. It says to the community that no matter what happens, whether the financial markets are going up or down, philanthropy will not be missing in action – it’s support for the community will not go below a certain level.

One objection to minimum foundation payouts is that they could impact upon the independence of foundations. As stated by Cathy Pharoah in her article for Alliance Magazine in December

Foundations’ asset base guarantees their independence and capacity to move into the spaces where state policy fails, and provides future-proofing for investment in change and progress.

Cathy is certainly right – but I think this is more an argument for setting a minimum payout at a reasonable rate, rather than not having one at all.

In Australia, there are foundations to which donations are tax deductible (referred to as private and public ancillary funds) and ones to which they aren’t (referred to as private or public charitable trusts). Private and public ancillary funds have a minimum payout of 5 and 4 per cent of their net assets respectively per year. Private and public charitable trusts have no minimum payout.

So, in Australia you have a choice. If you want a tax deduction, then you’ll also be subject to a minimum payout. But if you don’t need or want a tax deduction then you won’t be subject to a minimum payout.

It’s a sensible and flexible approach which Philanthropy Australia, as the peak body for philanthropy, supports.

Last year, the Australian Government proposed reducing the minimum payout for private and public ancillary funds. After careful consideration of the issue, and extensive consultation with our Members, we decided to oppose the change and set out our position in a detailed submission to the Government. A minimum payout needs to be set at a level which balances, on the one hand, the expectation that foundations will provide regular and ongoing support for charities, with the need to maintain the real value of an asset over time.

Whilst there are always some ups and downs as financial market conditions vary, modelling showed that a private ancillary fund set up in 2006 with a $1 million donation invested in a balanced portfolio would have assets of $1.2 million in 2015 after meeting its minimum payout obligations (and that period includes the global financial crisis!). Ultimately the Australian Government accepted our position and did not lower the minimum payout. We continue to monitor the level of the minimum payout, to ensure it is appropriate.

Every nation is different, with varying taxation arrangements and philanthropic sector characteristics – so it’s not my position to say what should or shouldn’t happen in the United Kingdom. But minimum payouts for foundations are an important part of the regulatory framework for philanthropy in Australia, helping to maintain and support the legitimacy of philanthropy within the community.

Krystian Seibert is the Advocacy and Insight Manager at Philanthropy Australia, and an Adjunct Industry Fellow with the Centre for Social Impact at Swinburne University of Technology.

For more discussion on philanthropy payouts, check out Alliance Audio: Philanthropy Payouts.