Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Film tax offset

This bill amends the ITAA 1997 to create an offset for film production in Australia. This measure is designed to attract large budget film productions to Australia in order to develop Australias film industry.

Broadly the offset for film production in Australia will have the following features:

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films with qualifying Australian production expenditure equal to or greater than $15 million and less than $50 million will have to spend 70% of their total expenditure on production activity in Australia to qualify;

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films with qualifying Australian production expenditure equal to or greater than $50 million will not have to meet the 70% requirement;

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the offset is to be applied at a fixed rate of 12.5% to qualifying Australian production expenditure on a film project;

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films that were not completed by 4 September 2001 will be able to apply for the new offset; and

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a film cannot receive both the new tax offset and the existing Divisions 10B or 10BA (of the ITAA 1936) deductions, or FFC funding. A Film Licensed Investment Company will not be able to invest any of its concessional capital in a film production seeking the offset.

Date of effect: Eligible films must have been completed on or after 4 September 2001. The offset for film production expenditure in Australia is effective from the announcement date and can be claimed from the income year ended 30 June 2002.

Proposal announced: The proposal was contained in the Integrated Film Package announced by the Federal Government on 4 September 2001.

Financial impact: The measures will result in a projected cost to the revenue as set out in the following table:

Compliance cost impact: Minimal. The offset is given to an Australian resident (or Australian permanent establishment) as producer, and verification of qualifying expenditure for the offset is substantially the same as would be required for income tax purposes. The provisions identify the producer in ways consistent with ordinary industry practice. Any additional costs around processes for post-completion certification in relation to qualifying projects should be small.

Summary of regulation impact statement

Regulation impact on business

Impact: The proposed amendments will impact upon companies who seek the production of big budget films, film producers, the Australian film industry and the government agencies who administer the offset for film production in Australia.

Main points:

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An incentive to attract expenditure on large budget film productions to Australia.

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The Australian film industry is expected to benefit from the offset through increased opportunities for Australian casts, crew and post-production and other services to participate in large budget productions.

Chapter 1 - Film tax offset

Outline of chapter

1.1 This chapter explains the entitlement rules to the offset. The chapter includes:

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who is entitled to the offset;

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eligible genres;

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what are the expenditure thresholds for the offset;

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production expenditure;

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what is not production expenditure;

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qualifying Australian production expenditure;

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currency conversion;

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expenditure to be no more than at arms length;

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how much is the offset, what is its nature and how is it to be claimed;

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when is a film completed;

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choice of benefits in relation to a film;

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requirements for certification;

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issuing of a certificate;

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requirements of the certificate;

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Ministers rule making powers;

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application provisions; and

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consequential amendments.

Summary of new law

1.2 The new law inserts a new offset for certain qualifying Australian production expenditure that a company incurs in making a film, provided the qualifying Australian production expenditure is equal to or greater than $15 million but less than $50 million and the qualifying Australian production expenditure constitutes at least 70% of production expenditure. If qualifying Australian production expenditure is $50 million or more, the company automatically qualifies for the offset. A company is eligible for the offset for the income year the film is completed once it has a certificate issued by the Arts Minister (defined in the ITAA 1997). The company applies for the offset in its tax return for the income year the film is completed.

1.3 The offset is 12.5% of the actual qualifying Australian production expenditure, part of the total production expenditure on the film. If the offset is claimed, other concessional support for the film cannot be claimed, whether under Division 10B or Division 10BA of the ITAA 1936, by way of Film Licensed Investment Company concessional capital investment in the film, or through FFC funding.

1.4 Certification shows that the Arts Minister is satisfied of a number of requirements. The Arts Minister must be satisfied that the company is an Australian resident, or is an Australian permanent establishment of a non-resident and has an ABN. The Arts Minister must be satisfied that the film has been completed, and that it was not completed before 4 September 2001, the date from which the offset was announced to become available. The Arts Minister must be satisfied that the film was produced for cinema release, for public broadcast (including by satellite or by cable), or for public video release (on tapes, DVDs or otherwise). The Arts Minister must be satisfied that the film is a film feature or a mini-series, and is not a documentary, a film of a public event, a training film, an advertisement or commercial, a discussion, quiz, panel, variety or like program, or a part of an ongoing series or intended to form part of such a series.

1.5 If qualifying Australian production expenditure is $15 million or more but less than $50 million, the Arts Minister must be satisfied that the company did, or arranged the doing of, every activity in making the film. If qualifying Australian production expenditure is $50 million or more, the Arts Minister must be satisfied that the company did or arranged the doing of every activity in Australian in making the film. The company must be the only such company.

1.6 The Arts Minister must also be satisfied that the films qualifying Australian production expenditure is $15 million or more, and that if that expenditure is less than $50 million it is no less than 70% of the production expenditure on the film.

1.7 As the Arts Minister is satisfied of these things, the claim for the offset in the tax return is not based directly on them, but only on the existence of the certificate and on qualifying Australian production expenditure. The claim for the offset does not require eligibility for the offset to be reopened: the certificate establishes eligibility, though not any particular amount of qualifying Australian production expenditure. However, if the certificate is revoked, because of fraud or serious misrepresentation in obtaining the Arts Ministers satisfaction of those issues, then the certificate will be taken never to have been issued, and the offset cannot be claimed or, if claimed, will be subject to amendment of the assessment to deny the offset.

1.8 The refundable tax offset will be reviewed within 5 years to determine if it has been effective as an incentive to encourage big budget films to locate in Australia. The review will also examine the benefits and opportunities the offset has delivered to the Australian film industry. Without this section, the requirement for review would be only administrative.

Detailed explanation of new law

Who is entitled to the offset?

1.9 A company is entitled to the offset for an income year only if it claims the offset in its income tax return for the year, and is an Australian resident company, or an Australian permanent establishment of a non-resident company andwhere it has an ABN, both when it lodges the income tax return and when the tax offset is due to be credited. [Schedule 1, item 2, subsection 376-5(1)]

1.10 The requirement that the company be either an Australian resident or a permanent establishment is consistent both with the non-binding obligation in the Australia-USA double tax treaty to avoid discrimination, and with the more general model non-discrimination clause in the OECD model treaty. There is no discrimination between production companies that have the same tax presence in Australia, wherever resident or wherever incorporated.

1.11 The requirement that the company be a resident company, or the permanent establishment of a company, is consistent with normal industry practice as explained in consultation on these measures. It simplifies drafting and administration of the measures, and ensures that the offset is given to producers with a uniform income tax rate and treatment, and so has the same real value to every producer.

1.12 A company must itself carry out, or make the arrangements for carrying out, all the activities that are necessary for the making of a film. If qualifying Australian production expenditure is $50 million or more, the company must itself carry out, or make the arrangements for carrying out, only all of those activities that are in Australia. This simplification eases compliance for companies where the relationship between qualifying Australian production expenditure and production expenditure as a whole does not affect the availability of the offset. There can be only a single company that is eligible for the offset for a particular film at any time. [Schedule 1, item 2, paragraphs 376-15(1)(g) and (h)]

1.13 Where there are several parties interested in a film made, or having Australian activities to make the film arranged and carried out, the provisions require a separate company or permanent establishment to be found or established. The definition does not allow for there to be joint producers of a film. This substantially simplifies the drafting of the law without imposing any substantial practical difficulties on the film industry.

