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Pooled Development Funds Amendment Bill 1994



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House: Senate

Portfolio: Industry, Science and Technology

Commencement: 1 July 1994

Purpose

The provisions of this Bill give effect to changes to Pooled Development Funds announced in the Prime Minister's February 1992 One Nation Statement. The major amendments will increase the total asset limit of companies in which a Pooled Development Fund may invest, remove the restriction that Pooled Development Funds must not invest more than 5% of their capital in start- up enterprises, and

increase the level of Pooled Development Fund funds that must be invested in investee companies.

Background

The Pooled Development Funds Act 1992 (the Principal Act) gave effect to initiatives announced in the Prime Minister's February 1992 One Nation Statement. 1 The Principal Act has two objects. First, to establish a scheme under which companies and their shareholders can qualify for certain tax concessions. Secondly, to encourage the provision of funds to small and medium sized Australian companies. 2

Under the Principal Act, eligible corporations may be registered as Pooled Development Funds (PDFs) to provide funds to corporations with assets not exceeding $30 million. To qualify as a PDF a company has to comply with a number of criteria, including that it be incorporated will implement a capital- raising plan and an investment plan. 3 The Principal Act requires a PDF to believe that money it invests in a company will be used solely or principally for one or more of the following:

* establishing an eligible business;

* substantially expanding the production or supply capacity of an established eligible business; or

* substantially expanding existing markets, or developing substantial new markets, for goods or services supplied by an established eligible business. 4

PDF's receive concessional tax treatment. PDF's qualify for a concessional tax rate of 25%. Gains on the disposal of PDF shares are exempt from tax, as are unfranked dividends paid by a PDF and franked dividends unless the shareholder elects that they are to be taxed as dividends paid by an ordinary company.

The stated purpose of this Bill is to give effect to changes to operational rules applying to PDF's announced in the May 1994 Working Nation Statement. Announced in that Statement was:

* a reduction in the concessional tax rate for PDF's from 25% to 15% for income derived from investments in small and medium sized enterprises (Note: It is stated in the Second Reading that the Treasurer will be introducing legislation to give effect to this measure.);

* an increase from $30 million to $50 million in the total asset limit of companies in which a PDF may invest;

* the removal of the restriction that PDF's may not invest more than 5% of their capital in start- up enterprises;

* an increase from 20% to 30% in the proportion of raised capital that a PDF may invest in any one business; and

* the granting of a discretion to the PDF Registration Board to allow PDF's to invest in excess of the 30% limit in any one business;

* an increase in the limit on ownership in a PDF by investors, other than banks and life offices, from 20% to 30%. 5

The objective of the above changes is to encourage more long- term investment in small and medium sized enterprises. The stated reason for the above changes is that:

Past attempts to increase the provision of equity for SMEs (small and medium sized enterprises) have not proved to be sufficiently effective. In particular, the Pooled Development Funds (PDFs) have not been attractive to investors. 6

In addition, it is stated in the Second Reading Speech to this Bill that:

The Program has not had the anticipated impact on creating a pool of investment funds, as only $35 million has been raised by PDFs. This is because there is a view that the incentive available under the Program is not sufficient to compensate for the risk associated with this class of investment, and because some of the operational rules have been seen as being overly restrictive.

The sentiments expressed above have also been endorsed by the Chairperson of the PDF Registration Board. In the PDF Registration Board Annual Report 1992- 93 the Chairperson stated:

In fact, the PDFs have reported great difficulty in generating investor interest given the limited incentives that the Program offers. There is no incentive for superannuation funds to invest in a PDF and there has been a general lack of enthusiasm from banks and large corporations who obviously perceive the incentives to be insufficient.

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Main Provisions

Clause 4 will increase from $30 million to $50 million the total asset limit of companies in which a PDF may invest.

Clause 7 will increase from 20% to 30% the proportion of raised capital that a PDF may invest in any one business and provide the PDF Registration Board with a discretion to allow PDF's to invest in excess of the 30% limit. The PDF Registration Board is not to allow a PDF to invest in excess of the 30% limit where satisfied that the investment is connected with a scheme or proposed scheme to which Part IVA of the Income Tax Assessment Act 1936 applies or would apply. Part IVA of the Income Tax Assessment Act 1936 contains the general anti- avoidance provisions of the Act and applies to schemes entered into after 27 May 1981 with the sole or dominant purpose of obtaining a tax benefit.

Clause 8 provides that a PDF Registration Board approval for an investment must be given subject to a condition that, at the end of a specified period, the amounts paid on the shares in the investee company and amounts remaining unpaid on the shares, must not exceed 30% of the total of shareholders' funds of the PDF and amounts remaining unpaid on the issued shares in the PDF.

Failure by a PDF to comply with the above condition will attract a maximum penalty of $50 000 ( clause 10).

Clause 13 will remove the restriction that PDF's must not invest more than 5% of their capital in start- up enterprises.

Clause 16 will increase the limit on the level investor ownership in a PDF, other than banks and life offices, from 20% to 30%.

Clause 17 will increase from 50% to 65% the level of a PDF's funds that must be invested in investee companies within a prescribed period or five years.

Endnotes

1. See pp. 75- 77 and 192 and 193.

2. See section 3 of the Pooled Development Funds Act 1992.

3. See sections 10- 18 of the Pooled Development Funds Act 1992.

4. See section 21 of the Pooled Development Funds Act 1992.

5. Prime Minister, Working Nation - Policies and Programs, 4 May 1994, pp. 75, 169 and 224, and Minister for Industry, Science and Technology, Media Statements, 4 May 1994.

6. Prime Minister, Working Nation - Policies and Programs, 4 May 1994, p. 75.

7. Pooled Development Funds Program, Annual Report 1992- 93, p. iii.

Ian Ireland (Ph. 06 2772438)

Bills Digest Service 9 June 1994

Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1994.

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Published by the Department of the Parliamentary Library, 1994.