Charitable Giving When Selling Your Business Benefits Everyone

Successful business owners are known for their ability to make the most of opportunities.

This is particularly important when they decide to sell their business. More and more, business owners are using what is likely their largest influx of income as the charitable opportunity of a lifetime. Charitable donations deliver a win-win opportunity, enabling them to reduce their tax burden and have a positive impact on the community.

The community in which a business operates is a big reason for its success, and charitable giving can be a way to say thank you for the community’s support. As a financial strategy, making a donation as part of a sale event can also significantly reduce the income tax burden.

What options does a business have?

Business owners can offset the tax on the proceeds of the sale by simply making a donation directly to a charity. A direct gift to charity gives the business owner a tax deduction, but the decision on where the gifts go has to be made immediately. This sounds simple, but it isn’t always an easy decision to make. The proliferation of charities can make deciding where to give overwhelming. It takes time to think through the causes and organisations to support, and time is the one thing a business owner is unlikely to have when they are in the middle of a transaction.

Another option is to establish a private ancillary fund (PAF). A PAF is a type of charitable trust that allows an individual or family to put aside a chunk of money for charitable purposes in perpetuity. The individual donates capital into the PAF and gets a tax deduction for the donation (the deduction can be spread over a five year period). The capital is then invested long-term, and a minimum of 5% of the value of the PAF assets must be distributed as grants to charities each year. To be eligible, a charity must have Deductible Gift Recipient Item 1 status, and plenty do – there are well over 20,000 charities to choose from.

Most people make an initial donation of at least $500,000, meaning that a PAF isn’t suitable for everyone. However, PAFs aren’t the only option. Public ancillary funds, though less well known, are more accessible and growing in popularity all the time.

A public ancillary fund (PuAF) has the same tax advantages as a PAF but is a communal structure. Unlike a PAF, there is no requirement to establish a new trust or trustee company, so a named sub-fund can be established immediately (someone could even do so just a few days before 30 June), and there’s no set-up cost to do this. Initial amounts donated are often smaller – for example, a sub-fund in the Australian Philanthropic Services Foundation can be established with $50,000.  A minimum of 4% of the PuAF assets must be given away each year, slightly lower than with a PAF, and the same range of charities can be supported.

Rather than having to make a quick decision, a PAF or sub-fund allows an immediate tax deduction while the choice of charity can be made when there is more time for research. The founder can spend time articulating what they are passionate about and the types of causes they want to support, and then set about finding the right organisations. Having the time to carefully consider where to donate and to understand how the charitable donation is being used generally leads to greater satisfaction.

A philanthropic structure can also be an important investment in the future. Multi-year funding commitments are easier as the PAF or sub-fund founder knows the money is already set aside, and the charity has the benefit of knowing they have a revenue stream for the next few years.  Involving the family also plays a part. Setting up a PAF or sub-fund can help to increase children’s social awareness and inspire future generations, and ensure the business owner’s philanthropic legacy continues for many years to come.

Antonia Ruffell is CEO of Australian Philanthropic Services (APS), a not-for-profit organisation that sets up and administers private ancillary funds, offers a public ancillary fund, and provides grant-making advice – www.australianphilanthropicservices.com.au.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.