Pooled Development Funds

This information is general in nature only and provides only broad guidelines of the nature of Pooled Development Funds (PDFs) and how they are treated for tax purposes.  Should an account have an investment in such a fund, it is recommended that independent taxation advice be sought to confirm the appropriate tax treatment.

PDFs are special types of investment companies, which can only invest into businesses that meet specific criteria. The structure was first established as a result of a government initiative in 1992 to encourage investment into small to medium sized businesses in Australia. In order to be attractive to investors, various tax concessions may be available to investors in PDFs.

To determine whether or not an investment is classified as a PDF, investors should check the PDF classification list which is published on the Australian Securities Exchange (ASX) website.

A PDF can invest in shares of Australian companies which have a capitalisation of less than $50 million. These investee companies are referred to as small to medium enterprises (SMEs) and are normally in the formative stage of development. The investee company must have issued the shares in itself for the purpose of raising capital to:

  • establish a new business activity
  • substantially expand production capacity or services; and/or
  • expand or develop markets.

PDFs cannot invest into retail or real estate businesses. A PDF must purchase at least 10% of a company's shares but cannot invest more than 30% of its committed capital into a single company.

The taxable component of a PDF is divided into two components:

  1. SME taxable component
    • This component is taxed at 15% and represents the SME assessable income derived by the PDF less any allowable deductions the PDF may incur (i.e. the allowable deductions are referable to both the SME and unregulated investment income components).
    • SME income broadly represents the income and capital gains derived from the disposal of the PDF’s SME assets.
  2. Unregulated investment component
    • This component is taxed at 25% and represents the difference between total assessable income of the PDF and the SME taxable component.
    • This component may comprise management fees and any interest earned by the PDF for the year.

When a company registers as a PDF during an income year, it is taxed as a company up to the day that it becomes a PDF. From that day onwards it is taxed as a PDF.

Where a company ceases to be a PDF during an income year, it is taxed as an ordinary company for the whole of the year.

No. Where a company ceases to be a PDF, the shares in the PDF are deemed to have been disposed of immediately before it ceases to be a PDF and reacquired immediately for market value. Any gain made, or loss incurred, on the deemed disposal is disregarded for tax purposes.

A PDF may distribute franked or unfranked dividends during an income year.  Note that although a PDF only pays tax at a rate of 15% on its SME income and 25% on its unregulated investment income, PDFs may frank a distribution up to the general corporate rate of 30%.  This enables a PDF to pass on a greater franking benefit to their investors.

  • Unfranked dividends are tax exempt for an investor.
  • Franked dividends are also exempt for an investor unless the investor makes an election to treat the franked dividend as assessable. In making this election the investor is also able to claim any franking credits.

Where the income of a PDF is treated as wholly exempt, any expenses incurred in deriving PDF income will be non-deductible. Conversely, if the investor has made an election to treat any franked dividend income derived through a PDF as assessable, the investor may be able to claim any expenses incurred in relation to the franked income as an allowable deduction. In this case, the investor will be required to apportion the expenses incurred between the assessable and exempt income.

Any capital gains (or capital losses) derived (or incurred) by a taxpayer from selling their shares in a PDF are disregarded.

For non-resident investors, unfranked dividends paid by a PDF are exempt from WHT.  Note that WHT is not required to be deducted from franked dividends paid to non-resident investors.

For resident investors, Tax File Number (TFN) WHT may be deducted where an Australian resident has not provided a TFN.

We have elected to treat any franked dividends paid by a PDF as assessable income. The Tax Report – Detailed discloses the franked amount of the dividends distributed in the Listed Securities section.