1.14 For example, there may be a number of entities who make arrangements for the making of a film. A major studio (or studios) could commission the project. Independent producers, directors or writers could originate and pitch the project. But only one party is intended to be able to claim the offset. So only one of these would qualify, the others would not carry out all the activities (or all the activities in Australia) necessary for actually making the film, nor would they make the arrangements for carrying those activities out.

1.15 Similarly, there may be a number of entities who carry out activities (or activities in Australia) necessary for actually making the film, or make arrangements for carrying those activities out. But there is only intended to be one possible claimant for the offset, and that is the company which is at the head of all those activities.

1.16 For the purposes of the offset, making a film includes some things and excludes others. In making a film, a company does what is necessary to produce the first copy of the completed film. [Schedule 1, item 2, subsection 376-25(2); item 7, subsection 995-1(1), definition of make in relation to film]

1.17 A company makes a film by the various activities that bring the film to the point where it could reasonably be regarded as ready for exhibition or distribution (by broadcast, satellite or cable, or by video distribution on tapes or DVDs or otherwise), for which it is being produced. This is the time when it is completed (see paragraph 1.76). Those activities include pre-production activities for the film, and post-production activities for the film; these are expressions which have reasonably established ordinary meanings within the film industry both in Australia and elsewhere. [Schedule 1, item 2, subsection 376-25(3]

1.18 But for the purposes of the offset, developing the proposal for the making of the film is not part of making the film, nor is arranging or obtaining finance for the film, which includes pitching the film. Similarly, the distribution of the film and its promotion are not part of actually making the film for the purposes of the offset. Some costs of promotional material are included in both qualifying Australian production expenditure, and production expenditure; so some promotional activities can be occurring while a film is being carried out (see paragraph 1.59). But these activities are nevertheless not part of making the film for the purposes of the offset. [Schedule 1, item 2, subsection 376-25(4); item 7, subsection 995-1(1), definition of make in relation to film]

1.19 The carrying out of, or arranging the carrying out of, all the things necessary for making the film must include all the things (or all the Australian things) included in making the film but need not include any of the things excluded from the actual making of the film. Though of course there will be cases where a company eligible for the offset is involved in some or even all of those activities.

1.20 Generally, a company carries out, or arranges the carrying out of, all the activities (or all the activities in Australia) necessary for making a film. Even when the production makes use of elements from a previous production, this is still usually the case. However, in some cases, a company has taken over the making of the film from another company (which may itself have taken over the making of the film from another company, and so on). In those cases, each company making the film is taken to have incurred the production expenditure of the previous companies. Its production expenditure excludes, then, any expenditure incurred to enable it to take over the making of the film; taking over is not part of actually making the film, in the same way that proposing, financing, promoting and distributing the film are not part of making the film. [Schedule 1, item 2, paragraphs 376-70(1)(a) to (c) and subsection 376-70(2)]

1.21 In those cases, eligibility for the offset extends to the company that completes the production (or the Australian production) of the film. That company does not actually carry out, or arrange the carrying out, of all the activities (or all Australian activities) necessary for making the film. But it is taken to do so, because it has taken over the making of the film from the previous company or companies, in the same way that it is taken to have incurred the production expenditure of those companies. So the company that completes the activities is taken to have carried out, or arranged the carrying out of, those activities that were necessary for making the film, that were actually carried out, or arranged to be carried out, by the previous company or companies. [Schedule 1, item 2, paragraph 376-70(1)(d) and subsection 376-70(2)]

1.22 Other requirements are that the film must be completed (a term defined in subsection 376-15(2)) in the year of income for which the offset is claimed. The company must also have applied for, and been issued with, a certificate for the film from the Arts Minister and the company must have claimed the offset in its tax return for the income year.

1.23 Some existing film incentive provisions only allow their benefits to flow to the owner of the copyright of the film (Division 10B of the ITAA 1936); or to the person who will be the first holder, or one of the first holders, of copyright in the completed film. Other film incentive provisions give their benefits to investors contributing to the cost of producing the film (Division 10BA of the ITAA 1936). Under this offset, the company doing and arranging the work, or the work in Australia, of making the film is the only taxpayer who can get the offset, even if it only does so on behalf of another person who will get the copyright of the film, or even if the cost of producing the film is contributed to by others.

1.24 Television stations or government film agencies even if listed in the credits to a film, who have contributed funds out of which the production expenditure was met or who provided some other kind of assistance for the making of a film, will not ordinarily be production companies where they are only contributing to the process of making a film. This is because they do not ordinarily make the arrangements for the actions to be taken that are necessary for the making of a film.

Eligible genres

1.25 The offset will only be available for productions of feature films (or films of that kind), or television drama mini-series, that are produced for public exhibition in cinemas or by means of television broadcasting (including satellite and cable) or distribution to the public as a video recording (on tape, DVD or otherwise). The law does not refer expressly to telemovies, though they are and are meant to be included, as the Governments announcement of the Integrated Film Package on4 September 2001 shows. This is because a telemovie is by its nature a feature film [Schedule 1, item 2, paragraphs 376-15(1)(c) and (d)] . Animated features are included in the definition of feature films [Schedule 1, item 5, subsection 995-1(1), definition of feature film] .

1.26 For this reason, the definition of film introduced by the new law is very broad. It includes any aggregate of images with or without sound and embodied in any material. As only feature films or the like, or television drama mini-series, can qualify for the offset, there was no need for the definition to elaborately and expressly exclude multimedia computer programs or interactive presentations. [Schedule 1, item 6, subsection 995-1(1), definition of film]

1.27 A production will be ineligible for the offset if it is a documentary, an advertisement or commercial. Discussion programs, quiz programs, panel programs, variety programs, and all other programs of that kind are ineligible. Similarly a production is not eligible if it is a film of a public event, a training film or a film forming part of a drama program series that is or is intended to be of a continuing nature. The excluded genres are the same as those that are excluded from the definition of eligible film in Division 10BA of the ITAA 1936, with the addition of documentaries. The genres are intended to be understood in the same terms and are adopted for similar policy reasons; guidelines in relation to those genres issued in relation to Division 10BA of the ITAA 1936 are thus consistent with the intention of the law. [Schedule 1, item 2, paragraph 376-15(1)(e)]

What are the expenditure thresholds for the offset?

1.28 To be eligible for the offset, the company must have spent at least $15 million on qualifying Australian production expenditure. Where the value of the qualifying Australian production expenditure is at least $15 million but less than $50 million, this expenditure must be at least 70% of total production expenditure. Alternatively, where the company has spent $50 million or more on qualifying Australian production expenditure, then it qualifies for the offset regardless of the total amount of production expenditure. [Schedule 1, item 2, paragraphs 376-15(1)(f) and (g)]

1.29 These expenditure thresholds show that the definition of, and relationship between, production expenditure and qualifying Australian production expenditure are important to an understanding of whether the offset will be available and to what expenditure it will apply. There is a general definition of production expenditure, from which there are express exclusions and to which there are express inclusions. Then there is a general definition of qualifying Australian production expenditure, essentially as production expenditure with an appropriate connection to Australia. However, there are inclusions in qualifying Australian production expenditure which if they lacked connection to Australia would not be production expenditure. These items increase the share of production expenditure that is qualifying Australian production expenditure while also increasing production expenditure. (If corresponding non-Australian expenditures were included in production expenditure, the Australian share might not increase so much.) There are exclusions from qualifying Australian production expenditure, and these items reduce the share of production expenditure that is qualifying Australian production expenditure, as they are not also excluded from production expenditure.

