Winning $10m in the X Lotto
Imagine winning $10 million in the X Lotto! Beyond the excitement, managing this windfall wisely is crucial. As a financial planner in this magical hypothetical world, we suggest a Private Ancillary Fund (PAF) to save on taxes while supporting charities you care about.
Here’s how a $10 million winner can use a PAF, including a potential amount to donate.
What’s a PAF?
A PAF is like your own charity account. You put money or assets (like shares) into it, then choose which charities get donations over time. It’s approved by the Australian Taxation Office (ATO) and offers tax perks:
- Tax break: Money you donate to a PAF lowers your taxable income that year, but you can’t carry the deduction to future years.
- Tax-free growth: Profits from investments in the PAF aren’t taxed, so your charity fund grows faster.
- No tax on donated assets: Donating shares or property avoids capital gains tax, keeping more for charity.
You decide which ATO-approved charities, like local schools or medical research, get the funds.
Your $10 Million Plan
Suppose you earn $150,000 a year before the win. The $10 million is tax-free, but investment earnings are taxable. You want to secure your future and give back. First, plan your needs:
- Emergency fund: $50,000 for six months of expenses.
- Home or debt: $1.5 million for a house or mortgage.
- Retirement: $4 million to generate income.
- Lifestyle: $1 million for travel or fun.
This leaves $3.45 million for a PAF or other uses.
Using a PAF
A $2 million PAF is a good choice:
- Tax savings: A $2 million donation reduces taxes in the year you donate. If your investments earn $320,000 a year (4% on $8 million), this deduction can offset that tax, but you need enough income that year. Splitting it into $1 million over two years may help.
- Charity impact: A PAF must give 5% yearly ($100,000 for $2 million), supporting causes like community programs.
- Growth: At 5% growth, $2 million becomes $3.25 million in 10 years, tax-free.
Getting Started
Set up a PAF with a financial planner and lawyer, register with the ATO, and choose investments and charities. A $2 million PAF balances tax savings, giving, and personal goals. Contact us to make your win count!
Sam Martin CFP®
Authorised Representative (No 252676)
