ASX-listed pooled development funds offer investors tax benefits

Astute investors weigh up the pros and cons before putting their hard earned money behind a company, and what appeals to people who invest in pooled development funds (PDFs) is the availability of generous tax concessions.

PDFs raise capital and make equity investments in small and medium-sized (SMEs) enterprises after complying with a structure established under the Australian Government’s PDF Act, enacted in 1992.

Australia’s Federal Government introduced the PDF Act to increase the supply of capital to SMEs and to foster wider economic benefits.

As a means of incentivising investment, Australian policymakers also introduced tax advantages to compensate for the elevated risk of investing in SMEs.

The PDF program was closed to new registrations in June 2007, but existing registered funds continue to operate and invest in a wide range of small Australian companies.

Several ASX-listed PDFs that continue to operate, offer Australian investors access to small cap companies while also alleviating their tax burden, which encourages ongoing investment in grass-roots businesses.

From the perspective of the Australian government, PDFs are venture capital funds registered under the PDF Act.

Tax breaks

Companies with PDF status are taxed at 15% on their income and capital gains received from their investments. This compares favourably with the full company tax rate of 30% and the lower company tax rate of 27.5%.

The good news for shareholders is that capital gains after selling shares are exempt from tax. But there is a catch. Investors are not entitled to deductions or capital loss on the sale of their shares.

Australian residents receiving franked and unfranked dividends are also exempt from tax with shareholders including an option to use the imputation credits attached to the franked dividends to offset other tax obligations.

Another condition PDFs must abide by is a restriction on company size. PDFs must invest in Australian companies with a market capitalisation of less than A$50 million.

The investee company must have issued shares for the purpose of raising capital to establish a new business, or to substantially expand production capacity, services, and/or its markets.

These investee SME companies are in the formative stages of development – a critical time for any company which can often make or break their future performance.

The idea is that by alleviating some of their challenges and encouraging the provision of investor funding, such companies can be given a solid foundation to become larger and create wider economic benefits for Australia.

As an indication of market direction and to prevent undesirable market imbalances, PDFs cannot invest in companies working in the retail sector or within property development – clearly, the Australian property market has enough support and doesn’t need any more.

A further condition levied upon PDFs is that they must buy at least 10% of a company’s shares if deciding to take a stake in a particular company, but cannot invest more than 30% of its committed capital into a single company.

PDFs trading on the ASX

For investors looking to invest in SMEs and potentially secure some tax breaks, PDFs currently trading on the securities exchange include:

Authorised Investment Fund (ASX: AIY)

Authorised Investment Fund invests in innovative SMEs which it deems as having a high potential for growth.

In recent months, AIY has been vocal about maintaining an industry-agnostic outlook and has thereby taken a wide spectrum of investments in a range of companies working within marketing, media, renewable energy and cosmetics, via its 30% stake in Aenea Cosmetics.

Aenea offers customers a full range of epigenetic skin care products which it has managed to monetise via a host of celebrities and a loyal following of engaged social media followers.

Given the fact that AIY’s investment mandate covers a wide spectrum of industries including digital, medical and cyber technology, the company is seeking to target high-growth industries that capture high multiples of future consumer spending.

Its cornerstone investments include a soon-to-be 30% stake in Asian Integrated Media (AIM) after buying into 25% in April this year.

AIM is global media representation company with a “programmatic advertising division” that commercialises a market niche that’s currently undergoing a strong rate of growth – backed by a consistent move towards mobile-centric content and digital marketing.

AIM’s other market interest is its agreement with the world’s leading Formula One sponsorship and content rights management group, Grand Prix Management Group (GPMG Media). Formula 1 racing is rapidly attracting a growing audience in China with more than 200 million F1 fans in China alone.

Via its holding, the AIY has a significant influence on AIM’s activities.

AIY also has an interest in Box Digital Media which publishes luxury lifestyle magazine’s targeting affluent and discerning consumers with a preference for premium lifestyle products but also a strong sense of social and ethical responsibility.

In addition, AIY holds a stake in NSX-listed company Endless Solar, gaining exposure to the renewable energy market.

Acrux Limited (ASX: ACR)

First and foremost, Acrux is a pharmaceutical company that develops topical pharmaceuticals for human skin.

Acrux was incorporated 20 years ago in 1998 and secured its first US patent in 2001. The company became veterinary licensed to Elanco including its transdermal solution product Recuvyra in 2003 and listed on the ASX a year later in 2004.

To date, Acrux has successfully developed, licensed and commercialised a number of topically-applied pharmaceutical products in the US and Europe.

Going forward, Acrux plans to develop a range of generic products for the US market by leveraging its on-site laboratories, GMP manufacturing suite, clinical and commercial experience to bring affordable products to market.

Despite its pharma background, Acrux is also registered as a PDF under the Pooled Development Fund Act 1992.

MEC Resources (ASX: MMR)

MEC Resources is an exploration company seeking energy and mineral discoveries in the form of oil, uranium, nickel, iron ore and gold.

The company offers investors the opportunity to secure equity in companies exploring for large energy and mineral discoveries – with a specific focus on emergent companies that have the potential to yield significant returns by advancing discoveries into production.

MEC also considers other monetisation strategies including IPOs joint ventures and/or acquisitions.

The company’s PDF status means that most MEC shareholders are within their rights to receive tax-free capital gains on their shares and tax-free dividends.

Strategic Elements (ASX: SOR)

Strategic Elements is advancing its in-house developed “printable nanocube memory ink” to facilitate a revolutionary memory technology that can be printed onto a variety of surfaces while remaining flexible and transparent.

Its chosen tech field targets the global multi-billion dollar printed electronics market with the potential of enabling large amounts of data to be stored and retrieved in printed electronic circuits, for use in advanced computing applications and improving data storage capabilities.

Strategic is focused on Australian SMEs, technology and resources with an admitted goal of creating tax-free ASX-listed capital gains.

The company is working with the University of New South Wales and has attracted two other significant development partners – CSIRO and VTT Finland – both world leaders in their prospective fields.

Also, Strategic is involved in the Printocent collaborative working group that contains large global companies in printed electronics, such as Nokia, Merck and BASF.

BTC Health (ASX: BTC)

BTC Health is an Australian speciality biopharmaceutical company, providing partnering, product development and commercialisation capabilities to its series of partners across the Asia-Pacific region.

The company is dedicated to assisting its partners through the final stages of product development, regulatory submissions, reimbursement, distribution and post-marketing compliance.

BTC says it can combine big company expertise with the entrepreneurial flair that only a small company can offer.

The biotech company is actively seeking new investment opportunities in entities operating in the biotechnology life-science sectors and attracts new investment in part due to its PDF status, which offers shareholders access to various tax concessions.

Generation Development Group (ASX: GDG)

Formerly known as Austock Group, Generation Development Group provides what it calls “smart and innovative tax-effective investment solutions”.

The group’s Generation Life unit is a specialist provider of investment bond product solutions having established Australia’s first flexible investment bond product over 15 years ago. 

In parallel, Generation Development Group operates Austock Financial Services which provides administrative services, including unit pricing, fund valuation, investment and fund accounting, fund administration and business registry services.

Currently, Austock operates as a registered PDF and offers development capital to financial sector businesses. Its status as a PDF provides favourable tax benefits to the group and its shareholders.