How pooled development funds (PDFs) are taxed
A PDF is a company that is registered as a PDF and provides development capital to small and medium sized companies. The PDF regime was closed to new applications for registration as a PDF from 21 June 2007.
If a company was registered as a PDF part way through an income year and is still a PDF at the end of the income year, it is taxed as a PDF for the period from the date of registration to the end of the income year as if that period were an income year. The taxable income in the pre-PDF period is taxed at the rate of 30%.
If a company ceases to be a PDF part way through an income year, it is taxed as an ordinary company for the whole year; that is, taxable income is taxed at the rate of 30% (or 27.5% if it is a base rate entity).
The SME income component of the PDF’s taxable income is taxed at the rate of 15%. The SME component is the company’s SME assessable income less any deductions allowable to the company for the year, whether they relate to SME assessable income or not. If the available deductions exceed the amount of SME assessable income, the excess may be applied against the unregulated investment component of the company’s taxable income.
SME assessable income is income derived from, or from the disposal of, an SME investment and includes amounts that would otherwise be capital gains. An SME investment is not an unregulated investment which is an investment by way of a loan to, deposit with or debenture of a bank, or a deposit with an authorised money market dealer.
The unregulated investment component of the PDF’s taxable income is worked out by deducting the company’s SME income component from its taxable income for the year. The amount (if any) remaining is the company’s unregulated investment component. The unregulated investment component is taxed at the rate of 25%.
Imputation
PDFs generate franking credits in the same way as other companies, mainly from the payment of income tax and from the receipt of franked distributions. The franking credit that arises is the tax paid (at the relevant rate applicable to the taxable income of PDFs, not at the company tax rate).
PDFs make franked distributions in the same manner as other companies.
The PDF obtains venture capital credits from the payment of income tax reasonably attributable to capital gains from venture capital investments; that is, SME investments made in accordance with the Pooled Development Funds Act 1992. If a PDF keeps a record of its venture capital sub-account, it can make distributions franked with venture capital credits.
If a PDF over-distributes venture capital credits during the income year, it incurs a liability to venture capital deficit tax.
Tax offset for franking credits
A PDF that receives a franked distribution must include the distribution and the franking credit attached to the distribution in its assessable income. The PDF is then entitled to a tax offset equal to the amount of franking credits included in its assessable income. This is the gross-up and tax offset rule.
Losses
Deductions for PDF tax losses are allowable only in an income year in which the company is a PDF throughout that income year.
PDF tax losses cannot be transferred to other companies in the same group.
Non-PDF tax losses incurred before the company became a PDF that are not recouped while the company is a PDF continue to be deductible after the company ceases to be a PDF.
Capital losses incurred while the company is a PDF are not deductible from capital gains accruing to the company after it ceases to be a PDF.
How PDF shareholders are taxed
Unfranked PDF distributions and the unfranked part of a franked distribution are exempt from tax.
The franked part of a PDF distribution is also exempt from income tax unless the shareholder elects to be taxed on it. The election is made by including the distribution (and franking credit) in assessable income. The election will apply to all franked PDF distributions derived during the income year. A corporate shareholder who receives a franked PDF distribution and who elects to include the distribution in assessable income will receive a franking credit equal to the franking credit attached to the distribution.
Special rules apply to PDF distributions franked with venture capital credits that are paid to complying superannuation funds, pooled superannuation trusts and like entities. Such entities are also entitled to a venture capital tax offset and the relevant part of the distribution is also exempt income.
The costs associated with borrowing to purchase PDF shares are not deductible to the extent the distributions are exempt from tax.
Non-resident PDF shareholders are exempt from withholding tax on PDF distributions.
PDF shares are not trading stock.
Income from selling shares in a company that is a PDF at the time of sale is exempt from income tax. Any capital gains or capital losses from the disposal of PDF shares are disregarded.