That will donate 0.5% to the author and will collect 0.5% fee for you.
An important thing to remember is that the way it works is a % of shares founds, not a % of the bitcoin paid by those shares. So each share has a 1% chance of going towards the fee+donation. 99% of the shares are paid totally to you. If you run a public node with 1% in fee+donation, you might not see anything happening at first.
My hope is that one day if there's ever another major p2pool version released with mandatory upgrade, that forrest adds support for the donation (and fee?) to appear right with the share data in the blockchain. Thus if you are 1% donation, and a block is found, 1% of that share's pay goes to forrest and 99% to the share's owner. This smooths it out so you don't randomly lose a share (which you might only be finding once a day as small miner), and provides less variance to miners, pool operators, and forrest himself.
Great point roy7, and it's worth repeating. When you charge a fee and/or donate to the author, the percentage you set is translated into a percentage chance that your found share will in fact be credited to the author's BTC address or your node's BTC address.
Imagine you're only finding a share a day, and the share you found was the one the node used for a fee/donation.