The Pooled Development Funds (PDF) program is a Federal Government initiative which provides tax advantages to registered venture capital funds investing in early stage businesses. The funds pay a reduced rate of tax (15%) on the income and capital gains received from their investments.

Shareholders in a PDF are also exempt from tax on both their income (dividends) and gains, provided certain requirements are met. However, deductions are not able to be claimed in the event of a capital loss.

The tax treatment is unique and reasonably complicated, and should be understood fully before choosing to invest. Of course, no investment should ever be made on the basis of tax treatment alone, and each investment needs to be considered on its own merits.

The program is now closed to new registrations and has been replaced by other incentives. There are currently 25 registered PDFs remaining. Of these, 6 are listed on the ASX.

Acrux Limited (ASX: ACR) undertakes pharmaceutical research and development.

Acrux’s current focus is the commercialisation of topical products for drug delivery using technology developed at Monash University. Its key product, Axiron, used for testosterone replacement therapy, was a strong performer but has suffered from falling sales following increased requirements from the US Food and Drug Administration (FDA).

Shares have fallen dramatically from highs of near $4.50 in 2012 to 78 cents currently. However, product sales appear to be stabilising, and the tax-free dividends are starting to look attractive.

Acrux has a market capitalisation of around $130 million.

Austock Group Limited (ASX: ACK) focuses on the financial sector. It has a wholly owned investee entity (Austock Life) which specialise in insurance bonds and has over $600 million in funds under management.

Austock also holds a key investment in a company providing fund administration and accounting services.

With a market capitalisation of around $51 million, shares are up 13% in the last 12 months to 50 cents. Austock has a trailing dividend yield of 4%.

Authorised Investment Fund Limited (ASX: AIY) has a market capitalisation of just over $4 million. Shares have been volatile and thinly traded in recent years.

Authorised recently announced new consultants to the company to work on projects including battery technology, wireless communications and a smartphone screen innovation.

It is too early to assess the likelihood of success for any of these projects, and I consider Authorised sits at the highest end of the risk spectrum.

BioTech Capital Limited (ASX: BTC) focuses on investments in biotechnology and life sciences.

The fund currently holds investments in Biointelect, which offers consulting services to the biopharmaceutical industry, and Sensear, which manufactures specialised communications headsets for industrial use.

BioTech Capital has a market capitalisation of $14 million. Shares are up 30% in the last year and are trading at 13 cents – a long way above the valuation of its underlying investments of 2.96 cents per share.

MEC Resources Limited (ASX: MMR) currently holds a key investment in Advent Energy, an oil and gas exploration company with an offshore gas project near Sydney.

MEC has a market capitalisation of $6.5 million. Shares are down nearly 80% in the last 5 years but have staged a recovery of 95% in the last 12 months.

Strategic Elements Ltd (ASX: SOR) owns 100% of Australian Advanced Materials, which is developing memory technology for electronics.

Strategic also intends to work with researchers to develop additional technologies relating to printed electronics.

Strategic has a market capitalisation of around $30 million. Shares are relatively unchanged in the last year.

Foolish takeaway

Despite the attractive tax benefits on offer when investing in PDFs, early stage businesses come with a high degree of risk. In addition, these funds do not appear to be well diversified – generally, a venture capital fund would be expected to have this risk spread across at least 10 or more investments.

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Motley Fool contributor Matthew Bugden has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.