House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

General outline

The Bill will put in statutory form the taxation concessions for capital investment in new Australian films that were foreshadowed in the Prime Minister's Policy Speech for the last elections. The concessions were the subject of a detailed ministerial statement on 18 December 1980.

Broadly, the concessions provide for 150 per cent of capital expenditure in the production of an Australian film to be eligible for deduction where that expenditure results in the acquisition of the initial copyright in the film. In addition, an amount of net earnings by an investor in such a film of up to 50 per cent of the amount of his or her investment in it is to be exempt from tax. The deduction will be available after the copyright in the relevant film comes into existence and in the year of income in which that copyright is first used for the purpose of producing assessable income.

Persons eligible

The concessions are to be available to a person who is a resident and who outlays capital expenditure on, or as a contribution towards, the production of a qualifying Australian film where, as a consequence of that expenditure, the person becomes the first owner, or one of the first owners, of the copyright in the film. A further requirement for eligibility is that the copyright or interest therein is acquired and used in the production of assessable income through the exhibition of the film to the public in cinemas or by way of television broadcasting.

Qualifying Australian films

To qualify for the new concessions the relevant investment must be in a film that is certified by the Minister for Home Affairs and Environment -

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as being a feature film (including animated feature length movies and telemovies), a documentary or a mini-series of television drama, produced for exhibition to the public in cinemas or by way of television broadcasting; and

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as having been made wholly or substantially in Australia (or an external Territory) and as having a significant Australian content or as being a film made pursuant to an agreement between the Australian government and another government.

Provisional certificates of qualification may be obtained from the Minister for Home Affairs and Environment prior to the completion of a film. However, eligibility for the concessions is to be dependent on a final certificate being given by the Minister on the film's completion.

The deduction

A person qualifying for the concessions is to be entitled to a deduction equal to 150 per cent of the amount of his or her capital expenditure in or by way of a contribution to the production of a qualifying Australian film where that expenditure is made under a contract entered into on or after 1 October 1980.

The deduction will be available after the film is completed and in the year in which the person first uses the copyright or his or her interest therein in the production of assessable income through exhibition of the film.

Expenditure will qualify for deduction only to the extent that it is expended directly in the production of the film. In circumstances where money is expended by way of contribution to the production of a film, the expenditure will qualify for deduction only to the extent that the moneys so contributed are applied directly in the production of the film.

The income exemption

A person who incurs expenditure to which the deduction concession applies is also to be entitled to an exemption of his or her net receipts from the film, up to an amount equal to 50 per cent of his or her qualifying expenditure.

The exemption is to apply to net receipts from the film after reduction for deductions available to the investor in respect of revenue expenses incurred in deriving those receipts, for example, interest on borrowed funds.

Generally, all receipts from the film, including amounts received on the disposal of the whole or a part of a person's interest in the copyright, will be treated as assessable income, subject to the income exemption conferred by the concessions. Where an individual or company has obtained a deduction under the new rules as a resident of Australia and subsequently becomes a non-resident, the person's income from the film will generally continue to be assessable in Australia.

An exception to the general inclusion of receipts in assessable income will apply in the case of income derived from and taxed in a country outside Australia where that income is otherwise exempt from Australian tax. Such income is to remain exempt from Australian tax to the extent that the income relates to the exhibition of the film in that other country. Where, by the operation of this rule, overseas income is subject to tax in Australia and is also subject to tax in its country of source, a credit in respect of the overseas tax will be available.

Carry-forward losses

Losses generated in a previous year by deductions conferred by the concessions will be available to be carried-forward for deduction, but only against income derived from qualifying Australian films. As in the case of carry-forward losses generally, such film investment losses will be capable of being carried-forward for deduction for a maximum of seven years.

Partnerships

The new concessions will not apply directly with respect to film investments made by partnerships. Rather, the concessions will be allowed to the individual partners.

For this purpose, any qualifying expenditure by a partnership will be treated as having been expended by the partners either in accordance with any agreement as to how the expenditure is to be borne or, in the absence of any agreement, according to each partner's interest in the partnership income. Any income derived from the film, including amounts in respect of the disposal of the copyright, will be similarly apportioned to each partner.

Where, on the formation or dissolution of a partnership, on a variation in the constitution of a partnership or in the interests of partners, a change occurs in the proprietary interests of persons in a film, the resulting diminution in interest and accretion in interest respectively, will be treated as a disposal and acquisition of a part of the copyright.

Provisional tax

Deductions conferred under the new concessions in a year of income will not be taken into account in determining the amount of provisional tax payable in respect of the succeeding year of income.

Safeguards

The Bill incorporates safeguards against arrangements to inflate film production costs and attempts to set a below-arm's length consideration for the disposal in whole or in part of a copyright.

A further general "at-risk" rule is to apply so that expenditure qualifying for the new concessions is to be limited to amounts in respect of which the investor is at risk of loss should the film venture fail. Any amount of expenditure which fails to qualify for the new concessions by virtue of this test will be available for deduction under the existing two year write-off concession for investment in Australian films, subject to the existing safeguards applying with respect to that concession.

Safeguards against the re-arrangement of contracts entered into prior to 1 October 1980 in an attempt to make expenditure qualify for the new concessions are also included.

Election that concessions not apply

A person is to be entitled to elect not to take the benefit of the new concessions in relation to investment in a particular film. A person making such an election will be entitled to seek deductions for his or her expenditure under the existing two year write-off provisions.

More detailed notes on the clauses of the Bill are contained in the notes that follow.

Notes on Clauses

Clause 1: Short title, etc.

Sub-clause (1) provides formally for the citation of the amending Act as the Income Tax Assessment Amendment Act 1981. By sub-clause (2) the Income Tax Assessment Act 1936 is to be referred to in the amending Act as "the Principal Act".

Clause 2: Commencement

Under this clause the Amending Act will come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

General plan of remaining clauses

It is convenient at this point to outline the structure of the key operative clauses of the Bill, and their relationship with each other.

A new Division 10BA to be inserted in Part III of the Principal Act by clause 13 will set out the various rules that are to govern the deduction for 150 per cent of qualifying expenditure on Australian films, including those that cover what is an Australian film. Also within Division 10BA are measures by which revenue expenses are to be deducted only against income from the film concerned.

By reason of clause 4, where expenditure on a film qualifies for the 150 per cent deduction, all earnings from the film will, basically, be subject to tax. However, provisions in clause 3 will allow exemption from tax of the net amount of such earnings, up to 50 per cent of deductible expenditure.

Where the amendments in clause 4 cause income taxed abroad to be subject to Australian tax, clause 14 will result in a credit for the foreign tax.

Clause 7 sets out the rules outlined earlier concerning the carry-forward from one year to another of losses resulting from the 150 per cent deduction.

Finally, clauses 10, 11 and 12 are consequential amendments to the existing provisions governing deductions over 2 years for capital investment in Australian films.

Clause 3: Exemption of certain film income

Clause 3 proposes the insertion of new section 23H in the Principal Act to give effect to the income exemption conferred under the new concessions.

As explained in the introductory note, a taxpayer who incurs eligible expenditure in the production of a qualifying film is to be entitled to an exemption of net receipts from the film of up to an amount equal to 50 per cent of his or her deductible capital expenditure on the film. Section 23H operates to confer this exemption on the following broad basis -

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revenue expenses of a taxpayer in relation to the investment (i.e., expenses that are not of a capital nature, such as interest on moneys borrowed to make the investment) incurred in a year of income are to be deductible only against otherwise assessable receipts from the film (see notes on clause 13 - proposed new section 124ZAO);

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if in a year of income the deductions otherwise available in respect of revenue expenses exceed the amount of assessable film income derived in that year, the excess will be carried forward for deduction in the next succeeding income year (see notes on clause 13 - proposed new section 124ZAO);

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the net receipts of the taxpayer from the film in a year of income will be exempt from tax to the extent that those receipts together with the net receipts of prior years do exceed 50 per cent of the amount of the taxpayer's qualifying investment in the film.

Sub-sections (1) and (2) are the operative provisions of section 23H.

Those sub-sections operate to confer the exemption on the basis of comparison of the "net assessable income" of a taxpayer from a film in a year of income with the amount of the "unrecouped capital expenditure" of the taxpayer relating to that film at the end of the year of income.

The "net assessable income" of a taxpayer from a film in a year of income is defined in sub-section (3) as the amount of the income from the film that would, but for the exemption to be conferred by section 23H, be included in the assessable income of the taxpayer in that year of income by the operation of proposed new section 26AG (clause 4), less the amount of any revenue expenses deductible against that income in accordance with proposed new section 124ZAO.

As will be explained in more detail in the notes on proposed new section 26AG, that section will apply, broadly, to include in the assessable income of a taxpayer all income derived in a year of income from the use of the taxpayer's interest in the film copyright acquired by virtue of his or her investment in the production of the film. Section 26AG will also apply to include in the taxpayer's assessable income of the year of disposal any amounts receivable in respect of the disposal in whole or in part of the copyright interest. Any exempt film income to which section 26AG does not apply by virtue of being derived from the exhibition of a film in a country outside Australia and being subject to tax in that country will not be taken into account in determining the amount of the exemption available under section 23H.

