House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Deductions for Share Capital Subscribed to Film Licensed Investment Company

This Bill amends the Income Tax Assessment Act 1997 (1997 Act) to provide a tax deduction for amounts paid to subscribe for shares in a Film Licensed Investment Company (FLIC) during the period the FLIC is licensed to raise share capital which will qualify for the deduction.

Under the Film Licensed Investment Company Bill 1998, a FLIC may be so licensed. That Bill contains provisions which establish a scheme to encourage investment in the Australian film industry through the tax concession for FLIC shareholders provided their share capital is invested by the FLIC in qualifying Australian films.

This legislative package is intended, as a pilot measure, to provide assistance to the Australian film production industry in addition to that currently provided through Division 10BA of the Income Tax Assessment Act 1936 (1936 Act).

Date of effect: Deductions will be available for eligible FLIC shareholders for the income years ending 30 June 1999 and 30 June 2000.

Proposal announced: The proposal was announced by the Minister for Communication, the Information Economy and the Arts on 15 November 1997.

Financial impact: The revenue cost of the FLIC pilot scheme is capped by the limited amount of concessional share capital that may be raised by FLICs - a total of $40 million over the two income years 1998-99 and 1999-2000.

Compliance cost impact: A minimal cost of compliance is expected. Compliance for FLIC investors may be slightly easier than for those who seek deductions under Division 10BA on a film-by-film basis.

Regulation Impact Statement: A regulation impact statement relating to the FLIC tax concession pilot scheme is contained in the Explanatory Memorandum to the Film Licensed Investment Company Bill 1998. Chapter 1

Chapter 1. Film Licensed Investment Company

Overview

1.1 Schedule 1 of the Bill will insert new Division 375-H into the Income Tax Assessment Act 1997 (the 1997 Act). Division 375-H will allow a deduction to taxpayers who subscribe for shares in a Film Licensed Investment Company (FLIC) during the period the FLIC is licensed to raise concessional share capital. The Division also provides for the deduction to be disallowed where the FLIC has breached conditions imposed under the pilot scheme established by the Film Licensed Investment Company Bill 1998 (the FLIC Bill) and the Minister administering the FLIC Act 1998 (the Minister) decides to remove the tax concession status of the shares.

1.2 Part 2 of Schedule 1 contains technical amendments to the 1997 Act and the 1936 Act that are consequential upon the enactment of Division 375-H .

Summary of the amendments

Purpose of the amendments

1.3 The amendments have the following broad features, they:

•

authorise a deduction to a shareholder in a FLIC for moneys paid in acquiring shares from the FLIC during the FLICs licence period (ie. before 1 July 2000);

•

withdraw entitlement to the deduction where the Minister has decided to remove the concessional status of the shares in the FLIC because the FLIC has breached conditions imposed under the FLIC Bill;

•

prevent the transfer - under company group loss rules - of tax losses (including capital losses) incurred during a FLIC's licence period;

•

deny a tax deduction for amounts of concessional capital that the FLIC spends in respect of qualifying Australian films.

Background to the legislation

1.4 In August 1996 the Minister announced that Mr David Gonski would conduct a Review of Commonwealth Assistance to the Film Industry. In responding to Mr Gonski's report, the Minister announced to the Screen Producers Association of Australia 12th Conference that there would be a pilot FLIC scheme for 2 years from 1998-99. Existing film investment tax concessions under Divisions 10B and 10BA would be retained. Under the pilot, FLICs would be able to raise concessional share capital of up to $40 million over two years to 30 June 2000, and taxpayers making the capital subscriptions to the FLICs would get a tax deduction for their payments.

1.5 The Film Licensed Investment Company Bill 1998 contains the provisions necessary to implement the pilot FLIC scheme. It covers matters such as applications, grant of licences, licence conditions, consequences of breach of conditions, and exchange of information for purposes of administration.

Explanation of the amendments

Part 1 - Insertion of new Subdivision

Subdivision 375-H - Deductions for shares in a FLIC

Provisions affecting members of a FLIC

What can you deduct?

