Believe it or not, there are a handful of shares that you can still buy today on the ASX that are exempt from tax when you finally sell them. I'm talking about ASX-listed pooled development fund (PDF) companies, which, despite their attractiveness, still tend to fly under the radar of most investors.
First, the history lesson: the PDF program was launched by the Paul Keating government in 1992 to help increase the supply of capital to small and medium-sized (SMEs) enterprises, based on certain criteria. A PDF raises capital and makes equity investments in SMEs and under the program, pooled development funds were offered generous tax concessions. While the PDF program has been closed to new registrations since 2007, existing registered funds continue to operate, and as such continue to have PDF status for tax purposes.
What are the tax breaks?
Buy one or more of these ASX PDF shares, and you'll receive a double-whammy in tax benefits.
Firstly, companies with PDF status are taxed at 15% on their income and capital gains received from their investments. By comparison, the full company tax rate sits at 30% and the lower company tax rate is 27.5%.
Secondly (and more importantly), as a shareholder in an ASX-listed PDF, you're exempt from the capital gains tax after selling. Assuming you're an Australian resident, you'll also receive franked and unfranked dividends that are also exempt from tax. There's also the option to use the imputation credits attached to the franked dividends to offset other tax obligations.
However, the benefit doesn't come without a potential downside, which is that you're not entitled to deductions or capital loss on the sale of these shares.
PDFs trading on the ASX
If you like the idea of investing in Australian SMEs, while also locking in some future tax breaks, here's a closer look at the 6 PDF shares trading on the ASX.
Authorised Investment Fund (ASX: AIY)
AIY invests in innovative SMEs within high-growth industries that capture the multiples of future consumer spending. For example, it has a 30% stake in Aenea Cosmetics, which offers customers a full range of epigenetic skin care products, and a 30% stake in global media representation company Asian Integrated Media.
AIY also owns a stake in NSX-listed company, Endless Solar, which has exposure to the renewable energy market.
While the company is currently suspended from trading pending its responses to an ASX enquiry, at 3 cents per share the last trade is undervalued relative to Morningstar's fair valuation of 4 cents.
MEC Resources (ASX: MMR)
This exploration company offers investors the opportunity to secure equity in companies exploring for large energy and mineral discoveries like oil, uranium, nickel, iron ore and gold. Its primary focus is on companies with the potential to yield significant returns by advancing their discoveries into production.
The company has called for a voluntary suspension of trading until 17 July pending a meeting of shareholders to effect an in-specie distribution of the Advent Energy shares that it holds. At 0.4 cents the stock is currently trading a discount to Morningstar's fair value of 1 cent per share.
Strategic Elements Ltd (ASX: SOR)
Strategic Elements is advancing its in-house developed 'printable nanocube memory ink', which hopes to revolutionise the ability to print onto multiple surfaces, while remaining flexible and transparent. Its chosen tech field targets the global multi-billion dollar printed electronics market for use in advanced computing applications and improving data storage capabilities.
The company is also working with the University of New South Wales and has attracted 2 other significant development partners – CSIRO and VTT Finland – both world leaders in their prospective fields. Strategic Elements is also involved in a collaborative working group called PrintoCent, which includes large global companies in printed electronics, such as Nokia, Merck and BASF.
Its subsidiary Stealth Technologies is developing technologies to help vehicles to drive autonomously, and do physical tasks with robotics.
BTC Health Ltd (ASX: BTC)
This Australian specialty biopharmaceutical company provides partnering, product development and commercialisation capabilities to partners across the Asia-Pacific. It's dedicated to assisting these partners through the final stages of product development, regulatory submissions, reimbursement, distribution and post-marketing compliance and is actively seeking new investment opportunities in the biotechnology life-science sectors.
Demand for BTC's specialty health products reduced significantly following the cancellation of category two and three elective surgeries by the Australian Government on 25 March. As a result, the share price was heavily sold-off in February, and at 9.5 cents per share, it remains significantly undervalued relative to Morningstar's fair value of 13 cents.
I expect the full resumption of elective surgery to be reflected in the share price – sooner or later.
Generation Development Group Ltd (ASX: GDG)
Formerly known as Austock Group, Generation Development Group is a specialist provider of investment bond product solutions. The group established Australia's first flexible investment bond product over 15 years ago.
Generation Development Group also operates Austock Financial Services, which provides administrative services, including unit pricing, fund valuation, investment and fund accounting, fund administration and business registry services.
The stock currently trades for 76 cents, slightly higher than Morningstar's fair valuation of 66 cents.
Acrux Limited (ASX: ACR)
Acrux listed in 2004 as a biotech share dedicated to developing and commercialising topical pharmaceuticals. Its early claim to fame was as the provider of roll-on testosterone, but its fortunes deteriorated when the US Food and Drug Administration (FDA) linked testosterone drugs to heart failure and strokes.
Since then, Acrux has focused on developing a pipeline of 10 topical generic drugs, and currently has 3 pharmaceutical products approved and marketed. The Acrux share price surged by as much as 62.96% in late May 2020, following revelations it has entered into an exclusive sales, marketing and distribution agreement with US-based private company TruPharma.
What I think is appealing is TruPharma's proven track-record of building niche product portfolios and getting difficult products FDA-approved and into the market. Subject to approval by the FDA, TruPharma will be responsible for the commercialisation of 6 existing products from the Acrux pipeline.