Broadly, the "unrecouped capital expenditure" of a taxpayer at the end of a year of income is an amount equal to the taxpayer's remaining exemption entitlement after taking into account any exemption conferred in relation to income from the film derived in a preceding year of income. Thus, sub-section (4) defines the "unrecouped capital expenditure" at the end of a year of income as the amount equal to one-half of the taxpayer's deductible expenditure on the film in that or any preceding year of income, less the sum of the amounts of any exemption conferred on the income from the film in a preceding year of income.

In circumstances where the "net assessable income" of the taxpayer from a film in a year of income is equal to or less than the amount of the "unrecouped capital expenditure" of the taxpayer in that film at the end of the year of income, sub-section (1) applies to exempt the amount of the net assessable income from the film of that year.

Where the net assessable income of a taxpayer from a film in a year of income exceeds his or her remaining exemption entitlement in relation to that film, sub-section (2) applies to exempt an amount of net assessable income from the film equal to the remaining exemption entitlement.

Sub-section (5) will ensure that, should a taxpayer outlay qualifying expenditure in the production of a film in an income year later than that in which income is first derived from the film, the expenditure is capable of being taken into account in determining any exemption entitlement in respect of that income. This situation could arise where income is derived under a pre-sale agreement entered into prior to the taxpayer's total investment in the film being made.

Sub-section (6) is a drafting measure that will ensure that revenue expenses incurred in relation to a taxpayer's investment in a film will not be reduced by virtue of some or all of the income derived from the film being exempt under section 23H. Such expenses are to be deductible in accordance with proposed new section 124ZAO, as explained in the introductory notes to this clause (see also the notes on that section in relation to clause 13).

Sub-section (7) is a drafting measure that enables the use in section 23H of the shortened expression "expenditure of capital moneys" as a reference to expenditure of moneys that is expenditure of a capital nature.

Clause 4: Certain film proceeds included in assessable income

Clause 4 proposes the insertion in the Principal Act of new section 26AG to introduce a code for the assessment of receipts from the use or disposal of a film copyright by a taxpayer whose capital expenditure on the film has qualified for deduction under the new concessions.

As a first step, sub-section (1) restricts the operation of the section to a taxpayer who has become the first owner of an interest in a film copyright by virtue of having outlaid capital expenditure that qualifies for deduction under the new concession.

Sub-section (1) then operates in conjunction with sub-section (2) to include in the assessable income of the taxpayer any amount derived by the taxpayer in a year of income as consideration for the use of, or the right to use, the copyright or the film, to the extent to which that amount is attributable to the interest obtained by the taxpayer in the copyright as a consequence of the qualifying investment. Those sub-sections also apply to include in the taxpayer's assessable income of a year of income any amount receivable in respect of the disposal in that year of the whole or a part of the relevant copyright interest.

One purpose of sub-sections (1) and (2) is to subject to assessment any amounts receivable on the disposal by a taxpayer of an interest in a film copyright which arose out of an investment qualifying for the new concessions. The sub-sections will also apply to identify income of a taxpayer which is to be subject to the new exemption of income under proposed section 23H. Income derived by a taxpayer from the use of a film copyright, and which would otherwise be subject to assessment under existing provisions of the Principal Act, is of course within the scope of section 26AG.

As the 150 per cent deduction is to be available only to a resident taxpayer, the broad effect of sub-sections (1) and (2) will be to include in the taxpayer's assessable income proceeds derived from exploitation of the film world-wide. This effect is, as explained in the notes on sub-sections 26AG(7) and (8) that follow, to be subject to an exclusion of income derived from a country outside Australia from the exhibition of the film in that country where the income is subject to tax in that country. Such income is to continue to be exempt under the existing provisions of paragraphs 23(q) and 23(r) of the Principal Act.

Sub-section (3) applies in circumstances where on the formation or dissolution of a partnership, or a variation in the constitution of a partnership or in the interests of partners, a change occurs in the interests of a person or persons in a film and where at least one of the persons who owned an interest before the change owns an interest after the change.

In the absence of sub-section (3), that change in interest could not be treated as giving rise to a disposal of a copyright interest. Sub-section (3) ensures therefore that a taxpayer who, as a consequence of the change, no longer has an interest in the copyright is to be treated as having disposed of his interest. The consideration receivable on the disposal of that interest will generally be taken to be the value of the taxpayer's former interest. However, in a case where the change occurred in pursuance of an agreement which specified as the value of the copyright for the purposes of the agreement an amount greater than the value of the copyright at the time when the change occurred, the consideration receivable on the deemed disposal of the taxpayer's interest will be the appropriate proportion of the specified value.

Where as a result of the change, the taxpayer's interest in the copyright is reduced, the taxpayer will be treated by sub-section (3) as having disposed of a part of his interest. An amount will be deemed receivable in respect of the disposal of the part interest on an equivalent basis to that applying where a taxpayer is taken to have disposed of the whole of his or her interest.

Sub-section (4) mirrors the existing section 124H of the Principal Act which applies for purposes of the existing two year write-off concession for investment in Australian films. Sub-section (4) will ensure that an amount received in respect of an infringement of a film copyright is capable of being treated as assessable income arising from the copyright.

Sub-section (5) defines for the purposes of the operation of sub-section (1) what is meant by references to consideration receivable on the ordinary disposal by a taxpayer, in whole or in part, of his or her interest in a film copyright. By sub-section (5), the consideration receivable in a case where there is a specified price on the disposal is that price less any expenses of disposal. Where the interest is disposed of together with other property for an overall specified price, the Commissioner of Taxation is to be authorised to determine the part of the specified price that relates to the disposal of the interest.

Sub-section (6) is to apply as a safeguard against attempts to apply an artificially low consideration on the disposal of a taxpayer's interest in a film copyright by parties who are not operating at arm's length in relation to that disposal. In these circumstances, sub-section (6) operates to treat the amount of consideration for the disposal as being an amount equal to the value of the interest at the time of the disposal.

As mentioned in the notes on sub-section (1), sub-section (7) will apply in a case where a resident taxpayer derives income from a country outside Australia and Papua New Guinea from the exhibition of a film in which he has made an eligible investment and where that income is subject to tax in that country. Under existing paragraph 23(q) of the Principal Act such income would be exempt from tax if it is not a case where, because Australia has a double taxation agreement with the other country, section 12 of the Income Tax (International Agreements) Act 1953 operates to make paragraph 23(q) inapplicable. (Papua New Guinea is specially mentioned because the credit, rather than the exemption, method of relief applies in relation to income from it.)

By virtue of sub-section (7), the paragraph 23(q) exemption will continue to apply, but only to the extent that the income is attributable to exhibition of the film in the overseas country that taxes the income.

Sub-section (8) will apply to ensure that film income derived by a person who, having outlaid qualifying expenditure on a film while a resident of Australia, has become a non-resident is treated on an equivalent basis to film income derived by a resident. In the absence of sub-section (8), all income derived outside Australia by a non-resident would be exempt from tax under paragraph 23(r) of the Principal Act. Sub-section (8) will mean that film income derived by a non-resident from an overseas country that is attributable to a copyright interest acquired as a result of expenditure qualifying for the new concession is to be exempt only to the extent that it was derived from the exhibition of the film in that country and has been subject to tax in that country.

As explained in the notes on clause 14, where, by the operation of these rules, any overseas income is subject to tax both in Australia and in an overseas country, a credit in respect of the overseas tax will be available. This situation would arise in circumstances where the income is derived in one country from the exhibition of the film in another country.

Sub-sections (9) and (10) are consequential on the application of the new concessions to partners in a partnership. As explained in the notes on clause 13 (proposed section 124ZAP) any qualifying expenditure by a partnership on the production of a film will be treated as having been expended in appropriate proportions by the partners. As such, the partners are to be entitled to the new concessions on the basis of that expenditure and their interest as a partner in the film copyright. Sub-section (9) ensures therefore that any income derived by the partnership from the use of the copyright is assessable on the basis of section 26AG in the hands of the partners. For this purpose the partnership income is to be allocated to the individual partners in accordance with any agreement as to the respective derivations of the income by the partners. Where no such agreement exists the income is to be attributed to the partners according to each partner's interest in partnership income generally. An effect of sub-section (9) will be to ensure that the partners individually are to be entitled to the exemption conferred by new section 23H.

Sub-section (10) applies similarly to attribute to partners any consideration receivable by a partnership on the disposal of the whole or a part of a film copyright. The amount of any consideration taken to have been received by a partner is then to be attributed to the disposal of the whole or a part of the partner's interest in the copyright.

Sub-section (11) applies to ensure that in the operation of sub-section (10) any amount of consideration receivable by a partnership is determined on the same basis as that which applies where a partnership is not involved. For example, sub-section (11) will ensure that the arm's length safeguard embodied in sub-section (6) applies with equal force to a disposal by a partnership.

Sub-section (12) is consequential on the operation of proposed new section 124ZAM (clause 13).

As explained in the notes on that section, an amount of expenditure incurred in the production of a film that gives rise to an eligible copyright interest may, by the operation of the "at risk" test in that section, be deductible in part under the new concession and in part under the existing two year write-off concession (Division 10B of the Principal Act).

