Expert guidance on donating unlisted equity and shares into a personal foundation.
How do I donate equity?
If your wealth is tied up in unlisted equity in your company, it can be hard to know how to give meaningfully. The good news is that you don’t have to wait for a liquidity event to get started with your giving. You can donate shares and set up a private ancillary fund (PAF) today. It is also possible to establish a PAF using unlisted equity, or a mix of shares and/or unlisted equity and/or cash.
When you donate your shares into the PAF, you receive a tax donation for their value. As your company grows, so does the value of your PAF, allowing you to scale your giving and impact year on year.
The easiest time to move unlisted shares to your PAF is when there is a funding round which drives a valuation of the company. The ATO has provided guidance about valuations of philanthropic gifts of unlisted equity. Contact us to request a copy.
The initial donation to set up your foundation should be a meaningful amount, but at a level that won’t compromise your financial security. If you have $20m of on-paper wealth, you could consider putting 5% into a PAF. You receive an upfront tax deduction, and with $1m invested, have $50k to give in year one. One million dollars is about the minimum required to make a PAF viable.
Once the PAF is established there is no requirement to keep topping it up. However, a PAF is required to distribute 5% of the value of its assets from its second financial year in operation to eligible charities, in cash. If a PAF only holds unlisted shares, you need to identify ways to raise cash to meet this requirement.
I want to donate equity into a private ancillary fund. How is it valued?
StartGiving can guide founders through the process of donating unlisted equity in their company through a private ancillary fund (PAF).
Here’s how it works:
- ATO-approved process
The Australian Taxation Office (ATO) has provided formal guidance on donating private company shares, typically using a valuation from a prior institutional funding round to determine the donation’s value. - Shares held in your PAF
Ownership of the donated shares is transferred to a private ancillary fund (PAF), but as a founder, you retain oversight by managing the PAF. - Support with costs
StartGiving covers the full establishment costs of your PAF.
For more information about StartGiving’s complimentary philanthropic services for tech founders or to access a copy of the ATO guidance, get in touch.
My private ancillary fund holds equity, but no cash. How do I manage liquidity so that I can meet my 5% gifting obligation?
Once your private ancillary fund (PAF) is established, there is no requirement to continue adding funds. However, from its second financial year onwards, a PAF must distribute at least 5% of its net assets annually to eligible charities in cash.
If your PAF primarily holds unlisted shares, you’ll need a strategy to generate cash to meet this requirement. Options include:
- Selling shares
The PAF may sell shares to existing institutional investors, a secondary fund, or, in some cases, to the donor or their family and friends (if managed at arm’s length) - Donating additional cash
A founder can contribute cash into the PAF to supplement the equity, reducing the need to sell shares.
In some situations, the Australian Taxation Office (ATO) Commissioner may approve a reduction (but not a complete waiver) of the minimum annual distribution rate for a given financial year. If you’re unsure how to manage distributions from a PAF, professional advice can help you plan effectively.
What are the tax implications of donating equity into a private ancillary fund?
Tax deductibility
- You receive a tax deduction for any donations made to a private ancillary fund (PAF) as the fund has Deductible Gift Recipient (DGR) status.
- The deduction can be claimed immediately or spread over up to five years, depending on your tax planning needs.
Capital Gains Tax (CGT) considerations
- When donating assets such as unlisted shares to a PAF, the transfer of the shares will trigger a CGT event.
- The capital gain or loss, broadly calculated as the market value of the shares less the cost base, is included in the donor’s assessable income.
- If the donor is an individual who has held the shares for more than 12 months, they should be eligible for a 50% capital gain discount.
- It is likely that the deduction claimed by the donor for the donation will wholly offset the capital gain realised by the donor for the income year, with some further tax deduction available to offset other assessable income during the year.
(This FAQ is intended for general illustrative purposes only and you should seek professional advice from your accountant or tax adviser.)
Ongoing tax treatment
- Earnings within a PAF are income-tax exempt.
Charity distributions
- Distributions from the PAF must be directed to charities with DGR Item 1 status
Professional advice is essential to ensure compliance with Australian Taxation Office (ATO) regulations.
