Medical research body the Bionics Institute is using a recent ATO ruling to appeal to a new generation of philanthropists who want to see tangible results from their donations.
The Bionics Institute aims to solve medical challenges using technology, particularly devices that interact with the nervous system. With past successes including the cochlear hearing implant, the institute works on conditions such as Alzheimer’s, Crohn’s and Parkinson’s disease, hearing impairment, chronic pain and arthritis.
Chief executive Robert Klupacs says the institute is targeting donations from private ancillary funds (PAFs), a tax-effective vehicle through which high-net-worth individuals can donate to charity.
When a wealthy person or family establishes a PAF, they receive an immediate tax deduction for the amount they put in the fund. PAFs are a particularly useful tax-effective vehicle for individuals who have received a windfall, such as from a business sale, because they can leave the money in the fund and distribute it in years to come, rather than having to decide and do it immediately. PAFs are also appealing to a new generation of philanthropists, who want to have more say over how their money is spent.
“One of the reasons we targeted them was that we can see that segment of philanthropy is growing in a big way,” says Klupacs. “We’re seeing a lot of people wanting to make a much bigger impact.”
Donors, many of them entrepreneurs, put the funding proposal “through the wringer” when they provide funds. The Bionics Institute is well-placed to appeal to this style of donor. Many universities and medical institutes are focused on discovery and knowledge generation, which can take a long time to translate into a clinical product — or even into a clinical concept.
“Where we’re different is that we’re very focused on taking these product concepts and moving them as fast as we can into the clinic to see whether they have the potential to work and be commercialisable,” says Klupacs. “Because in the end, we have a very strong philosophy that the reason we do what we do is because we want patients to benefit.”
As much as the institute is pleased to receive one-off donations, it also needs guaranteed longer- term funding to support specific projects, which can take several years. The institute believed it could achieve this by receiving loans from PAFs and sought an Australian Taxation Office (ATO) ruling to help it do so.
The ATO arrangement
In a 2022 ruling, the ATO determined that when a PAF makes a loan to an NFP, the difference between the interest it charges the NFP and a commercial rate of interest is counted as a donation. Additionally, if the PAF forgives the loan, then the loan is also counted as a donation. This is important because PAFs must distribute at least five per cent of the market value of the fund’s net assets each year.
The ATO also ruled that PAFs can accept another consideration aside from cash when the loan is repaid. It means that as an alternative to forgiving a loan at the end of the term, PAFs have the option of taking equity in the commercial spin-off their money has supported, should one eventuate.
This appeals to many PAF trustees, says Klupacs. “A lot of them, because they’re entrepreneurial, love to invest directly in early-stage companies. But they know they’re very high-risk. Our model allows the charitable structure to donate to an area of work that could be translatable, which could lead to something that’s investable.”
The institute expects that most loans made through a PAF structure are forgiven — or if they are converted into an equity stake in a startup, it hopes that the PAF would recycle some of the gains from a successful startup back through the institute to support other projects.
There’s another incentive for the PAF trustees to donate. The trustees have the opportunity to invest their own personal funds alongside the investment by their PAF. Typically, by this stage, the trustees have already gained a good understanding of the nascent commercial venture, thanks to six-monthly updates to the PAF and their interactions with the PAF.
“As entrepreneurs, they can see an opportunity that might come about because of what they’ve done,” says Klupacs. “It gives them a chance to be more involved, to learn more about it and get to know the people. One way of looking at it is as a lengthy due-diligence process.”
Delivering donations
The institute has changed its approach to seeking donations following the ATO ruling. It is working to progress some of its projects to take them closer to commercialisation so the institute can say to potential donors, “Look, we’ve got an early-stage program, but if we can incubate it further, it is highly likely to be commercialisable”.
“The last thing we want to do is necessarily have a loan agreement from the PAFs for something that’s really interesting, but is not going to lead to a product,” says Klupacs. “We want to make sure we can put projects up for this type of funding that are likely to play to the strengths of it.”
The institute has already received one loan from a PAF for an Alzheimer’s project and has three other sufficiently advanced projects. Klupacs acknowledges that many of these projects will ultimately fail, as this is the nature of early-stage commercialisation, but he hopes that with support from PAFs and wealthy individuals, some will get additional funding or list on the stock exchange, thus allowing the institute to exit and recycle the proceeds for other projects.
Bionics Institute board member Michael Coleman FAICDLife notes that PAFs are particularly useful for those charities aiming for a specific outcome. “This is a very innovative structure,” he says. “I don’t know that anybody else has used it [as convertible donations]. Unless you’re anticipating an outcome — something that is commercialisable — then it’s probably just a convenient source of longer-term funding and perhaps a way of encouraging your donors to have a longer vision when they’re putting the money into your charity.”
With their trustee-supervised structure, running a PAF is not dissimilar to running a self- managed super fund, says Michael Hutton, a wealth management partner at HLB Mann Judd in Sydney.
“It’s not something to be feared as a great unknown,” he says, adding that many people use PAFs as a vehicle for donating to charity while they’re still alive, rather than leaving bequests.
In the decade to FY21, donations to private ancillary funds grew from 15 per cent to 27 per cent of individual giving. Over that period PAFs have donated $11.4b and have distributed their funds at an average rate of eight per cent per year, according to Productivity Commission data.
This article first appeared under the headline 'Due Diligence Donors’ in the September 2024 issue of Company Director magazine.
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