More and more business owners are turning to philanthropic activities to continue supporting their local community and simultaneously reduce their tax burden following the sale of their business, according to Australian Unity Trustees.
SME owners often look to give back to their communities during their time in business, but once the business is sold and these people find themselves with more time on their hands, philanthropy is becoming an increasing focus for them, said executive general manager Emma Sakellaris.
Asked about how entrepreneurs are going about these charitable activities, Ms Sakellaris told My Business that “depending on the size, sale price of the business and the personal needs of the client following the sale, the most common structure we see is a private ancillary fund (PAF)”.
“A PAF suits donations of $300k plus and provide[s] donors with greater involvement with regard to investment management and granting decisions,” she said.
“Alternatively, clients selling businesses do also establish public ancillary funds, particularly in circumstances in which the client does not wish to have responsibility for investment management and overall governance of the trust, and over time, may wish to be able to accept unlimited donations into the fund from a broad range of individuals within the community.
“The majority of clients establishing perpetual charitable trusts, following the sale of a business, do tend to establish PAFs, reflecting the scale of the sale proceeds and the funds then remaining for lifestyle requirements and other commitments.”
Ms Sakellaris noted that the obvious discrepancies in the size and sale price of a business directly influence the amount of funding being put into these philanthropic endeavours.
But she explained that the business itself cannot be donated into such a fund.
“The business would need to be sold and proceeds from the sale then donated to establish the trust. A PAF cannot run a business,” she said.
Establishing a charitable fund comes with its own set of tax rules and benefits, Ms Sakellaris said, and can help reduce the burden of capital gains tax post-business sale.
“The primary tax benefit associated with the establishment of a perpetual charitable trust is the ability to claim a tax deduction for the donation, which can be spread over five years. This deduction is used to offset the resulting CGT liability from the sale of the business,” she said.
“The income generated with the trust is also tax-exempt. All future donations into the trust by the client also result in a tax deduction, deductible up to the limit of a client’s taxable income.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.