Production expenditure

General test

1.30 There is a general test for what constitutes production expenditure. Production expenditure of a film is so much of a companys expenditure as it incurs in, or in relation to, the making of the film; or as is reasonably attributable to the use of equipment or other facilities for the making of the film or to activities undertaken in making the film. [Schedule 1, item 2, subsection 376-25(1); item 8, subsection 995-1(1), definition of production expenditure]

1.31 For discussion of what activities are included in the making of a film, and what activities are excluded (see paragraphs 1.13 to 1.15). The scope of the making of the film needs to be borne in mind in applying the general test.

1.32 It is ordinarily only the expenditure of the company itself that can attract the tax offset. Generally this is the only company incurring production expenditure (or production expenditure incurred in Australia) in relation to the film, even where a film is intended to make use of material from an abandoned project, the new film is its own project having only its own activities necessary to make the new film. An example could include where another entity initiates the development of a production and then incorporates a new company to actually make the film. In this case, the first entity would bill the company for its work and so the company would incur production expenditure, at least to the extent that some of the cost is for activities in actually making the film.

1.33 In some cases a successor company may take over the making of a film from another company, and expenditure incurred by the old company is then to be treated as if it had been incurred by the new company (see paragraph 1.17). This situation most commonly arises where the original company fails to complete the film and the film is completed under a completion bond or guarantee arrangement. The new company might well incur expenditures to take over the project. Those expenditures are excluded from its production expenditure, and the production expenditure incurred by its predecessor or predecessors is treated as its own expenditure. [Schedule 1, item 2, section 376-70]

1.34 The definition of production expenditure is designed to allow expenditure to be apportioned between the film production project and any other purpose for which it has been incurred. For example, this allows the costs of facilities used in the making of a number of films to be apportioned between the films. Expenditure will count as long as it has been incurred. The company does not have to actually discharge its liability to pay. This will allow expenditure to count on an accruals basis. This is consistent with commercial practice in the film industry, in which a company might well be making a film on a cost-plus basis and hold significant expenditures unpaid until put in funds by payments from a commissioning studio. Some of these expenditures, and some part of the payments by the commissioning studio, could be unpaid at the time of completion of the film and at the time the offset is claimed. [Schedule 1, item 2, subsection 376-25(1)]

1.35 Production expenditure may have been incurred in the income year for which the offset is claimed - the year the film is completed. It may have also been incurred in earlier years. Films are not presumed to be made within a single year. Production expenditure will generally be of a revenue nature, but may also be of a capital nature, and this is expressly acknowledged in the law. Production expenditure may, but need not, be expenditure that gives rise to an income tax deduction. [Schedule 1, item 2, subsection 376-25(5)]

Specific inclusions not otherwise covered by the general test

1.36 Production expenditure for a film will also include some specific expenditure incurred by the company which may not meet the general test of what is production expenditure. These specific inclusions allow Australian productions to receive the offset for the same items which would be subsidised under other Australian film assistance schemes, whilst not penalising foreign funded film for not undertaking such processes as development in Australia.

1.37 All qualifying Australian production expenditure is included in production expenditure, even if it would not otherwise come within the scope of production expenditure. For discussion of these inclusions (see paragraphs 1.53 to 1.63). [Schedule 1, item 2, section 376-30]

1.38 Where a company holds a depreciating asset and uses it in making a film, the companys production expenditure on the film includes so much of the decline in value (for tax purposes) of the asset as is attributable to its use on the film. Hold, depreciating asset and decline in value are terms from the capital allowances system. The capital allowances system in the tax law, expressed in Division 40 of the ITAA 1997, is designed to give deductions for the cost of depreciating assets over their effective life. This is their decline in value for tax purposes. The capital allowances system also reconciles this assumed loss of value to the actual change in value worked out when the asset is disposed of, scrapped or abandoned, with a balancing gain or loss. The corresponding exclusion of any element of the cost of depreciating assets from production expenditure is discussed in paragraph 1.49. This provision gives a company the benefit of an appropriate allowance for the cost of depreciating assets it uses on a production, even if those assets were acquired originally for another project or before any particular film project began. A company may well have assets of this kind, and the cost of making a film should take proper account of their cost, whether they are acquired for the particular film, at the time of the particular film, or otherwise. [Schedule 1, item 2, subsection 376-25(6)]

1.39 In principle, reconciliation between deductions over effective life and actual change in value should also be taken into account in working out production expenditure. However, some assets may have substantially longer effective lives than the making of a film, and reconciliation would therefore keep the amount of expenditure open for potentially long periods. For this reason, in the interests of ease of calculation and of compliance, and as express acceleration of tax deductions for decline has been removed from the tax system, only the tax decline in value is taken into account in working out production expenditure.

1.40 Again, as a matter of simplicity, deductions for buildings and structures and work on them, if given by Division 43 of the ITAA 1997, are excluded from production expenditure. This is understood to present no practical unfairness for film production, as in general such buildings and structures are not held by companies doing or arranging the activities of making a film, and where needed are leased for the period required for the film project. Deductions under Division 43 of the ITAA 1997 do not spread the taxpayers cost over effective life; they spread the actual original capital cost of construction work over a statutory period.

1.41 Only those development costs for the film which are included as qualifying Australian production expenditure will be included as production expenditure. These costs will be those incurred in developing proposals for the content and the arrangements for making the film which are for goods and services provided in Australia or the use of land in Australia or the use of goods that are located in Australia at the time they are used in making the film. However, they will not include costs incurred in relation to the financing of the film. Legal costs will be included in development costs only to the extent that they relate to writers contracts or chain of title and other copyright issues. [Schedule 1, item 2, subsection 376-45(2)]

What is not production expenditure

1.42 There are a number of specific exclusions that will not be eligible to be included as production expenditure.

1.43 Expenditure incurred by way of, or in relation to, the financing of a film is not production expenditure. This will specifically include interest, or other returns, on amounts invested in the film and costs connected with raising and servicing finance for the film. [Schedule 1, item 2, section 376-35, item 1 in the table]

1.44 Development expenditure for the film is not production expenditure, except so far as it is qualifying Australian production expenditure. [Schedule 1, item 2, section 376-35, item 2 in the table]

1.45 Development expenditure is a defined term. It is expenditure incurred in meeting the development costs for a film and includes:

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expenditure on location surveys otherwise identifying or assessing possible locations;

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on storyboarding and scriptwriting;

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on research for the film;

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on casting actors;

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on developing a budget; and

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on developing a shooting schedule for the film.

