Flow through tax incentives to encourage investment in venture capital funds

Pooled Development Funds (PDFs) raise capital and make equity investments in Australian small and medium-sized enterprises. Registration is no longer available. Funds registered under the PDF programme will continue to operate and invest in small Australian companies.

The aim of the Pooled Development Funds programme is to increase the supply of capital to Australian small and medium-size enterprises (SMEs).

PDFs are venture capital funds registered under the Pooled Development Funds Act 1992

PDFs and their shareholders receive tax benefits on the income derived from their equity investments. This is to help compensate for the higher risk of investing in SMEs.

PDFs will be taxed at 15% on the income and gains derived from equity investments in Australian SMEs. Shareholders are exempt from tax on the income and gains derived from holding and disposing of PDF shares.

The extent of the above tax benefits depends upon a number of factors. PDFs and their shareholders should seek professional tax advice.

What are the eligibility criteria?

Fund managers of a PDF can make eligible investments by acquiring newly-issued shares in SMEs with total assets of not more than $50 million.

The investee company must have issued shares to raise capital to:

• establish a new business activity
• substantially expand production capacity or services
• expand or develop markets

While a PDF holds an investment, it can enter into the following transactions with the investee company:

• acquiring non-transferable options to buy shares
• lending money
• charging management fees

A PDF can't invest in companies whose primary activities are either:

• retail operations
• property development