Unlike the new concession, Division 10B applies in the case of a disposal of an interest in a film copyright to effect a balancing adjustment. The amount of any consideration on the disposal is applied to reduce the amount of any deductions remaining available in relation to that interest or, where deductions have been fully allowed, to include in the assessable income of the taxpayer the amount of the consideration up to the amount of the deductions allowed.

Sub-section (12) will ensure, where any consideration is received on the disposal in whole or in part of an interest to which both the new concessions and Division 10B applies, that the amount of the consideration is first taken into account to effect the balancing adjustments required under Division 10B. Should the amount of the consideration exceed the amount taken into account for the purposes of those balancing adjustments, the excess will be treated as assessable income under section 26AG.

Sub-section (13) gives extended meanings to a number of terms used for the purposes of the operation of section 26AG.

Paragraph (a) will ensure that an assignment by a taxpayer of a right to receive amounts as consideration for the use of a film copyright is taken to give rise to a disposal by the taxpayer of the whole or a part of the taxpayer's interest in the copyright.

Paragraph (b) ensures that income from the granting of a licence in respect of a copyright in a film that has yet to come into existence is capable of being included in the assessable income of the taxpayer.

By paragraph (c) the Commissioner of Taxation is to be empowered to attribute a reasonable value to an interest in a film copyright for the purposes of the operation of section 26AG in circumstances where there is insufficient evidence of the value of the copyright at that time.

Paragraph (d) is a drafting measure that enables the use in section 26AG of the shortened expression "expenditure of capital moneys" as a reference to expenditure of moneys that is expenditure of a capital nature.

Paragraph (e) ensures that for the purposes of section 26AG a reference to a person becoming the owner of an interest in a copyright includes the case of a taxpayer who becomes the owner of the whole copyright.

Paragraph (f) defines "copyright" in a way that is consistent with the definition contained in proposed new Division 10BA (clause 13) which applies for the purpose of granting the 150 per cent deduction. The definition of copyright will apply to ensure that income from world-wide exploitation of the film will be subject to the operation of section 26AG.

Clause 5: Divisible deductions

This clause proposes a technical amendment to section 50G, one of the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act. This amendment is consequential upon the insertion in the Principal Act, by clause 13, of new section 124ZAF to allow a deduction for moneys expended in producing, or as a contribution towards the cost of producing, a qualifying Australian film.

In broad terms, the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event", e.g., on the occurrence of a 50 per cent or greater change in shareholders' dividend, capital or voting rights. A net loss incurred in one relevant period is not to be offset against net income derived during another relevant period of the same year unless the company satisfies a "continuing ownership" test or, the alternative "same business" test.

For purposes of these provisions, section 50G describes a category of deductions as "divisible deductions" and directs how such deductions are to be taken into account under those provisions. Very broadly, divisible deductions are those allowable deductions of a year of income which are apportioned or spread in an appropriate manner over the relevant periods of the company in relation to the year of income for the purpose of determining the notional taxable income or the notional loss of the company in relation to each of its relevant periods.

The effect of the amendment proposed by clause 5 will be that a deduction for moneys expended in investing in a film and allowable under section 124ZAF in a year of income will be treated as a divisible deduction and pro-rated over the relevant periods of that year of income on a time basis.

Clauses 6, 7 and 8 : Film losses

Introductory note

The amendments to be made to the Principal Act by these clauses will give effect to the new basis of deduction for carry-forward losses generated by deductions conferred under the new concessions. By these amendments, any such "film losses" will be deductible only against income derived from eligible Australian films. Such film losses will be capable of being carried forward for deduction on this basis for a maximum of seven years.

Clause 6: Losses of previous years

Clause 6 will effect amendments to section 80 of the Principal Act consequential on the introduction of the new code for deduction of film losses.

Under section 80, a taxpayer who incurs a loss in a year of income may, subject to certain stipulations, carry that loss forward as an allowable deduction against income of any of the seven succeeding years of income. A loss is deemed to be incurred by a taxpayer in a year of income when the allowable deductions for that year exceed the sum of any assessable income and net exempt income derived in the year.

In calculating the loss for a particular income year, any deduction that might be allowable in respect of a carry-forward loss from a prior year of income is not taken into account. Such amounts are deductible in accordance with section 80 (or, as explained below, in accordance with section 80AA) in a year of income in which a taxpayer does not otherwise incur a loss. Paragraph (a) of clause 6 will ensure that any deduction in respect of a carry-forward film loss is similarly excluded in determining the amount of any loss incurred in a year of income.

A loss incurred in engaging in primary production may, by virtue of section 80AA, be carried forward indefinitely. In calculating a loss from engaging in primary production, only primary production income and related allowable deductions are taken into account. Existing sub-section 80(2A) therefore applies to exclude from the determination of any deductions allowable under section 80, so much of any loss incurred in a year of income as is attributable to primary production activities. That loss is deductible, without limit, in accordance with section 80AA, while any remaining non-primary production loss is deductible under section 80, subject to the seven year limit. Paragraph (b) of clause 6 will substitute a new sub-section 80(2A) so as to similarly exclude from the operation of section 80 any film loss that is to be deductible in accordance with proposed new section 80AAA (see notes on clause 7).

Proposed new sub-section 80(2A) will apply to ensure that where a taxpayer is taken to have incurred a loss in a year of income, so much only of the loss as exceeds the sum of any primary production and film losses of that year is deductible in accordance with the operation of section 80.

The operation of new sub-section 80(2A) may be illustrated by the example of a taxpayer who, in a year of income, incurs an overall loss of $20,000 in the year of income, $10,000 of which is attributable to film investment, $8,000 to carrying on primary production and $2,000 to carrying on another business. New sub-section (2A) will have the effect of treating the $2,000 as a loss to be carried forward for a period of seven years in accordance with section 80. Section 80AA will apply to the $8,000 primary production loss, permitting it to be carried forward indefinitely. The proposed section 80AAA will apply to the $10,000 loss, permitting it to be carried forward for deduction against film income for a period of seven years.

Paragraph (c) of clause 6 will insert new sub-section 80(3C) in the Principal Act as a further measure designed to ensure consistency of treatment between a person who derives film income to which new section 26AG applies as a resident and a person who, having obtained deductions under the new concession in respect of expenditure on a film at a time when he or she was a resident, derives income from the film as a non-resident.

The net exempt income of a resident taxpayer for the purposes of the carry-forward loss provisions would, on the existing definition contained in sub-section 80(3), include film income derived from all sources that is exempt from tax, either by reason of new section 23H (clause 3) or by reason of paragraph 23(q) as applied by virtue of new sub-section 26AG(7) (clause 4).

Proposed new sub-section 80(3A), will ensure that the net exempt income of a non-resident taxpayer will be determined on a similar basis by including film income to which section 26AG applies from all sources that is exempt from tax by reason of new section 23H or by reason of paragraph 23(r) as applied by virtue of new sub-section 26AG(8). (Presently the definition of net exempt income of a non-resident applies only to include exempt income from Australian sources.) The amount to be included in the net exempt income of a non-resident taxpayer will be the amount of that exempt income less any expenses incurred in deriving that income and any taxes payable overseas in respect of that income.

Clause 7: Film losses

Clause 7 proposes the insertion of new section 80AAA in the Principal Act to introduce a code for the deduction of film losses of a previous year, arising within the operation of the new concessions.

Broadly, a film loss will, in the first instance, be taken to occur in a year of income where the film deductions (deductions for expenditure on the production of an Australian film and associated revenue expenses that are deductible in accordance with new Division 10BA) exceed the amount of any assessable film income to which section 26AG applies.

The amount to be carried forward as a film loss will be calculated by reference to whether the taxpayer has in the year of income incurred an overall loss in accordance with section 80 and whether the taxpayer has also incurred a primary production loss in accordance with section 80AA. Broadly, the amount of any film loss that will be available to be carried forward will be limited by reference to the amount of the taxpayer's overall loss for the particular year of income remaining after deducting the amount of any primary production loss incurred in that year of income.

Where there is a film loss in a year of income, that loss is to be available for deduction in any of the next succeeding seven years but only against assessable film income to which section 26AG applies. For this purpose the loss will, consistent with the existing operation of the general carry-forward loss provisions, be deductible first against exempt film income.

Sub-section (1) of section 80AAA defines various terms used in the new section.

By paragraph (a) the exempt film income of a taxpayer of a year of income is defined as the amount of the film proceeds to which new section 26AG (clause 4) applies and which are exempt from tax. Exempt film income is thus income that is exempt by virtue of the new concession under proposed section 23H (clause 3) and any film proceeds that would otherwise be assessable under section 26AG but which are exempt from tax by virtue of being subject to tax in another country.

Paragraph (b) defines the assessable film income of a taxpayer of a year of income as the amount of film proceeds to which proposed section 26AG applies and that are assessable to the taxpayer in the year of income.

Film deductions of a taxpayer of a year of income are taken by paragraph (c) to be the sum of any deductions that are allowable to the taxpayer in the year of income under new section 124ZAF (clause 13) for capital expenditure in the production of a qualifying film and deductions for any revenue expenses that are deductible against film income in accordance with proposed section 124ZAO.

Paragraph (d) defines the net exempt film income of a taxpayer of a year of income as the amount of the exempt film income (paragraph (a)) of that year of income reduced by the sum of any taxes payable outside Australia in respect of that income and any revenue expenses incurred in the year of income in deriving that exempt film income.