[Schedule 1, item 4, subsection 995-1(1), definition of development expenditure]

1.46 Another exclusion to production expenditure is expenditure that is incurred in acquiring copyright, or a licence in relation to copyright, in a pre-existing work for use in the film, except so far as this is qualifying Australian production expenditure, essentially because the pre-existing work is Australian. The cost of copyright or of a copyright licence to allow the film to use an existing work is generally not an expenditure in making the film so much as it is a cost of being in a position to make the film, and so is preliminary to production expenditure. However, the cost for pre-existing Australian copyright is included, essentially to increase the share of qualifying Australian production expenditure. This measure reflects and supports broader Australian cultural policy. [Schedule 1, item 2, section 376-35, item 3 in the table]

1.47 Another exclusion is general business overheads of the company that are not incurred in, or in relation to, the making of the film and are not reasonably attributable to activities, or the use of equipment or facilities, in making the film. In effect, no part of general business overheads can be attributed to making the film. However, if a part of those overheads is qualifying Australian production expenditure under the specific inclusion criteria, then that part of general overheads is not excluded from production expenditure. [Schedule 1, item 2, section 376-35, item 4 in the table]

1.48 Expenditure that relates to publicising or otherwise promoting the film (press expenses, still photography, promotion, videotapes, public relations and other similar expenses) is not part of production expenditure, even if it is incurred during production, unless it is qualifying Australian production expenditure. [Schedule 1, item 2, section 376-35, item 5 in the table]

1.49 Another specific exclusion will be expenditure incurred by way of:

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amounts that are payable out of the receipts, earnings or profits from a film;

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amounts that depend on the receipts, earnings or profits from a film; and

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amounts that are otherwise dependent on the commercial performance of the film.

In practice, some work is done in making a film not for a set cost but for an interest in the films performance. The production expenditure for a film, on which the offset is paid, is meant to be limited to those expenditures the amount of which (and perhaps the existence of which) is independent of the films commercial performance and its earnings. [Schedule 1, item 2, section 376-35, items 6 and 7 in the table]

1.50 An amount payable in satisfaction of a residual payment right to a member of the cast cannot count as production expenditure except to the extent to which the amount is actually paid before the film is completed. [Schedule 1, item 2, section 376-35, item 8 in the table]

1.51 The exclusion of expenditure by way of profit share or for residual payments would be ineffective if production expenditure included amounts liable to be repaid because of the economic performance of the film or because residual payments proved not to be required. So all advances against profit share, against economic performance of the film or its receipts, or against residual payments are excluded from production expenditure unless the advances are non-recoverable from the payee. Then the advance is expenditure that is independent of the films commercial performance or earnings, and of whether the residual rights are used or needed. [Schedule 1, item 2, section 376-35, item 9 in the table]

1.52 Any expenditure that goes into the cost of a depreciating asset, whether one for which deductions are calculated under Division 40 of the ITAA 1997 or one for which deductions are calculated under Division 43 of the ITAA 1997, is not production expenditure. This includes both original cost and further depreciable costs of such items. However, the decline in value of a depreciating asset (other than those buildings, structures and improvements to which Division 43 of the ITAA 1997 applies) is itself expressly included in production expenditure. The exclusions ensure that the total production expenditure on a film, and its qualifying Australian production expenditure, are not skewed by the inclusion of substantial capital costs for depreciating assets that actually relate to many films and not only the particular film. [Schedule 1, item 2, section 376-35, item 10 in the table]

1.53 Regulations may specify other costs to be excluded from production expenditure. Such regulations would be subject to the procedural rules applicable to Australian regulations and so would require gazettal, and would be required to be laid before both Houses of Parliament where they would be subject to disallowance in the Parliamentary process. [Schedule 1, item 2, section 376-35, item 11 in the table]

1.54 There is also an important exclusion from production expenditure that a company can choose to make. A company can choose to disregard the remuneration to one person for the purposes of the offset. Remuneration includes all benefits provided for the persons services in the making of the film, and it includes the travel and other costs associated with those services, such as the costs of bringing the person to and from Australia. These costs will then be disregarded for all purposes. They will not be taken into account as part of production expenditure, or as part of qualifying Australian production expenditure. The offset will not be given for those expenditures either. The reason for choosing to disregard one persons remuneration would generally be that the remuneration would add to production expenditure but not qualifying Australian production expenditure, and so could exclude a film from eligibility for the offset where total qualifying Australian production expenditure is below $50 million by making that expenditure less than 70% of production expenditure. The company must nominate the person whose remuneration is to be disregarded in its application for a certificate from the Arts Minister on completion of the film. [Schedule 1, item 2, section 376-20]

Qualifying Australian production expenditure

General test

1.55 Qualifying Australian production expenditure for a film is the production expenditure for the film to the extent to which it is incurred for, or is reasonably attributable to:

•

goods and services that are provided in Australia;

•

the use of land located in Australia; or

•

the use of goods that are located in Australia at the time they are used in the making of the film.

This broad test connects particular items of production expenditure to Australia. It is meant to ensure the opportunities for Australian taxpayers and for the Australian film industry which are a major purpose of the offset. However, there are exclusions from that general connection, (see paragraphs 1.64 to 1.67), which further support this intention. [Schedule 1, item 2, section 376-40; item 9, subsection 995-1(1), definition of qualifying Australian production expenditure]

Specific inclusions

1.56 There are a number of specific inclusions provided for in the legislation [Schedule 1, item 2, subsection 376-45(1)] . All of these are also therefore production expenditure. Because a number of them are items which are not otherwise production expenditure, they increase not only the total production expenditure but also the share of production expenditure which will be qualifying Australian production expenditure. This means that these inclusions can operate to bring films within the eligibility for the offset if certain expenditures happen in Australia, not only by connecting production expenditure to Australia, but also by connecting to Australia some kinds of expenditure which would fall outside the definition of production expenditure but which support Australian cultural objectives.

1.57 Development expenditure is generally not production expenditure, as discussed in paragraphs 1.41 and 1.42. However, so far as development expenditure is for goods and services provided in Australia, the use of Australian land, or the use of goods located in Australia when they are used in making the film (e.g. hiring equipment or props for use in Australia on a shoot), development expenditure is production expenditure. The double benefit of counting this as production expenditure and as qualifying Australian production expenditure encourages development expenditure to be carried out in Australia and adds support for Australian film projects, which are likely to have lower budgets and so have more difficulty with both the expenditure and the percentage thresholds for eligibility. [Schedule 1, item 2, subsection 376-45(1), item 1 in the table]

1.58 However, qualifying Australian production expenditure will not include legal expenses except those which relate to writers contracts or to copyright issues, including chain of title. Otherwise, substantial expenditures likely to be connected more to the financing and structuring of the project than to film development could come into production expenditure. [Schedule 1, item 2, subsection 376-45(2)]

1.59 Copyright expenditure incurred to acquire copyright, or a licence in relation to copyright, in a pre-existing work for use in the film will be qualifying Australian production expenditure, and so production expenditure if the copyright is held by:

•

an Australian citizen;

•

an Australian protected person; or

•

a person resident in Australia.