1.6 New section 375-855 expresses the basic rule that a taxpayer who pays money for shares in a FLIC is entitled to a deduction for the payment if the shares are issued to the taxpayer by the FLIC during its licence period. For that purpose, a FLIC is a company that has been granted a licence under the FLIC Act to raise concessional capital. [Subsection 375-855(2)]

When can you claim the deduction?

1.7 Under section 375-860 the deduction is allowable for the income year in which the shares are fully paid and issued. In a case where moneys are paid in one year but the shares are not issued until the next year, the deduction is allowable in that later year.

Capital Gains

1.8 Taxpayers who obtain a deduction for the cost of shares in a FLIC are not entitled to have that deductible cost counted in calculating any taxable capital gain on a subsequent disposal of the shares. This was announced in the Government's 1997 Budget and proposed amendments for CGT cost base adjustment will reduce the amount of an asset's consideration required to be taken into account in working out the asset's cost base or indexed cost base. The amount of consideration is reduced under those sections to the extent of any deductions that are allowable to the taxpayer in respect of the consideration.

How can you lose your entitlement?

1.9 New section 375-865 specifies the circumstances under which a deduction under Subdivision 375-H can be lost. This will occur if the Minister decides to remove the concessional status of the shares under powers set out in the FLIC Bill. Broadly, the Minister is entitled to remove the concessional status of the shares if the FLIC has breached the conditions imposed on it under the FLIC Bill. The Minister is not obliged to remove the concessional status if, for example, he considers the breach of conditions is minor or can be remedied by the FLIC.

1.10 A deduction may be lost, too, if the Commissioner of Taxation is satisfied that the FLIC has breached a relevant condition imposed by the FLIC Act. However, before taking any action to disallow a deduction, the Commissioner must notify the Minister that the Commissioner considers that there has been a breach of licence condition. The Minister has authority to decide whether or not the breach is of sufficient gravity that shareholders should lose their deductions. If the Minister does not respond within 6 months, the Commissioner may disallow deductions, but must notify the Minister about the loss of entitlements that have occurred. [See new subsections 375-865(2) and (3)]

How this Subdivision applies to partners and partnerships

1.11 New section 375-870 covers the situation where the partners in a partnership subscribe jointly for shares in a FLIC and the partnership pays for the shares. The partnership will not get the deduction for the share subscription; each partner will be entitled to a deduction of a proportion of the payment for the shares that is agreed between the partners. If there is no specific agreement, each partner's deduction proportion is the same as the partners share in the net income or partnership loss of the partnership for the particular year of income.

Provisions affecting film licensed investment companies

Tax losses cannot be transferred to or from FLICs

1.12 New subsection 375-875(1) prevents a FLIC from transferring a tax loss or a net capital loss incurred during the period its licence is in force to another company in the same group. New subsection 375-875(2) applies in a similar manner to prevent companies in the same group transferring a tax loss or a net capital loss to the FLIC.

FLIC cannot claim deductions for concessional capital

1.13 Where the FLIC has invested concessional capital in a film as required by the FLIC Bill, the FLIC is not entitled to a taxation deduction for the money spent in making that investment. [New subsection 375-880(1)] Concessional capital means the money paid to the FLIC as consideration for the issue of shares during the FLIC's licence period. [New subsection 375-880(2)]

Part 2 - CONSEQUENTIAL AMENDMENTS

Income Tax Assessment Act 1997

Deductions

1.14 The table in section 12-5 of the 1997 Act lists the provisions which deal with specific types of deductions. This table is amended to include appropriate references to deduction amounts under the FLIC pilot scheme to which Division 375-H applies.

1.15 Subdivision 40-B has a table of capital allowances. That table is to be amended to include a reference to the deduction for moneys paid for shares issued by Film Licensed Investment Companies.

Defined Terms

1.16 Part 2 will add a number of new definitions to the Dictionary of defined terms in section 995-1 of the 1997 Act, as follows:

Income Tax Assessment Act 1936

1.17 In general, the Commissioner of Taxation can amend an assessment to increase a taxpayer's liability within four years from the date the tax became due and payable under the assessment. Existing subsection 170(10AA), which overrides that time limit in order to give effect to specified provisions of the 1997 Act, is being amended to include a reference to deductions allowable under new Division 375-H .