The return of the pooled development fund

Melbourne-based boutique fund manager Intrinsic Investment Management has launched an agribusiness pooled development fund (PDF) to invest in the timber industry.

A PDF is a company designed to invest in small to medium-sized enterprises, and because of that it receives special tax concessions.

The tax concession for a PDF happens at two levels, says Intrinsic managing director Glenn Woolley.

“The company (the PDF) is taxed at 15 per cent on the income and capital gains it receives from the investments,” he says. “The fund can frank its dividends and pass on the franking credits at 30 per cent.”

Shareholders in the PDF pay no capital gains tax on the value of their shares. They can also include PDF dividends as assessable income if they want, Woolley says.

“This means it is an ideal tax-planning product and banks, life insurance and superannuation funds are able to claim back capital gains tax paid on their behalf by the PDF,” he says. “Overseas investors do not have to pay dividend withholding tax.”

To receive these tax credits a PDF invests at least 65 per cent of its capital in Australian companies within five years, but not more than 30 per cent of its capital in one business.

Individual shareholders in the PDF can only hold up to 30 per cent of the equity, but banks, life companies and superannuation are exempt from the limit.

A PDF cannot invest in retail or property development and must make investments in companies with assets of $50 million or less. The minimum investment in a company is 10 per cent of the business’ capital.

“PDFs are the lowest-taxed equity investment vehicle available,” Woolley says. “For some investors, they will be 94 per cent better off using a PDF rather than an ordinary business.”

The types of investors who will benefit with a 94 per cent return are those on a 47 per cent tax rate and with the PDF paying unfranked dividends.

An investor on the 30 per cent tax rate would get a 46 per cent return on franked dividends, while a self-managed superannuation fund would achieve a 17.6 per cent return.

The agribusiness PDF being launched by Intrinsic will invest in small to medium-sized enterprises operating in timber and forestry products. The PlantationTimberBank Australia PDF plans to raise $30 million with a minimum investment of $5,000. Potential investments by the PDF include a firewood business, pine plantations and timber mills.

Specialist advice on potential timber investments for the PDF are being made by the Plantations Timber Group. This Mount Gambier-based company was founded in 1867 and has specialised in agribusiness investment and operations in the area. It manages tree plantations for a number of international investors including Mitsui, Nippon Paper and Weyerhauser. Returns for the timber PDF area expected to be between 12 and 14 per cent, Woolley says.

“Adding timber assets to a balanced portfolio adds about 2 per cent to returns while reducing volatility by 6 per cent,” he says. “This is not a managed investment scheme and when the business model is right, we will upscale the PDF.”

The PlantationTimberBank Australia fund has been given a three star rating by researcherAustralian Agribusiness Group.