This encourages the use of copyrights held in Australia, and so, indirectly, the use in film projects of material that is under Australian creative control. [Schedule 1, item 2, subsection 376-45(1), item 2 in the table]

1.60 Another item of qualifying Australian production expenditure is an appropriate share of expenditure on general business overheads of the company that are not directly incurred in or in relation to the making of the film and are Australian expenditure. This encourages production companies to be located in Australia even if they make projects that do not qualify for the offset as well as projects that do, because a share of general overheads will only qualify for the offset if they are located in Australia. [Schedule 1, item 2, subsection 376-45(1), item 3 in the table]

1.61 These overheads are only covered to the extent that they do not exceed the lesser of 2% of the total of the companys production expenditure on the film or $500,000. This limits the extent to which general overheads can be apportioned to any particular film project. [Schedule 1, item 2, subsection 376-45(3)]

1.62 Publicity for a film is not part of making it. But where publicity material, for use in publicising or otherwise promoting the film, is copyright held by an Australian citizen, an Australian protected person or a person resident in Australia, and the expenditure on the material was incurred by the company before completion of the film, that expenditure is part of qualifying Australian production expenditure. This encourages the use of Australians in publicity undertaken during production. [Schedule 1, item 2, subsection 376-45(1), item 4 in the table]

1.63 Qualifying Australian production expenditure also includes a companys expenditure in relation to a persons travel to Australia to undertake activities in relation to the making of the film if the remuneration paid to that person for those activities is qualifying Australian production expenditure of the company. However, there is a specific exclusion if that person is not a cast member and is to work on the film for less than a fortnight; the exclusion is discussed in paragraph 1.65. [Schedule 1, item 2, subsection 376-45(1), item 5 in the table]

1.64 Regulations may prescribe additional items of expenditure as qualifying Australian production expenditure. [Schedule 1, item 2, subsection 376-45(1), item 6 in the table]

Specific exclusions

1.65 If expenditure has been incurred when the company is neither an Australian resident nor has both a permanent establishment in Australia and an ABN, that expenditure is not eligible as qualifying Australian production expenditure. So if a company starts a production as a non-resident without a permanent establishment in Australia this will reduce both its qualifying Australian production expenditure and the share of total production expenditure that represents. [Schedule 1, item 2, paragraph 376-50(a)]

1.66 Where a person is not a member of the cast and enters Australia to work on the film for less than 2 consecutive calendar weeks, expenditure in relation to the remuneration and other benefits for this person for services regarding the film, and expenditure on the persons travel and other costs, are not qualifying Australian production expenditure. Therefore, people other than cast members must have more than a fortnights production work in Australia before their costs can be part of qualifying Australian production expenditure. This balances the policy objective of ensuring opportunities for the Australian film industry and for Australian taxpayers, against the intention not to create special Australian labour rules restricting the benefit of the offset. [Schedule 1, item 2, paragraph 376-50(b)]

1.67 Regulations may prescribe other exclusions from what would otherwise be qualifying Australian production expenditure. [Schedule 1, item 2, paragraph 376-50(c)]

1.68 If a company enters into what is essentially a service contract, the test of whether expenditure under the contract is qualifying Australian production expenditure does not depend only on where goods embodying the result are delivered. If services will be embodied in goods that are delivered to the company and those services were predominantly performed outside Australia, for the purposes of determining qualifying Australian production expenditure this service is not provided in Australia. This rule is intended to have the effect that what would not be qualifying Australian production expenditure if it were incurred on activities the company carries out for itself does not become qualifying Australian production expenditure by engaging someone else. For example, the cost of animation or special effects work carried out outside Australia is not qualifying Australian production expenditure. If a company contracted to be delivered the animation or effects work as stock or computer media, in Australia, that would not make the expenditure on contracting out qualifying Australian production expenditure, the animation or special effects work would have to be carried out in Australia for that to be true. [Schedule 1, item 2, section 376-55]

Currency conversion

1.69 All production expenditure and qualifying Australian production expenditure must be worked out in Australian dollars. For the purposes of converting production expenditure and qualifying Australian production expenditure into Australian dollars, the average rate of exchange for the period of production is to be used. For the purposes of this section, the period of production is defined to be from the start of principal photography or when the production of the animated imaging commences, and the production period ends when the film is completed.

1.70 The ATO has published a ruling, IT 2498 Income Tax: Foreign Tax Credit System: Currency Translation or Foreign Income: Trading Stock and Depreciable Plant: Basis of Returning Foreign Income: Capital Gains/Losses which gives some assistance in determining a method of calculating an average rate of exchange over a period. The ATO also publishes exchange rates which a company may wish to use to calculate its own average rate. [Schedule 1, item 2, section 376-60]

Expenditure to be no more than at arms length

1.71 Where the company incurs expenditure under an arrangement and any parties to the arrangement did not deal with each other at arms length and the amount of the expenditure would be more than it would be if they dealt with each other at arms length, then the amount of expenditure is taken to be the amount that would have been incurred if the parties had been dealing with each other at arms length. This rule applies not only to the actual arrangement under which the company incurs expenditure, but also to any act or transaction directly or indirectly connected with the expenditure the company incurs. So, for instance, arrangements which require a company to obtain certain goods or services from a particular source can be tested and, if not at arms length, the expenditure on those goods or services will be limited to an arms length amount. This will be so even if the company itself was dealing at arms length to obtain the goods and services, a non-arms length deal between others could otherwise inflate the cost. [Schedule 1, item 2, section 376-65]

1.72 This provision does not automatically raise expenditure to arms length rates if it is lower. However, if expenditure has been lowered to qualify for the offset (e.g. by reducing production expenditure in total so as to increase the percentage of qualifying Australian production expenditure), general anti-avoidance rules could apply.

How much is the offset, what is its nature and how is it to be claimed?

1.73 The amount of the offset is determined by multiplying qualifying Australian production expenditure by 12.5%. The certificate of the Arts Minister covers eligibility for the offset, but not its amount, or the amount of qualifying Australian production expenditure. [Schedule 1, item 2, section 376-10]

1.74 Where a company has equal to or greater than $15 million but less than $50 million qualifying Australian production expenditure, a rate of 12.5% on qualifying Australian production expenditure will give a reduction of 8.75% of production expenditure on a film where the minimum 70% of the production is spent in Australia. This value rises to 10% if 80% of the budget is spent in Australia.

1.75 Alternatively, where the company has qualifying Australian production expenditure of $50 million or more the 70% requirement need not be met. For example, a film with a total budget of $200 million and spending only $100 million in Australia would receive a reduction of $12.5 million, or 6.25% of all its production expenditure.

1.76 Of course, if all production expenditure is qualifying Australian production expenditure, then the offset is 12.5% of the total production expenditure. The specific inclusions in qualifying Australian production expenditure (see paragraphs 1.53 to 1.63) show that by locating a range of expenditures in Australia it is possible to get the offset for some parts of development expenditure, general overheads, and publicity although they are not part of the cost of actually making the film.

1.77 A refund of tax offsets will occur where the total of those offsets exceeds the amount of income tax and other tax liabilities that the company would have had to pay if it had not got those tax offsets (but had got all its other tax offsets), by operation of section 67-30 of the ITAA 1997. The amount of the tax offset to be refunded will be reduced so far as the company has other Commonwealth tax liabilities including GST, FBT and withholding taxes. Any amount of offset that is refunded to a company would not be assessable income for income tax purposes.

