Bathing in a tax-free pool

Investors in four ASX companies will never have to pay tax on their gains … and it’s all legal.

PORTFOLIO POINT: Listed Pooled Development Funds receive special capital gains tax-free concessions from the federal government. Here’s four companies that are “Canberra beaters”.

Those who occasionally like to play the speculative end (or “dare-devil” may be more appropriate in this case) of the ASX, may be familiar with names such as Acrux Limited (ACR), Authorised Investment Fund (AIY), Biotech Capital Limited (BTC) and Mec Resources (MMR).

Then again, these four ASX-listed companies hardly receive any coverage from the marketplace, so don’t be too disheartened if you haven’t.

Of the four companies, Acrux is by far the most well-known. It has successfully taken its product Axiron to the market – a testosterone supplement for men whereby the substance is applied by spraying under your armpit in the same fashion that you would apply deodorant to yourself each morning. Amazing!

If technology such as this doesn’t get you excited, then I’m not sure what will. Perhaps making a tax saving is more to your liking? If so, I encourage you to read on.

These four companies are truly “Canberra beaters”, as their shareholders will never pay any capital gains tax nor will they ever pay any tax on dividends or distributions that come their way. Vanilla investments, with a positive twist. And a brilliant one at that.

So, how is this all possible?

Well, 20 years ago the federal government announced a new package aimed at promoting activity within the venture capital sector. The initiative was labelled the “Pooled Development Fund” (PDF) program, with ACR, AIY, BTC and MMR being the only current ASX companies that can claim this illustrious status.

PDFs and their shareholders receive these tax concessions due to the fact that investing in Australian small and medium-sized enterprises are of a much more speculative nature – it is thought that the tax benefits received are an adequate offset for the higher risk inherited.

The PDFs raise capital and make equity investments in SMEs with the aim of increasing the supply of capital to the growing Australian SMEs.

What investments are eligible?

Eligible investments in a PDF are SMEs with total assets of not more than $50 million, and these investments are made by acquiring newly issued shares.

There is a strict condition placed on the investment and that is PDFs may only invest in SMEs where its primary activities do not involve retail operations or property development.

In addition, the investee company must raise capital with the intentions of:

  • Establishing a new business activity;
  • Substantially expanding production capacity or services; or
  • Expanding or developing markets.

But, if you are thinking about registering your new venture, unfortunately the PDF registration is no longer available. The good news is though that funds already registered as PDFs will continue to operate and invest in small Australian companies.

So, how realistic is it to profit from investing into a PDF?

Obviously, the intention here is not to make you go out and purchase ACR, AIY, BTC and MMR on the market.

The purpose of this is to simply demonstrate to you that there are a range of investments out in the market that, whilst they appear to have quite “normal” characteristics; they may in fact not.

As far as a working example goes, let’s take a look at Acrux.

If you had purchased the stock at the end of 2008, firstly, let me point out just how brave you are; and secondly, you could have picked up the stock for 32 cents per share. It then reached a high of $4.77 just over a month ago, which is almost 15-times your original investment (this is, of course, if you managed to get in at the bottom and sell at the top).

However, whatever profit you have made from the stock is entirely yours to keep and completely tax-free. There was also a 60 cent debut dividend declared in March 2011 and, at the time, this equated to a yield of about 15% (tax-free)!

Simon Bridgland is an associate advisor at Lachlan Partners, publisher of The Investing Times newsletter. This article is an extract from the August 2012 edition.

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