The net assessable film income of a taxpayer of a year of income is defined in paragraph (e) as the amount of the assessable film income (paragraph (b)) of the taxpayer of that year as reduced by the film deductions (paragraph (c)) of that year of income.

By sub-section (2) "net exempt income" is given a meaning corresponding with that in the existing general loss provisions of section 80.

Thus in the case of an Australian resident "net exempt income" means, broadly, the part of his or her net income derived from all sources that is exempt from Australian tax, as reduced by any overseas taxes payable in respect of the income.

In the case of a non-resident, the term relates to the sum of the net income derived from Australian sources that is exempt from Australian tax and the amount of film income to which new section 26AG applies derived from all sources that is exempt from tax as reduced by any expenses and overseas taxes payable in respect of the income (clause 6).

Sub-section (3) sets out the circumstances in which a taxpayer is to be treated as having incurred a film loss in an income year.

The first requirements in determining whether a film loss has been incurred are that the taxpayer has incurred an overall loss for the purposes of section 80 in that year and that the film deductions of the taxpayer of the year exceed the sum of the assessable film income and net exempt film income of the taxpayer of that year. Where the taxpayer has incurred a primary production loss in that year, it is further required that the amount of the overall loss exceed the primary production loss.

Where these criteria are met the amount of the overall loss that is to be taken to have arisen from the loss on film investments is then determined after having regard to the extent, if any, to which the overall loss is attributable to a primary production loss.

Broadly, where there is no element of primary production loss in the overall loss, the film loss is taken to be the lesser of -

•

the amount of the excess of film deductions of the year of income over the sum of the assessable film income and net exempt film income of the year of income; or

•

the amount of the loss that the taxpayer is deemed to have incurred for the purposes of section 80 of the Principal Act.

Where the overall loss includes a primary production loss, the loss is attributed firstly to the loss on primary production activities. The film loss is thus taken to be the lesser of -

•

the amount of the excess of film deductions of the year of income over the sum of the assessable film income and net exempt film income of the year of income; or

•

the amount by which the overall loss that the taxpayer is deemed to have incurred for the purposes of section 80 of the Principal Act exceeds the amount of the primary production loss for the purposes of section 80AA of the Principal Act.

To the extent that the overall loss is attributed to primary production activities on this basis, the loss will be available for deduction on an unrestricted basis under section 80AA of the Principal Act.

The operation of sub-section (3) is illustrated in the following examples.

In this example, the overall loss of $13,000 that is deemed to be incurred for the purposes of section 80 exceeds the amount of the loss attributable to eligible film investment. Accordingly, a $9,000 film loss will be carried forward for deduction in accordance with section 80AAA against film income derived in any of the subsequent seven income years. The balance of $4,000 will be deductible in accordance with section 80.

In this case the loss attributable to eligible film investments in the year is offset to the extent of $5,000 by the net income derived from other activities. Accordingly, a $4,000 film loss will be carried forward for deduction in accordance with section 80AAA.

In this example, the combined losses from eligible film investments and primary production of $11,000 are offset by the net income of $4,000 from other activities. Of the resultant overall loss of $7,000, $2,000 is attributable to primary production activities which is deductible in future years on an unrestricted basis in accordance with section 80AA. The remaining $5,000 of the overall loss is attributed to the loss on eligible film investments with the result that $5,000 is carried forward as a film loss deductible in accordance with section 80AAA.

In this example, the combined losses from eligible film investments and non-primary production activities of $13,000 are offset by the net income of $10,000 from primary production activities. The overall loss is attributed firstly to eligible film investments with the result that a $3,000 film loss is carried forward for deduction in accordance with section 80AAA.

Sub-sections (4), (5) and (6) of section 80AAA prescribe the method of calculating the amount of a film loss incurred by a company in a year of income in which the anti-avoidance provisions of Subdivision B of Division 2A of the Principal Act relating to current year losses apply to the company. The method prescribed is consistent with the operation of corresponding provisions contained in the existing carry-forward loss provisions of the Principal Act.

Sub-section (7) is the operative provision of proposed new section 80AAA and authorises a deduction in a year of income of a film loss incurred in any of the seven years of income preceding the year of income to the extent to which that loss has not been recouped from the assessable income or exempt income of the taxpayer of a succeeding year of income. The basis of deduction prescribed by sub-section (7) is consistent with that applying in relation to primary production losses (except for the unlimited period available for carrying those losses forward) and other losses under the existing provisions of the Principal Act.

Thus, paragraph (a) permits an undeducted film loss incurred in any of the previous seven years to be deducted from the assessable income of the taxpayer of a year of income where the taxpayer has not derived exempt income during that year of income. In a case where a taxpayer has derived exempt income during the year of income paragraph (b) requires that the deduction for the film loss is to be offset first against the amount of the net exempt income (see notes on proposed sub-section (2)). To the extent that the undeducted loss exceeds the amount of the net exempt income, the excess is available as a deduction from the assessable income of the taxpayer of the year of income.

Paragraph (c) ensures that where a deduction is allowable under section 80AAA in the same year for two or more film losses, the losses will be allowed as deductions in the order in which they were incurred.

Sub-section (8) qualifies the operation of sub-section (7) to ensure that any deduction available in respect of a film loss in a year of income is limited to the amount of film income derived in that year from eligible film investments.

For this purpose, paragraph (a) requires that the amount of any film loss deducted from the taxpayer's net exempt income in a year of income is not to exceed the amount of the taxpayer's net exempt film income (see notes on sub-section (1)) of the income year. Paragraph (b) applies similarly to ensure that the amount of the deduction available in respect of a film loss from the taxpayer's assessable income in a year of income is not to exceed the net assessable film income (see notes on sub-section (1)) of that year.

Sub-sections (9), (10) and (11) operate in circumstances where a taxpayer has become a bankrupt or, not having become a bankrupt, is released from debts by the operation of an Act relating to bankruptcy and will deny an entitlement to deductions in respect of film losses incurred before the date of bankruptcy or release. This denial of deductions is subject to modification where a taxpayer who has become bankrupt, or has been released from debts, voluntarily pays an amount in respect of a debt incurred by him or her that was taken into account in the calculation of the amount of the film loss. These provisions are consistent with those relating to primary production losses and other losses under the existing provisions of the Principal Act.

Sub-section (12) will ensure that sub-section 80(6) of the Principal Act has its intended effect of preventing, with first effect for the 1980-81 income year, the carry-forward of losses generated under certain section 36A schemes of tax avoidance that are the subject of remedial legislation contained in the Income Tax Laws Amendment Bill 1981.

That remedial legislation has effect from 30 January 1981 and the ban on the carry-forward of losses is achieved by requiring that any loss in the 1980-81 and preceding income years be calculated as if the remedial legislation had always applied. As explained in the notes on new sub-section (3), the amount of a film loss is calculated by reference to the overall loss for section 80 purposes. Sub-section (12) will ensure, therefore, that in determining the amount of any deduction available in respect of a film loss, the amount of a film loss deemed to be incurred in the 1980-81 income year is determined by reference to a section 80 loss that excludes any deductions generated under a section 36A scheme prior to the date of effect of the remedial legislation.

Clause 8:

Section 80AB : Order in which deductions allowable in respect of losses of previous years are to be taken into account

Section 80AC : Limitation on net exempt income to be taken into account in respect of deductions under sections 80 and 80AA

Clause 8 proposes the repeal of existing sections 80AB and 80AC and the substitution of two revised sections.

Existing section 80AB applies to prescribe the order in which deductions are to be allowable for losses where a taxpayer has incurred a loss in engaging in primary production and has also incurred a loss from other activities. In these circumstances existing section 80AB requires that non-primary production losses be deducted before primary production losses.

Proposed section 80AB will prescribe a new order of deduction to take account of the introduction of the new class of film losses. By virtue of the revised section 80AB, a film loss deductible under sub-section 80AAA(7) is to be deducted first against income of a non-loss year. A loss from other activities deductible under sub-section 80(2) is next deductible, before any primary production loss. The effect of section 80AB will be to ensure that in determining the order of deduction in any year, the loss with the greater restrictions on its deductibility is first deductible.

Existing sub-section (1) of section 80AC applies to prevent a duplication of the application of amounts of losses against exempt income derived by a taxpayer who has incurred both a primary production and a non-primary production loss. In the absence of section 80AC, the situation might arise where a loss would be required to be applied against the same amount of net income for the purposes of both section 80 and 80AA. The practical effect of this would be to reduce twice the deductions allowable to the taxpayer from his or her assessable income in respect of the losses.

Proposed sub-section 80AC(1) will serve a similar purpose to the existing sub-section but will also take account of any film losses deductible under section 80AAA. Under the revised section 80AC any loss deductible in respect of a film loss is to be applied first against any net exempt income (subject to the restriction of being deductible only against film income - proposed sub-section 80AAA(8)). Any excess exempt income remaining is then applied first against non primary production losses and finally against primary production losses.

Proposed sub-section 80AC(2) will serve a similar purpose to sub-section 80AC(1) in ensuring that deductions in respect of debts paid after bankruptcy or a release from debts under the Bankruptcy Act are not reduced by the same net income being taken into account in the calculation of deductions allowable under existing sections 80 and 80AA and new section 80AAA.