1.78 The offset must be claimed by the company in its income tax return for the income year in which the film is completed. Once lodged, there is no opportunity for that claimant to change the claim from the tax offset to a special deduction under Divisions 10B or 10BA of the ITAA 1936 or vice versa. The claim made at the time of lodging the return is irrevocable. [Schedule 1, item 2, subsection 376-5(1), reference at the end of subsection to paragraph (c)]

When is a film completed?

1.79 A film is completed when the film is first in a state where it could reasonably be regarded as ready to be distributed or exhibited to the general public. This point is generally accepted to be at a stage that includes post-production and editing as well as the shooting of the film. It does not have to be distributed or exhibited, just be in a state where either could reasonably happen if desired. To be eligible for the refundable offset, the film must not have been completed before 4 September 2001. [Schedule 1, item 3, subsection 995-1(1), definition of completed in relation to film; item 2, paragraph 376-15(1)(b)]

Choice of benefits in relation to a film

1.80 The offset can only be claimed where other concessional support for the film is not claimed, and other concessional support for the film cannot be claimed where the offset is claimed. Division 10B of the ITAA 1936 provides concessional support in relation to films, by giving a 2-year write-off of the cost of the copyright in the film. Division 10BA of the ITAA 1936 provides substantially more generous treatment of taxpayers contributing to the cost of production of certain Australian films, including immediate deductibility and concessional treatment in relation to income. So if any deduction is claimed under Division 10B, a company cannot claim the offset, no matter who has claimed under Division 10B, as that claim need not be by the company. Also, if a provisional or final certificate has been issued for the purposes of Division 10BA, even if the certificate is no longer in force (e.g. because it was a provisional certificate, and no application for a final certificate has been made in the required time), a company cannot claim the offset, no matter that the benefit of Division 10BA would not have gone to the company. [Schedule 1, item 2, subsection 376-5(2)]

1.81 Correspondingly, Division 10B of the ITAA 1936 does not apply to the cost of copyright in a film for which a claim for the offset is made, and Division 10BA of the ITAA 1936 benefits are excluded from a film for which a claim for the offset has been made, as the appropriate final certificate cannot be given. [Schedule 1, item 10, subsection 124L(1A); item 11, paragraph 124ZAC(2)(b)]

1.82 FFC funding is excluded by the Division 10BA provisions. The exclusion of Film Licensed Investment Company investment of concessional capital also occurs by the Division 10BA provisions, without the need for additional amendment.

Certification

Requirements for certification

1.83 Certification requires that the Arts Minister is satisfied of a number of requirements. The Arts Minister must be satisfied that when the application is made the company is an Australian resident, or is an Australian permanent establishment of a non-resident and has an ABN. [Schedule 1, item 2, paragraph 376-15(1)(a)]

1.84 The Arts Minister must be satisfied that the film has been completed, and that it was not completed before 4 September 2001, the date from which the offset was announced to become available. However, the Arts Minister need not decide on the exact date of completion to come to the necessary conclusion. [Schedule 1, item 2, paragraph 376-15(1)(b)]

1.85 The Arts Minister must be satisfied that the film was produced for cinema release, for public broadcast (including by satellite or by cable), or for public video release (on tapes, DVDs or otherwise). In essence, therefore, the film must be produced for public release or distribution in some form. Although the words are not identical to those used to define when a film is completed, that is, when the film could reasonably be regarded as ready for distribution, broadcast or exhibition to the general public, the 2 concepts are clearly intended to achieve the same policy effect. [Schedule 1, item 2, paragraph 376-15(1)(c) and subsection 376-15(2)]

1.86 The Arts Minister must be satisfied that the film is a feature film or a mini-series, and is not a documentary, a film of a public event, a training film, an advertisement or commercial, a discussion, quiz, panel, variety or like program, or a part of an ongoing series or intended to form part of such a series. [Schedule 1, item 2, paragraphs 376-15(1)(d) and (e)]

1.87 The Arts Minister must also be satisfied that the companys qualifying Australian production expenditure on the film is $15 million or more, and that if that expenditure is less than $50 million it is no less than 70% of the production expenditure on the film. Depending on the level of qualifying Australian production expenditure, the company must carry out or arrange for either all the activities necessary for making the film, or all the activities that are in Australia. This part of the test is discussed in paragraph 1.11. [Schedule 1, item 2, paragraphs 376-15(1)(f) and (g)]

1.88 As the Arts Minister is satisfied of these things, the claim for the offset in the tax return is not based directly on them, but only on the existence of the certificate and on the qualifying Australian production expenditure. The claim for the offset does not require the companys eligibility for the offset to be reopened, the certificate establishes that, though not any particular amount of qualifying Australian production expenditure. However, if the certificate is revoked, because of fraud or serious misrepresentation in obtaining the Arts Ministers satisfaction of those issues, then the certificate will be taken never to have been issued, and the offset can not be claimed or, if claimed, will be the subject of amendment of the assessment to deny the offset.

Issuing of a certificate

1.89 For a company to be entitled to the offset for a film, the Arts Minister must have issued a certificate for the film. The Arts Minister will, in practice, issue a certificate after receiving advice from the Film Certification Advisory Board. [Schedule 1, item 2, subsection 376-5(1)]

Requirements of the certificate

1.90 Any certificate that the Arts Minister issues is expected to be in writing, to state the companys ABN and to state that the film is eligible for the offset. The Arts Minister must notify the Commissioner of the issue of the certificate within 30 days, and will give the companys name, address, and such other information as the Arts Minister and the Commissioner agree. [Schedule 1, item 2, section 376-85]

1.91 If the company wants to exclude someones remuneration from all offset calculations, it must nominate the person in its application for a certificate. Details of such an exclusion would be an example of the sort of information that the Arts Minister and the Commissioner might agree should be provided with the notice (see paragraph 1.51 for discussion of this exclusion from the offset).

1.92 The Arts Minister will have the power to revoke the certificate if the issue of the certificate was obtained by fraud or by serious misrepresentation. Revocation will have the effect of requiring full repayment of any offset given through a tax return process. However, unless a company is likely to have engaged in fraud or serious misrepresentation, the certificate provides certainty regarding eligibility for the offset. The amount of the offset will be 12.5% of actual qualifying Australian production expenditure as claimed in the companys tax return. The ATO will have the power to audit claims. Should an audit find that there is a variance between actual expenditure and the amount claimed, there will be an appropriate adjustment of the amount of the offset through the tax system. However, as stated earlier, this will not affect a companys eligibility except where the certificate is revoked. [Schedule 1, item 2, subsections 376-90(1) and (3)]

1.93 Where a certificate is revoked, the Arts Minister must give the company to whom the certificate was issued written notice, including reasons. [Schedule 1, item 2, subsections 376-90(2) and (4)]

1.94 If the Minister decides not to issue a certificate, the company seeking the certificate must receive written notice of that decision. [Schedule 1, item 2, subsection 376-95(1)]

1.95 The decision not to issue a certificate, and the decision to revoke a certificate, will be reviewable in the AAT on application by the company whose interests have been affected. [Schedule 1, item 2, section 376-100]

1.96 The notice of refusing to issue a certificate need not set out the findings on material questions of fact, refer to the evidence and other material on which the findings were based and the reasons for the decision. The notice will include advice that an application can be made to the AAT and will include advice that a statement giving that information may be requested unless the reasons have already been supplied. The notice of revocation of a certificate will include the same notifications. If the Arts Minister fails to comply with these requirements, the Minister has still refused to issue the certificate or revoked it and the Ministers refusal or revocation is no less (and no more) valid. [Schedule 1, item 2, subsections 376-95(2) to (5)]

Ministers rule making powers

1.97 The Arts Minister may establish a Film Certification Advisory Board to consider applications for eligibility for the offset and advise the Minister on whether to issue certificates of eligibility. The Arts Minister may decide on other activities and duties in relation to the offset for the Board to undertake. The Arts Minister may specify the membership of the Board and the terms and conditions of its appointment, and may specify the procedures of the Board. [Schedule 1, item 2, subsection 376-105(1)]

1.98 In setting up administrative procedures for the claiming of the offset, the Arts Minister may decide on requirements for applications for certificates:

•

the form;

•

type of information to be provided;

•

methods of verification of that information (such as requiring reports by auditors or independent line producers); and

•

procedures around the provision of supplementary or additional information that the Minister may request.

