Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 11 - Minor amendment to the refundable film tax offset
Outline of chapter
11.1 Schedule 11 to this Bill amends both the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to allow revocation of provisional certificates issued under Division 10BA of the ITAA 1936 where no taxpayer has claimed a deduction under that Division in respect of the film.
Context of amendments
11.2 The refundable tax offset for large scale films, contained in Division 376 of the ITAA 1997, was introduced with effect from 4 September 2001. The offset applies at a rate of 12.5 per cent of qualifying Australian production expenditure on the film.
11.3 The Division 376 offset is designed to encourage large scale film productions to locate in Australia, and is aimed at providing greater economic, employment and skill development opportunities. Access to the offset can be denied for a number of reasons, including where a film project has a provisional Division 10BA certificate. Access is denied for holding a provisional Division 10BA certificate regardless of whether investors have accessed any Division 10BA benefits.
11.4 Division 10BA is a tax concession designed to encourage private investment in Australian film and television productions. Broadly, investors are entitled to a 100 per cent deduction for capital expenditure on Australian films in the year the expenditure is incurred. To be eligible under Division 10BA projects must be assessed and certified as a qualifying Australian film. The certification process is in two stages, provisional and final. Certification under Division 10BA is also required for Film Finance Corporation Australia Limited financial assistance.
11.5 This amendment addresses complications in industry practice. Film producers routinely seek provisional Division 10BA film certification as the first stage in raising funds for a film concept, without knowing whether or not a foreign studio will fund the project and that access to the Division 376 offset is to be sought. Therefore, where a film has a provisional Division 10BA certificate and is subsequently financed by a foreign studio, the film is unlikely to be eligible for a final Division 10BA certificate and is also excluded from the Division 376 offset.
Summary of new law
11.6 The amendments will provide for the revocation of provisional Division 10BA certificates for films where no taxpayer has claimed a Division 10BA tax deduction in respect of that film. Paragraph 376-5(2)(b) of the ITAA 1997 will also be amended to carve out provisional certificates so revoked from the general exclusion from access to the Division 376 offset for films with a provisional Division 10BA certificate.
11.7 The broad overall intent behind the film tax concessions is to preserve mutual exclusivity between the Division 376, Division 10BA and Division 10B concessions. Additionally, the intent is also to maintain mutual exclusivity between Film Finance Corporation Australia Limited funding and the Division 376 offset.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Allows revocation of provisional Division 10BA certificates where no taxpayer has claimed a deduction under Division 10BA in respect of the film. Effectively dormant provisional Division 10BA certificates may be revoked, allowing a film project to then apply for the Division 376 refundable film tax offset. | A film with a provisional Division 10BA certificate, whether or not the certificate has been utilised to claim a tax deduction, is denied access to the Division 376 offset. |
Detailed explanation of new law
11.8 The amendments will insert a new power for the Minister for the Arts and Sport (the Minister) to revoke provisional Division 10BA certificates [Schedule 11, item 1, subsection 124ZAB(6A) of the ITAA 1936]. Currently under section 124ZAB there are already existing powers of revocation.
11.9 The original applicant for the provisional Division 10BA certificate can apply to the Minister in the approved form for revocation of that certificate, provided they fulfil certain criteria. [Schedule 11, item 1, paragraph 124ZAB(6A)(a) of the ITAA 1936]
11.10 The original applicant for the provisional Division 10BA certificate must provide a statutory declaration to the Minister outlining compliance with a number of criteria in their application for revocation. [Schedule 11, item 1, paragraph 124ZAB(6A)(b) of the ITAA 1936]
11.11 The mandatory criteria contained in the statutory declaration required in order to qualify for revocation are that:
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- no taxpayer has claimed a deduction under Division 10BA of the ITAA 1936 in respect of the film;
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- a final certificate in respect of the film has not been issued under Division 10BA of the ITAA 1936;
- •
- a taxpayer intends to claim a tax offset under Division 376 of the ITAA 1997 in respect of the film; and
- •
- financial assistance has not been provided by the Film Finance Corporation Australia Limited in respect of the film.
[Schedule 11, item 1, subparagraphs 124zab(6a)(B)(i to iv) of the ITAA 1936]
11.12 Revocation of a certificate under subsection 124ZAB(6A) is designed to allow a person to claim the Division 376 offset in respect of the film. The original applicant for the provisional Division 10BA certificate must state in their statutory declaration that a taxpayer intends to claim the Division 376 offset. [Schedule 11, item 1, subparagraph 124ZAB(6A)(b)(iii) of the ITAA 1936]
11.13 A certificate that is revoked under subsection 124ZAB(6A) is taken never to have been in force. [Schedule 11, item 1, subsection 124ZAB(6A) of the ITAA 1936]
11.14 Where, for whatever reason, both a Division 10BA claim and a claim under Division 376 for a film is made, then the Division 10BA claim will be denied first. As a revoked provisional Division 10BA certificate is taken never to have been in force, notwithstanding the truth of claims made in the mandatory statutory declaration, any deductions actually claimed under Division 10BA in relation to a film can be disallowed. [Schedule 11, item 1, subparagraph 124ZAB(6A)(b)(i) of the ITAA 1936]
Example 11.1
A producer, Alan Smithee, applies in good faith for revocation of his provisional Division 10BA certificate in relation to his dormant film project 'A Sunday Folly'. Having carefully canvassed initial investors as to whether they had claimed a Division 10BA deduction, he then signs a statutory declaration in order to revoke the certificate. This declaration states, amongst other things, that no taxpayer has claimed a Division 10BA deduction in relation to the film. The film project then proceeds, is completed and also qualifies for and claims the Division 376 refundable film tax offset. However, it later emerges that an investor did claim a Division 10BA deduction in relation to the film. In this case the Division 376 claim stands but the investor's Division 10BA deduction is denied.
11.15 Certificates revoked under subsection 124ZAB(6A) of the ITAA 1936 are carved out from the general exclusion for holding a provisional Division 10BA certificate in terms of access to the Division 376 offset. In other words the exclusion wording, 'whether or not the certificate is still in force', does not apply to certificates revoked under subsection 124ZAB(6A). [Schedule 11, item 4, paragraph 376-5(2)(b) of the ITAA 1997]
Application and transitional provisions
11.16 The amendments apply to any eligible expenditure incurred, whether before or after commencement of this Bill. Effectively expenditure incurred on films completed on or after 4 September 2001 may be eligible under Division 376 of the ITAA 1997.