Clause 9: Interpretation

Clause 9 proposes amendments in section 82KH of the Principal Act to modify the operation of the "expenditure recoupment" provisions of Subdivision B of Division 3 of Part III of the Principal Act. Those provisions are to be extended by the Income Tax Laws Amendment Bill 1981 to counter tax avoidance schemes designed to exploit the availability of deductions under the present two-year film concession (Division 10B of the Principal Act) for capital expenditure incurred in the production of a film. The amendments proposed by clause 9 are consequential on the introduction of the new film deduction concession. In the notes that follow, references to existing provisions dealing with expenditure recoupment schemes mean those provisions as proposed to be amended by the Income Tax Laws Amendment Bill 1981.

Broadly, as they apply to capital expenditure on the production of a film, the expenditure recoupment provisions deny a deduction for the amount of the expenditure where that expenditure is incurred as part of a tax avoidance arrangement under which the taxpayer (or an associate) receives a compensatory benefit, the value of which together with the tax saving sought, effectively recoups the taxpayer for the loss or outgoing.

In meeting this objective, the expenditure is categorised as "relevant expenditure" under sub-section 82KH(1) to the extent to which deductions would be allowable under Division 10B in respect of the expenditure.

As a second step it is required that that amount of relevant expenditure be "eligible relevant expenditure" as defined in sub-section 82KH(1F). Expenditure deductible under Division 10B fits that description where it is incurred under an agreement that has a purpose, other than a merely incidental purpose, of tax avoidance and under the tax avoidance agreement the taxpayer or an associate is to obtain a benefit in addition to the benefits that flow in the ordinary course of events from the incurrence of the expenditure. If the additional benefit relating to the expenditure, when taken together with the "expected tax saving" in respect of that expenditure is equal to or greater than the expenditure itself then, by sub-section 82KL(1), a deduction is not allowable for the expenditure. Broadly, the expected tax saving in respect of an amount of expenditure is the amount by which a person's liability to tax in any year of income would be decreased if deductions were allowable in respect of the expenditure. Where an amount of "eligible relevant expenditure" is incurred by a partnership, the expenditure recoupment provisions apply these provisions in relation to the partnership.

The amendments proposed by clause 9 are designed to enable the expenditure recoupment provisions to apply in a case where, as a consequence of the introduction of the new film concessions, a part only of a taxpayer's capital expenditure on a film qualifies for the deduction under Division 10B or where a partner in a partnership is treated as having expended a proportion of the partnership expenditure on the production of a film.

The second of these situations would arise by reason of the application of the new Division to individual partners in a case where one of those partners elects not to take advantage of the new concessions (clause 13 - proposed section 124ZAE) and seeks a deduction under Division 10B. In these circumstances proposed new sub-section 82KH(1S) will ensure, in determining for the purposes of the expenditure recoupment provisions the amount of any additional benefit obtained by a partner in relation to the proportion of partnership expenditure attributed to the partner, that any benefit obtained by the partnership in relation to the incurring of the total expenditure on the film can, to the extent that it relates to the amount otherwise deductible under Division 10B, be taken into account.

The first situation could arise, as explained in the notes on clause 10, where by reason of the "at risk" tests of new Division 10BA (clause 13 - new section 124ZAM) a part of a taxpayer's qualifying expenditure on a film does not qualify for deduction under the new concessions. In these circumstances that amount may be eligible for deduction under Division 10B and proposed new sub-section 82KH(1T) will ensure in these circumstances that in determining the amount of any "additional benefit" obtained by the taxpayer a benefit obtained in relation to the total expenditure being incurred can, to the extent that it relates to the amount otherwise deductible under Division 10B, be taken into account.

Clauses 10, 11 and 12 : Consequential amendments to Division 10B of the Principal Act

These clauses propose amendments to the provisions of Division 10B of Part III of the Principal Act consequential on the introduction of the new concessions for investment in Australian films.

Division 10B presently applies to allow a deduction for certain capital expenditure incurred by a taxpayer, either as an owner or a licensee, in acquiring rights in respect of a patent granted in Australia, a design registered in Australia or a copyright subsisting in Australia. The broad plan of the Division is to allow the owner or licensee of rights in respect of an Australian patent, design or copyright (referred to as a "unit of industrial property") to deduct the cost of the unit over the period during which the owner or licensee may exercise rights in respect of the unit.

In respect of a film classified as an "Australian film" the Division attributes to a unit of industrial property that relates to the copyright in the film an effective life of two years, with the result that one-half of the cost to a taxpayer of acquiring an interest in the copyright is deductible in the year of income during which the unit is first used for the purpose of producing assessable income and the remaining half is deductible in the following year of income. The definition of "Australian film" for the purposes of Division 10B is wider than that applicable for purposes of the new concessions, but would include films that are to qualify under the proposed new Division 10BA.

The amendments proposed by these clauses will apply to ensure that capital expenditure that falls for deduction under the new concession under proposed new section 124ZAF (clause 13) is excluded from the operation of Division 10B. Further amendments will modify the operation of Division 10B with respect to partnerships, consequential on the application of the new concessions to individual partners.

Clause 10: Interpretation

Clause 10 proposes the substitution of new sub-sections in section 124K to exclude from the operation of Division 10B amounts that fall for deduction under new Division 10BA.

Existing sub-section 124K(2) applies to exclude from the operation of Division 10B expenditure which is otherwise deductible under the Principal Act. Existing sub-section 124K(2) would therefore apply to exclude any expenditure in respect of which a deduction is allowable under proposed new Division 10BA. However, the existing sub-section would not apply to exclude from the operation of the Division the amount of any expenditure that fails to qualify for deduction under new Division 10BA by reason only of the safeguards to be incorporated in that Division. Thus, in the absence of the amendments proposed by clause 10, an amount of expenditure that failed to qualify under Division 10BA by reason, for example, of the arm's length test to be applied to amounts of film expenditure under proposed new section 124ZAJ, might fall for deduction under Division 10B.

The revised sub-section 124K(2) will, in paragraph (a), re-enact the existing sub-section (2) and, by paragraph (b), apply to exclude amounts that fail to qualify for deduction under Division 10BA by reason of the safeguarding provisions to be incorporated in that Division.

Proposed new sub-section 124K(2A) will apply an exception to the rule outlined above. As explained in the notes on proposed section 124ZAM (clause 13) a general "at risk" safeguard is to apply under Division 10BA to limit the availability of the new 150 per cent deduction to amounts in respect of which the investor is at risk of loss should the film venture fail. Any amount of expenditure which fails to satisfy that test is to be eligible for deduction under Division 10B, but subject to existing safeguards applying to deductions under that Division. Proposed sub-section 124K(2A) will give effect to that intention.

Clause 11: Application of Division where deductions allowable under section 124ZAF

Clause 11 proposes the insertion of new section 124KA consequential on the application of the new concessions to individual partners.

As explained in the notes on proposed section 124ZAP (clause 13) any capital expenditure by a partnership on a new Australian film is, for the purposes of the new concessions, to be apportioned to individual partners who are to be entitled to seek deductions in respect of that expenditure. As further explained in the notes on proposed section 124ZAE (clause 13), a taxpayer is to be entitled to elect not to take advantage of the new concessions.

In these circumstances the situation could arise where not all of the partners in a partnership seek a deduction under new Division 10BA in respect of their portion of the relevant partnership expenditure. Proposed new section 124KA will apply in these circumstances to entitle a partner who elects not to take advantage of the new concession to seek deductions under Division 10B in respect of his or her portion of the partnership expenditure.

For this purpose sub-section 124KA(1) will apportion partnership expenditure on the same basis as is prescribed for the purposes of new section 124ZAP, i.e., in accordance with any agreement as to how the expenditure is to be borne, or in the absence of such an agreement, according to each partner's interest in the partnership income. As with new section 124ZAP, the amount to be apportioned is to be the amount of the partnership capital outlays expended directly in the production of a film and subject, where appropriate, to reduction on the basis of an arm's length test as to the amount.

Each partner's deemed share of the expenditure will then be subject to the screening test of new sub-section 124K(2), so that the expenditure share of partners who have taken advantage of the new concessions will be excluded from qualifying for deduction under Division 10B.

Sub-section 124KA(1) will, with effect from 1 October 1980, also apply to entitle individual partners to deductions under Division 10B in respect of capital expenditure on the production of a film that is incurred prior to the introduction of the new concessions, in circumstances where one or more of the partners has sought deductions under new Division 10BA in respect of further expenditure on the film by the partnership on or after 1 October 1980.

As explained in the notes on proposed sub-sections 26AG(9) and (10) (clause 4) any amounts of income derived by a partnership from the use of the film and any receipts on the disposal of all or part of the copyright will be apportioned to individual partners. The latter will ensure that the balancing adjustments on disposals applicable under Division 10B (explained previously in the notes on proposed sub-section 26AG(13) - clause 4) will apply in the case of a partner who seeks deductions under that Division in lieu of Division 10BA.

Sub-section 124KA(2) is a drafting measure that enables the use in section 124KA of the expression "expenditure of capital moneys" as a reference to expenditure of moneys that is expenditure of a capital nature.