[Schedule 1, item 2, subsections 376-105(3) and (4)]

1.99 The Minister may also decide to provide for the issuing of provisional certificates. [Schedule 1, item 2, subsection 376-105(2)]

1.100 All such decisions must be made by making written rules. Any such rules that the Minister makes will be disallowable instruments under section 46A of the Acts Interpretation Act 1901. This means that the rules will require tabling in the Parliament and can be disallowed on the basis of either House passing such a resolution within 15 sitting days of receiving notice of the rules. [Schedule 1, item 2, subsections 376-105(5) and (6)]

Review

Requirements for review

1.101 This section requires the review of the offset to be conducted and completed within 5 years of its commencement; that is, before 4 September 2006. Because of the amendment, the review will be mandatory where it would otherwise have been an administrative expectation.

1.102 Allowing for the establishment of the offsets administration by mid-2002, and the need to commence the review by mid-2005, this will provide an effective 3 years of data on which to evaluate the success of the offset as an incentive to attract film production to Australia. This is particularly appropriate for the film industry where the processes surrounding the planning and production of a film project can take several years. [Schedule 1, item 2, subsection 376-110(1)]

Scope of the review

1.103 The evaluation of the success of the offset, taking account of its net cost, in attracting high end quality and big budget film productions is a mandatory part of the review. The review will consider the extent to which the offset has resulted in opportunities for growth in the Australian film production industry, including the production service and post-production industries.

1.104 The Government is concerned to ensure that the offset benefits Australian film industry personnel. The review will therefore also assess the extent to which the offset has resulted in opportunities for employment and skills development of Australian film industry professionals. The requirements allow additional elements to be included in the review, as appropriate when it is actually conducted. [Schedule 1, item 2, paragraph 376-110(2)(a)]

Consultation within the review process

1.105 The offset is targeted at attracting foreign film production to Australia, and is designed to benefit the Australian film industry generally. The review will involve a consultation process that is intended to involve individuals and organisations from all aspects of the Australian film industry, including State government agencies, as well as taking into account the views of the offsets focus group - major international film studios. The review must give film industry participants the opportunity to make written submissions. However, this requirement is not meant to limit the extent of an appropriate consultation process, which may well include other elements. [Schedule 1, item 2, paragraph 376-110(2)(b)]

Reporting the review

1.106 The people who conduct the review must report it in writing, to the Arts Minister. The Minister then has 15 sitting days within which to lay copies of the report before each chamber of the Parliament. This requires the report to be appropriately presented both to the Government and to the Parliament. [Schedule 1, item 2, subsections 376-110(3) and (4)]

Application provisions

1.107 If a film was in production on 4 September 2001, the company may seek to apply for the refundable offset. The production will still have to satisfy the eligibility criteria. This means that if a film was in a state to be released or distributed before 4 September 2001 it will not be eligible even if it is in fact not released until after that date. [Schedule 1, item 12]

Consequential amendments

1.108 A new subsection is added to subsection 67-25 including the film tax offset on the offset rules. [Schedule 1, item 1]

Chapter 2 - Regulation impact statement

Policy objective

The objectives of the offset for film production in Australia

2.1 This bill adds to the incentives available to the film industry. The offset for film production in Australia will be jointly administered by the ATO and DCITA under the ITAA 1997.

2.2 The policy objective of the offset for film production in Australia is to provide for an incentive to attract expenditure on large budget film productions to Australia in order to:

•

increase opportunities for Australian casts, crew, post-production and other services to participate in large budget productions; and

•

showcase Australian talent.

2.3 The provision of this incentive recognises that many such large productions cannot access similar tax benefits, for example, those currently available to other taxpayers through Division 10B of the ITAA1936.

Implementation

2.4 The offset was announced by the Federal Government on 4 September 2001 as part of its Integrated Film Package, which includes increased funding for Australias local film industry. The offsets features were announced to include the following:

•

films with qualifying Australian production expenditure of at least $15 million and less than $50 million will have to spend 70% of their total expenditure in Australia to qualify;

•

films with qualifying Australian production expenditure of $50 million or over will not have to meet the 70% requirement;

•

the offset is to be applied at a fixed rate of 12.5% to qualifying Australian production expenditure on a film project;

•

films that are not completed by 4 September 2001 will be able to apply for the new offset; and

•

tax deductions will also continue to be available under Divisions 10B and 10BA of the ITAA 1936 but a film cannot receive both the new tax offset and the existing Divisions 10B or 10BA deductions, or FFC funding. A Film Licensed Investment Company will not be able to invest any of its concessional capital in a film production seeking the offset.

2.5 DCITA, the Commonwealth Department with responsibility for film policy, will manage the program. Applications for final certification will be initially processed by DCITA; where particular concerns about the budget arise those concerns can be referred to an independent line producer who works predominantly on film budgets. Applications will then be referred to an independent board appointed by the Arts Minister. The Boards title will be the Film Certification Advisory Board. The Board will make a recommendation to the Arts Minister. The Arts Minister will certify eligibility for the offset. The offset will be claimed in the tax return for the year, on the basis of the qualifying expenditure. The certificate will then be retained by the company for the usual period for tax purposes.

Offset for film production

2.6 The measure provides for a offset of 12.5% of qualifying Australian production expenditure, provided to the film producer on completion through the producers tax return. The offset amount is derived by applying the 12.5% rate of assistance to qualifying Australian production expenditures. The offset amount is then applied to any Australian tax liabilities of the producer and any excess would be refunded.

2.7 This measure provides certainty to film producers as it is uncapped. The fact that it is uncapped means that the offset will be delivered without administering agencies having to consider Government budget factors.

Assessment of impacts

Impact group identification

2.8 The purpose of the Governments policy with respect to this film production incentive is to attract expenditure on large budget film productions to Australia. The groups to be affected by this measure include:

•

large film studios involved in the production of big budget films;

•

film producers;

•

the Australian film industry; and

•

the ATO and the DCITA as joint administrators of the offset for film production in Australia.

Benefits

2.9 Companies that complete large budget films in Australia, either by themselves or by contract, are likely to benefit from this proposal. In particular all companies that complete films in Australia with qualifying Australian production expenditure of at least $15 million:

•

will be entitled to an incentive which will amount to approximately 10% of a films cost of production (varying with the proportion of qualifying Australian production expenditure to total production expenditure); and

•

will benefit from the experience gained from personnel in the Australian film industry who will be increasingly exposed to work on large budget film productions.

2.10 The Australian film industry is expected to benefit from the offset in the following ways:

•

increased exposure of Australian casts and crews to new skills used in big budget film production;

•

a small increase in the number of big budget films produced in Australia and/or a smoother investment pattern in such projects;

•

increased expenditure on Australian casts, crews, post-production facilities and ancillary services;

•

an increase in investment in Australian infrastructure; and

•

helping Australian films move from small to medium to slightly larger budgets, thereby enhancing the quality of local films, viewer enjoyment and their commercial success.

2.11 The film and television production industry contributes income, averaging $1.1 billion annually to the Australian economy, employs more than 29,000 people, and earned export revenue of $145 million in 1998-1999. Foreign productions contribute substantially to this total. The value of productions shot in Australia under foreign creative control increased from $144 million in 1996-1997 (with $79 million spent in Australia) to $325 million in 1999-2000 (with $115 million spent in Australia).

2.12 The tax offset should attract increasing levels of eligible production over the 5-year period, thereby increasing the potential benefits for local players. The expected growth of the value of foreign production in Australia is up to $850 million in 2005-2006. This represents around 5 large scale films a year (with total average budget of $120 million and average expenditure in Australia of around $60 million), and a similar number of medium scale films (with total average budget of $50 million and average expenditure in Australia of around $37.5 million). Beyond this timeframe, this figure is likely to continue to grow, due to growth in average film production costs and some capacity increase in the Australian industry.

2.13 There has been detailed work undertaken to assess the multiplier effects of big budget film production, both locally and internationally. The results have proven highly contentious, principally due to the complexity of the filmmaking business and the number of associated industries potentially affected, which depends on a productions budget and genre. For these reasons we have not attempted to carry out a multiplier effect analysis against the options proposed.

Analysis of costs

2.14 In determining the cost and benefits of this measure an assumption in relation to the expected uptake of this measure has been made as follows. Over the first 5 years of the offsets operation, it is expected that the offset will apply to 6 big budget films in Australia each year, and 4 medium budget level productions.

Compliance costs

2.15 An applicant for the offset for film produced in Australia will need to meet the eligibility criteria. These criteria include:

•

a company must either be an Australian resident or if not an Australian resident have a permanent establishment in Australia and have an ABN;

•

the film has been completed and was completed on or after 4 September 2001;

•

the film was produced for exhibition to the public in cinemas, by way of television broadcasting, or by distribution to the public as a video recording;

•

the film is a feature film or a mini series of television drama;

•

a film company must spend a minimum of $15 million in qualifying Australian production expenditure on production of an eligible film;

•

if a films qualifying Australian production expenditure is equal to or greater than $15 million but less than $50 million, the producers will be required to spend a minimum of 70% of the films total production expenditure on qualifying Australian production expenditure to be eligible for the offset; and

•

film productions that spend $50 million or more in Australia will automatically qualify regardless of the percentage ratio of qualifying Australian production expenditure to a films overall expenditure.

2.16 Adherence to and demonstration of the Australian expenditure requirement will also impose some compliance costs on foreign film producers. Nonetheless, these compliance requirements are less burdensome than those required in competitor countries. For example, in both the United Kingdom and Canada, there is also a requirement to justify the proportion spent on local labour. DCITAs information strategy will also go some way to easing this disbenefit.

2.17 There should be limited additional compliance costs for those companies which decide to claim the offset. The burden imposed by the record keeping provisions in relation to their qualifying Australian production expenditure is the same as it would be without the existence of the tax offset. Some procedures associated with completion of certification of a film may impose additional compliance costs, for necessary applications and associated provision of information.

Administration costs

2.18 DCITA and the ATO will require additional resources to ensure effective and transparent processes during certification of films and assessment of returns. During the initial stages of the incentives operation, DCITA would also need to implement an information strategy about revised arrangements.

2.19 Estimated departmental expenses associated with the proposed measures will be $4.1 million over 5 years. These expenses will cover:

•

additional staff and associated costs to manage the program and provide a secretariat to the Film Certification Advisory Board;

•

costs associated with the Board;

•

employment of a line producer as required to provide an independent assessment of applications; and

•

an information campaign including establishment of a website to enable online applications.

Government revenue

2.20 The additional cost of the offset for film production in Australia will be funded, through additional budget appropriations. A summary of the annual estimated cost of assisting big budget film production in Australia is provided in Table 2.1.

Table 2.1: Expected annual cost of the offset for big budget film production in Australia

2.21 The numbers indicated in Table 2.1 provide the estimated revenue implications of this measure.

Other issues - consultation

2.22 At the time of the announcement on 4 September 2001, the Arts Minister undertook to consult with the industry on how the concepts of total budget and qualifying Australian production expenditure would be defined. A discussion paper canvassing options for these definitions, and also administrative arrangements, was released on Tuesday 13 November 2001, with a series of consultations held in Melbourne, Sydney and Brisbane, and a phone conference with the MPAA and its affiliate members. Officials from both DCITA and the ATO conducted these consultations, except in Melbourne, which was a one-on-one meeting between DCITA and the Victorian state film body. Within Australia, the paper was distributed to all Commonwealth film agencies, all state film agencies, all peak bodies representing those employed in the Australian film industry, Fox Studios, Warner Bros, and any individual who had indicated an interest in receiving the paper.

2.23 There were comments made on the original decision. Both the Australian industry and the MPAA wanted the offset extended to episodic television and lower budget movies. However, the intent of the measure is to attract high quality productions to Australia, rather than attract a large volume per se, which would have a concomitant impact on the local industrys ability to continue production. Some sectors of the Australian industry also argued for a labour test component, either to exclude the employment of non-Australians or require that a certain proportion of Australians be employed. This was not considered appropriate. There is already a degree of regulation through the immigration system for the entry of cast and crew, requiring union consultation. Further, one of the main attractions for offshore producers is the lower labour costs in Australia.

2.24 In relation to the actual discussion paper, those consulted were generally satisfied with what had been proposed. Several constructive suggestions were made which were taken on board. The MPAA asked that the exclusion provision for individuals be reconsidered, as our original option to exclude the 2 highest paid personnel would have reduced the level of the offset as a proportion of total budget to a point where it was no longer an incentive. This has now been revised to allow producers to exclude the costs of one individual, should they want. We had proposed for qualifying Australian production expenditure that money had to have been spent in Australia, and the MPAA suggested that this be changed to proof that the activity being claimed against had actually taken place in Australia. This change was accepted, which is less subject to rorting.

2.25 There have been further one-on-one consultations with both the MPAA and members of the local industry, to ensure that the definitions in the legislation are workable and concur with industry practice.

2.26 All participants in the November 2001 consultation round have been provided with a revised version of the discussion paper, incorporating changes made.

Conclusion

2.27 The measure contained in this bill attracts expenditure on large budget film productions in Australia which will increase opportunities for Australian casts, crew, post-production and other services to participate in large budget productions and showcase Australian talent.

2.28 The measure will also ensure that Australia benefits from increased investment in film productions, enhanced production skills and enhanced industry infrastructure.