Clause 12: Disposal of a unit of industrial property where deductions allowable under section 124ZAF

Clause 12 proposes the insertion of new section 124WA in Division 10B of the Principal Act to provide a code for the treatment of changes in interests of persons in a copyright on the formation, etc., of a partnership, in circumstances where one or more of the partners has previously obtained a deduction under proposed new Division 10BA in respect of capital expenditure on the production of the relevant film. The amendments are again consequential on the application of the new concessions to individual partners rather than to the partnership.

Existing section 124W of Division 10B applies where there is a change in the ownership of, or the interests of persons in, a film copyright on the formation, etc., of a partnership where at least one of the persons who owned an interest in the copyright before the change retains an interest in the copyright after the change. In these circumstances section 124W applies to deem the persons who owned the copyright before the change to have disposed of the copyright to the person or persons who own it after the change.

The effect of section 124W is to permit -

•

balancing adjustments to be made in the assessments of the transferors in consequence of the deemed disposal of the copyright (sections 124N or 124P of the Principal Act) based on the amount that is prescribed by section 124W as the consideration receivable in respect of the transfer; and

•

deductions to be allowable to the owners of the copyright after the change in consequence of their acquisition of the copyright (section 124M of the Principal Act) based on the amount that is prescribed by section 124W as the cost of acquiring the unit.

As explained in the introductory note, the new concessions are to apply to individual partners and, in a case where on the formation or dissolution of a partnership, etc., a change occurs in the interests of persons in a film copyright, the diminution in interest, and the accretion in interest, are to be treated as a disposal and acquisition respectively of a part of the copyright.

Consequent on this operation, it is necessary to ensure that a deduction entitlement arises under Division 10B to a partner in the partnership who is to be taken under these rules to have acquired an interest in the copyright as a result of such a change. For this purpose, proposed new section 124WA will override the operation of section 124W in circumstances where a variation of a kind to which that section would otherwise apply occurs in the ownership of a copyright and where one of the owners before the change had previously been entitled to a deduction under Division 10BA in respect of his or her interest in the copyright. Section 124WA will apply in these circumstances on the basis of treating any diminution in interest of a partner as a disposal of that part of his or her interest in the copyright and any accretion in interest of a partner as an acquisition of that part of the copyright.

The amount taken to be the consideration receivable on the disposal and the amount taken to be the cost of acquiring the relevant interest are to be determined on an equivalent basis to that under existing section 124W, as appropriately relates to the part of the copyright that is deemed to be disposed of or acquired.

The practical effect will be that a person who is deemed to have acquired an interest in a copyright will be entitled to deductions under Division 10B in respect of the deemed cost of acquiring that interest.

With respect to the disposal of any part of a copyright, proposed new sub-section 26AG( 3) (clause 4) will apply - in the case of an owner who had obtained deductions under the new concessions - so as to treat the amount of the consideration deemed to be received on the disposal as assessable income within the terms of that section. In a case where an owner who is deemed to have disposed of a part of his or her interest had obtained deductions in respect of that interest under Division 10B (e.g., by reason of electing not to take advantage of the new concessions - see notes on clause 11) the deemed consideration on disposal will be taken into account in determining any balancing adjustments applicable under Division 10B.

In a case where new section 124WA applies but where after the change of ownership or interests none of the owners are persons who have obtained a deduction in respect of the copyright under Division 10BA, those owners will be treated as having acquired the copyright in whole from the former owners, thereby enabling deduction entitlements to revert to the partnership as such under the existing operation of Division 10B.

Clause 13: Division 10BA - Australian films

Clause 13 will insert new Division 10BA in Part III of the Principal Act to allow a deduction for 150 per cent of the capital moneys invested by a person in producing, or by way of contribution to the cost of producing, a qualifying Australian film.

The deduction in respect of an amount of capital moneys expended by a taxpayer on a film will be allowable if at the time the moneys were expended the taxpayer was a resident of Australia and a provisional or final certificate referred to in sections 124ZAB or 124ZAC was in force. In addition, the Commissioner of Taxation is also to be satisfied that at the time when the moneys were expended the taxpayer expected to become the first owner, or one of the first owners, of the copyright in the film and intended to use that copyright, or his or her interest in it, for the purpose of producing assessable income from the exhibition of the film or from the granting of rights to exhibit the film, to the public in cinemas or by way of television broadcasting.

Where these conditions are fulfilled and the taxpayer becomes the first owner, or one of the first owners, of the copyright by reason of the moneys being expended by the taxpayer an amount equal to 150 per cent of the amount of the moneys expended will be deductible if the taxpayer uses the copyright, or his or her interest in it, for the purpose of producing assessable income or derives assessable income in consequence of an agreement entered into before the copyright came into existence under which he or she agreed to grant rights to exhibit the film.

Division 10BA is divided into Subdivisions A, B and C.

Subdivision A : Preliminary

Section 124ZAA : Interpretation

Section 124ZAA contains a number of definitions and interpretational provisions relevant to the operation of the new Division 10BA.

Sub-section (1) of section 124ZAA defines certain terms used in the Division:

"Australian film" has the same meaning as in Division 10B and is -

•

a film that has been made wholly or substantially in Australia or in an external Territory and has a significant Australian content; or

•

a film that has been made in pursuance of an agreement or arrangement entered into between the Australian Government or an authority of the Australian Government and the government of another country or its authority;

"copyright" is defined in relation to a film as meaning the copyright subsisting in a film in Australia by virtue of the Copyright Act 1968 and any copyright subsisting in, or in relation to, the film or in any work comprised in the film under the law of a country outside Australia;

"feature film" includes an animated feature film;

"film" also has the same meaning as in Division 10B and means an aggregate of images, or of images and sounds, embodied in any material;

"final certificate" identifies a certificate issued by the Minister for Home Affairs and Environment under section 124ZAC;

"future copyright" facilitates a reference to transfers of interests in relation to a copyright that has not yet come into existence at the time of transfer;

"Minister" is the Minister for Home Affairs and Environment;

"provisional certificate" is defined to identify a certificate issued by the Minister for Home Affairs and Environment under section 124ZAB:

"public event" identifies, but not exhaustively, a number of types of public activity, a film in relation to which is not to qualify as an eligible film under the Division;

"qualifying Australian film" identifies eligible films that are Australian films (as defined) as the kind of film which if certified as such by the Minister for Home Affairs and Environment is to qualify under the Division. (The term "eligible film" is in turn given meaning by the operation of sub-sections 124ZAA (4) and (5));

"television broadcasting" is defined to include cable television.

Sub-section (2) is a drafting measure which extends the meaning of the term "film" to include a proposed film.

Sub-section (3) enables a reference to "expenditure of capital moneys" to be taken as a reference to the expenditure of moneys that is expenditure of a capital nature.

Sub-section (4) limits for the purposes of the operation of the Division the meaning of the term "eligible film". The Minister for Home Affairs and Environment in certifying a film as a "qualifying Australian film" will decide whether it is an eligible film. An eligible film is, by sub-section (4), a film produced wholly or principally for exhibition to the public in cinemas or by way of television broadcasting being a feature film or a film of a like nature produced for exhibition by way of television broadcasting, or being a documentary or a mini-series of television drama.

Sub-section (5) will operate to further restrict the meaning of the term "eligible film" by excluding a film that is, or is to a substantial extent -

(a)

a film for exhibition as an advertising program or a commercial;

(b)

a film for exhibition as a discussion program, a quiz program, a panel program, a variety program or a program of a like nature;

(c)

a film of a public event;

(d)

a film forming part of a drama series that is, or is intended to be, of a continuing nature; or

(e)

a training film.

However, a film which includes in part only footage from a film of a type listed will not on that account only fail to qualify as an "eligible film".

Sub-section (6) will assist in identifying which of the moneys expended in relation to the production of a film are to be the subject of the 150 per cent deduction. The relevant moneys are to be those that are expended directly in producing a film, as distinct from moneys such as brokerage fees for arranging that a group of people join together to produce a film.

Sub-section 124ZAA(6) is relevant, for example, to the basic provisions of section 124ZAF and to the related provisions of sections 24ZAG and 124ZAH.

Section 124ZAB : Provisional Certificates

This section outlines the arrangements necessary for making an application to the Minister for Home Affairs and Environment to obtain a certificate certifying that a proposed film will be a qualifying Australian film.

A provisional certificate to this effect may be issued by the Minister in respect of a film while it is in the planning or production stage and will serve as an indication, on the information presented with the application, that the film when completed will be a qualifying film. The succeeding section - section 124ZAC - provides for the issue of a final certificate by the Minister after the film is completed.

A deduction will be allowed in respect of moneys expended so long as at the time it was expended there is or is deemed to be in force in relation to a film a provisional or final certificate. To this end, any certificate that comes into force or issue will also be deemed to have been in force at all times before the time when it was issued. The Minister will have the power in certain circumstances to revoke a provisional certificate and a revoked certificate will be deemed never to have been in force. A further provisional certificate may be issued by the Minister if he becomes satisfied on the facts that it is appropriate to do so.

An application for a final certificate must be made within six months of the completion of a film. If the application is not made within that time the Minister will be empowered to revoke any provisional certificate in force.

If a deduction is allowed by the Commissioner of Taxation on the basis of a provisional certificate and that certificate is subsequently revoked the assessment of the taxpayer will be subject to amendment to disallow the deduction.

Sub-section (1) of section 124ZAB will allow a person, referred to in the section as the "applicant", to apply to the Minister for Home Affairs and Environment for a certificate that a proposed film will, when completed, be a "qualifying Australian film" (section 124ZAA) for the purposes of Division 10BA.

Sub-section (2) sets out the manner in which a person is to make application for a certificate. The application is to be in writing, signed by or on behalf of the applicant and be accompanied by such information as the Minister requires. The type of information which the Minister may require is outlined in section 124ZAD but such further information may be requested as the Minister considers necessary.

After an application is received in terms of sub-section (1) the Minister is required by sub-section (3) to issue a certificate under section 124ZAB (a provisional certificate) if satisfied that the proposed film, when completed, will be a qualifying Australian film and that the applicant is an appropriate person to whom to issue a certificate.

Sub-section (4) allows the Minister to request an applicant to whom a provisional certificate has been issued to provide such further information in respect of the film as the Minister requires. This will enable the Minister to become aware of any changes that occur in the production of the film which may influence the decision whether the film will be a qualifying Australian film.

Sub-section (5) gives the Minister power to revoke a provisional certificate if the applicant does not comply with a request under sub-section (4) for further information. The revocation is to be in writing and will have the effect that the certificate will be deemed for the purposes of the Principal Act never to have been in force.

Sub-section (6) gives the Minister further powers of recovation of a provisional certificate and enables a certificate to be revoked if the Minister becomes satisfied that -

•

the proposed film, when completed, will not be a qualifying Australian film; or

•

if the film has been completed - the completed film is not a qualifying film for the purposes of the Division.

Under sub-section (7) any revocation of a provisional certificate by the Minister must be notified in writing to the applicant.

Sub-section (8) allows the Minister to issue a further provisional certificate in relation to a film after an earlier provisional certificate has been revoked.

Sub-section (9) operates to deem a provisional certificate to have been in force at all times before the time when it was issued, subject to the operation of sub-sections (5), (6) and (10) which, in the circumstances in which those provisions apply, provide for a certificate to be revoked and to be deemed never to have been in force.

Sub-section (10) requires the holder of a provisional certificate to make an application for a final certificate in respect of a film within six months of the completion of the film. If the application is not made within that time then any provisional certificate in force is deemed never to have been in force.

Section 124ZAC : Final certificates

After a film is complete application may be made under section 124ZAC for the issue of a final certificate by the Minister for Home Affairs and Environment. After due consideration the Minister is, if satisfied that the film is a qualifying Australian film, to issue a final certificate.

If the Minister decides not to issue a final certificate then no deduction is allowable under Division 10BA in relation to expenditure incurred in producing the film. If a deduction has been allowed on the basis of a provisional certificate before the Minister's decision that the completed film is not a qualifying Australian film, authority is to be given to the Commissioner to disallow the deduction after the provisional certificate has been revoked in terms of sub-section 124ZAB(6). This will also be the case if the application for a final certificate is not made within six months of the completion of the film so that any provisional certificate is deemed never to have been in force.

Sub-section (1) of section 124ZAC authorises a person to make application to the Minister for a final certificate.

Sub-section (2) sets out the manner in which application is to be made. The application is to be in writing, signed by or on behalf of the applicant and be accompanied by such information as the Minister requires.

Sub-section (3) requires the Minister to issue a certificate under section 124ZAC (a final certificate) if satisfied that the film is a qualifying Australian film and that the applicant is an appropriate person to whom to issue the certificate.

As previously explained, sub-section (4) deems a final certificate issued under this section to have been in force at all times before it was issued.

Section 124ZAD : Determination of Australian content

This section sets out the matters to which the Minister for Home Affairs and Environment is to have regard in deciding, for the purposes of determining whether to issue in respect of a film a provisional or final certificate, whether a film has a significant Australian content. A film must have a significant Australian content if it is to be a qualifying Australian film.

The matters to be considered include the subject matter of the film, where the film is made, the nationalities and places of residence of the actors, script-writers, producers, directors and other people involved in the making of the film, the persons who beneficially own the shares in the capital of any company concerned in the making of the film, the persons who beneficially own the copyright in the film, the source of the moneys used to finance the production of the film, and any other relevant matters.

Section 124ZAE : Election that Division not apply

Sub-section (1) of section 124ZAE will allow a person who has invested moneys in producing a qualifying Australian film to elect that the provisions of Division 10BA not apply in relation to the expenditure incurred by that person. The result of such an election will be that the provisions of Division 10B will apply to the expenditure instead of Division 10BA.

In this regard each partner in a partnership will be entitled to lodge an election in relation to such part of relevant moneys that are expended by the partnership in producing a film as are deemed to be borne by that partner.

Sub-section (2) sets out the manner and the time within which an election must be lodged if Division 10BA is not to apply to moneys expended or deemed to have been expended by a person.

Subdivision B - Deductions for capital expenditure

Subdivision B contains the main code for the allowance of deductions of 150 per cent of qualifying expenditure. The Subdivision incorporates a number of safeguarding provisions designed, broadly, to ensure that only capital expended directly in the production of a qualifying film is to be deductible under the concession. A further general safeguard will apply to limit expenditure qualifying for deduction to amounts in respect of which the investor is at risk of loss should the film venture fail.

Section 124ZAF : Deductions for capital expenditure

Proposed sub-section 124ZAF(1) is the operative provision of Subdivision B. Subject to the conditions specified, sub-section (1) will authorise the allowance of deductions on the new 150 per cent basis for capital expenditure by a taxpayer in or as a contribution towards the production of a qualifying film. By reason of sub-section 124ZAA(6) reference to expenditure in producing a film is to be read as expenditure directly in producing the film.

Paragraphs (1)(a) to (d) specify the conditions that are required to be satisfied for a taxpayer to become entitled to the new deduction in respect of his or her expenditure on the film. The first three of these (paragraphs (a) to (c)) require that the expenditure be under a contract entered into on or after 1 October 1980 and that at the time of the expenditure -

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the taxpayer was a resident;

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there was a provisional certificate or a final certificate in force in relation to the film when the amount was expended (see notes on proposed new sections 124ZAB and 124ZAC); and

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the Commissioner of Taxation be satisfied that the taxpayer expected to become the first owner, or one of the first owners, of the copyright in the film and intended to use that copyright or his or her interest in it for the purpose of producing assessable income from the exhibition of the film to the public in cinemas or by way of television broadcasting.

Where these conditions are satisfied, a deduction will be available provided that (as required by paragraph (1)(d)) the taxpayer in fact becomes the first owner of the copyright (or an interest in it) as a consequence of the expenditure and that the copyright is used for the purpose of producing assessable income from the exhibition of the film. This latter test would alternatively be satisfied if, prior to the copyright coming into existence, the taxpayer derives income from pre-sale arrangements relating to the exhibition of the film on its completion.

Where all of these conditions are satisfied an amount equal to 150 per cent of the expenditure by the taxpayer in or as a contribution towards the production of the film is to be allowable as a deduction in the income year in which the taxpayer was the owner of the copyright (i.e., the film has been completed) and first used it for the purpose of producing assessable income from the exhibition of the film. Alternatively, in a case where pre-sale arrangements had been entered into prior to the copyright coming into existence, the 150 per cent deduction is to be available in the income year in which the copyright or interest is first owned by the taxpayer (i.e., when the film has been completed).

The reference to expenditure by way of contribution to the cost of producing a film will ensure that deductions are available in respect of capital contributions to a production account to be used for the purpose of producing a qualifying film. As explained in the notes on proposed new section 124ZAG the amount of deduction available in respect of a contribution will be limited to so much of the contribution as is expended directly in producing the film.

In all cases, the amount that is to be taken to be expended by a taxpayer for the purposes of the operation of section 124ZAF is subject to the application of the safeguarding provisions outlined in succeeding notes. Broadly, these provisions are directed at ensuring that only amounts genuinely expended in the production of a qualifying film are subject to deduction. Thus, for example, where a taxpayer's expenditure is artificially inflated, the amount to be taken into account for the purposes of section 124ZAF will be so much of that amount as has been reduced by the operation of the "arm's length" safeguard incorporated in proposed new section 124ZAJ.

Section 124ZAF does not apply to a partnership. Rather, as explained in the notes on proposed new section 124ZAP, the partners will be taken to have expended an appropriate proportion of the partnership expenditure on the film and their deduction entitlements in respect of that expenditure will be subject to the requirements of section 124ZAF.

Proposed sub-section 124ZAF(2) will apply to a taxpayer who expends capital in the production of a qualifying film with the purpose of acquiring a copyright for use in the production of assessable income but who dies prior to the copyright coming into existence. The effect of the sub-section will be to ensure that a deduction is available where the Commissioner is satisfied that the taxpayer would have become the first owner of an interest in the copyright and would have used the copyright for the purpose of producing assessable income from the exhibition of the film. The deduction will be allowable in the assessment of the taxpayer in respect of the year of income in which he or she died.

New sub-section 124ZAF(3) will ensure that the requirement in sub-section (1) that the copyright or interest be used in the production of assessable income will be taken to have been satisfied where that copyright or interest is used in the production of income that, by virtue of proposed new section 23H (clause 3), is to be exempt from tax.

The remaining provisions of Subdivision B are designed, broadly, to ensure that the amount of any expenditure in or by way of contribution to the production of a film that is to qualify for deduction under section 124ZAF is to be restricted to amounts that are genuinely expended directly in the production of the film.

Section 124ZAG : Expenditure of contributions

Where a taxpayer's qualifying expenditure is by way of contribution to the cost of producing a film, the amount that is to be eligible for deduction under the new concession is to be limited by section 124ZAG to so much of the amount contributed as is actually expended in the production of the film. For this purpose section 124ZAH applies to determine the extent to which a taxpayer's contributions have been expended on the production of the film.

Capital expenditure which satisfies this test will, subject to the taxpayer satisfying the general "at-risk" test (proposed section 124ZAM) and not assigning an interest in the future copyright (proposed section 124ZAL), qualify for deduction under section 124ZAF.

Section 124ZAH : Allocation of expenditure

Proposed sub-section 124ZAH(1) applies for the purposes of section 124ZAG to authorise the Commissioner of Taxation, in circumstances where taxpayers contributed towards the production of the film, to attribute actual expenditure on the production of that film out of the relevant production account to the contributions of a particular taxpayer.

In determining the amount of any expenditure out of a production account that is to be treated as having been expended in the production of the film, sub-section (2) ensures that account is taken of the operation of the arm's length safeguard proposed by section 124ZAJ and proposed section 124ZAK relating to the acquisition of assets that are used only partly in the production of a film or that are subsequently disposed of. (Sub-section 124ZAA(6) also applies so that a reference to moneys being expended in producing a film is a reference to moneys expended directly in that film.).

Section 124ZAJ : Non-arm's length transactions

Proposed sub-section 124ZAJ(1) will operate as a safeguard against attempts to inflate the cost of production of a film.

Sub-section (1) will apply where, in the course of the production of a film, an amount is expended on the supply of goods or the provision of services by parties not operating at arm's length in relation to the transaction. Where, in these circumstances, the Commissioner is satisfied that the expenditure exceeds the amount that would have been expended by parties operating at arm's length, he is to be empowered to appropriately reduce the amount that is to be taken for the purposes of the new concessions to have been expended on the production of the film.

This and other powers of determination by the Commissioner under the Bill are, of course, subject to review by an independent Taxation Board of Review which may substitute its opinion for that of the Commissioner.

Sub-section 124 ZAJ(2) ensures that the safeguard embodied in sub-section (1) applies equally to expenditure by a taxpayer as consideration for another person to produce the film for the taxpayer.

Section 124ZAK : Amounts expended in acquiring assets

Section 124ZAK applies where an amount expended in the production of a film is expended in the acquisition of an asset (e.g., a camera) and where the asset is used also for purposes unrelated to the production of the particular film or is disposed of for consideration on completion of the film. In these circumstances, the Commissioner is authorised to appropriately reduce the amount that is taken to be expended on the production of the film.

Section 124ZAL : Deduction reduced if future copyright assigned

Sub-section 124ZAL(1) will apply where a taxpayer expends an amount in the production of a film and where, before the copyright in the film comes into existence, the taxpayer assigns to someone else part of his or her interest in the future copyright in the film. In these circumstances the Commissioner is to be authorised to exclude from deductibility under the concessions an appropriate amount of the taxpayer's expenditure.

Sub-section 124ZAL(2) will ensure that the safeguard applied by sub-section (1) applies also in circumstances where a taxpayer, before a film is completed, enters into an agreement to transfer a copyright in the film to another person upon that copyright coming into existence.

Section 124ZAM : No deduction unless expenditure at risk

Section 124ZAM proposes a general safeguard to limit expenditure qualifying for deduction under the new concession to amounts in respect of which the investor is at risk of loss should the film venture fail.

The section applies after the other safeguards incorporated in the Subdivision have operated to determine the amount that the taxpayer has expended directly in the production of the film. Having determined that amount, section 124ZAM asks the basic question whether, if the film were not to produce a yield of income or capital the taxpayer, at the time of the expenditure, stands to suffer a loss as a consequence of the expenditure that is at least equal to the amount of the expenditure otherwise eligible for deduction under the new concession.

In the case of the deemed expenditure of a partnership, the question is basically the same - whether, by reason of the partnership expenditure, the partner stands to suffer a loss of an amount at least equal to so much of his or her deemed partnership expenditure as would otherwise be deductible.

In determining, in response to this question, the extent of the loss that would be suffered the Commissioner of Taxation is to have regard to all of the circumstances that have, at the time of the expenditure, or that are likely at a future date to have, the effect of reducing the loss to be suffered by the taxpayer should the film derive no income. Circumstances that would be taken into account would include any loan arrangement entered into to fund the expenditure, where the liability to repay the loan is limited to such film proceeds as may be derived. Another factor that would be taken into account is the extent to which a taxpayer's liability in respect of funds borrowed to finance expenditure by a partnership of which he or she is a member is restricted by reason of the taxpayer being a partner with limited liability. (This kind of limited partnership is possible under some State mercantile laws).

Income arising from a pre-sale arrangement will not generally be taken to reduce the taxpayer's risk of loss. However, to the extent that the income was derived under the same arrangement by which the taxpayer was (by loan or otherwise) put in funds to enable the expenditure to be made, the income will be taken into account in determining the amount for which the taxpayer was at risk.

Where the Commissioner is satisfied that the amount of loss for which a taxpayer is at risk by reason of expenditure on a film is less than the amount of the expenditure that would otherwise be deductible to the taxpayer, the amount deductible will be reduced to an amount equal to the amount in respect of which the taxpayer is at risk of loss.

Any amount of otherwise deductible expenditure that fails to qualify under the new concessions by virtue of this test will, as explained in the notes on clause 10, be available for deduction under the existing two-year write-off concession of Division 10B, subject to the existing safeguards applying with respect to that concession.

Sub-section 124ZAM(1) is the operative provision that will apply the "at-risk" test.

Paragraph (a) applies to identify the expenditure by reason of, or reference to which, the taxpayer is to be taken to be at risk of loss. In the case of an individual the expenditure is the gross expenditure on the film prior to the application of any safeguards. In a case of a taxpayer in the capacity of a partner the expenditure is the gross partnership expenditure on the film.

Paragraph (b) identifies the amount of the gross expenditure for which the taxpayer would, but for the "at-risk" requirement, be entitled to a deduction in respect of the new concession, i.e., the amount after application of the other safeguards incorporated in the Subdivision or, in the case of a partner, his or her deemed share of the partnership expenditure after the application of those safeguards.

The remaining paragraphs, paragraphs (c), (d) and (e), apply, where appropriate, to reduce the expenditure otherwise deductible to the taxpayer on the basis of the comparison of the net expenditure referred to in paragraph (b) with the amount for which the taxpayer is at risk by reason of the gross expenditure referred to in paragraph (a).

Sub-section 124ZAM(2) specifies the basis on which the amount of a taxpayer's risk in relation to expenditure is to be determined. Broadly, that amount is the amount of the loss that, in the opinion of the Commissioner, would be suffered by reason of that expenditure, if no income (see sub-section (5)) were to be derived from the film. However, income identified in sub-section (3) is to be taken into account in determining how much a taxpayer is at risk.

Sub-section 124ZAM(3) modifies the operation of sub-section (2) so that the taxpayer's risk of loss is taken to be reduced by income derived from the film under an agreement that the Commissioner is satisfied was entered into with a purpose of providing moneys to the taxpayer or, where appropriate the partnership, to enable the gross expenditure to be made.

Sub-section (4) will enable the Commissioner to look to all of the surrounding circumstances in determining the amount for which a taxpayer is at risk of loss in relation to an amount of expenditure.

Sub-section (5) defines certain terms used in the section.

Paragraph (a) ensures that for the purposes of the section, the term "agreement" is given the meaning it has in other safeguarding provisions of the Principal Act.

Paragraph (b) defines income derived from a film to include -

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any consideration for the use of, or the right to use, the film or the copyright or any copyright interest in the film;

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any consideration for granting a licence in respect of a future copyright in the film; and

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any consideration for the disposal of the whole or any part of a copyright interest in the film or for the assignment of rights to derive income from the copyright.

Section 124ZAN : Variation of contracts

As observed in the notes on proposed section 124ZAF, a taxpayer is to be entitled to deductions under the new concessions for capital expenditure on or by way of contribution to the production of a film where that expenditure is under a contract entered into on or after 1 October 1980. Section 124ZAN is designed to act as a safeguard against the re-arrangement of contracts to avoid that limitation.

The section is modelled on similar provisions elsewhere in the Principal Act and will operate where the Commissioner is satisfied that a taxpayer entered into a contract before 1 October 1980 under which capital was to be expended on the production of a film and, on or after that date, in an attempt to qualify for the new concession, the taxpayer entered into another contract under which capital was to be expended, in lieu of the original expenditure, on the production of a film (whether on the same film or on another film). In these circumstances the Commissioner is to be empowered to deny a deduction for the expenditure.

Subdivision C - Miscellaneous

Subdivision C will enact provisions relating to the treatment of revenue expenses associated with qualifying film investments and will give effect to the scheme of applying the new deduction concession, where it relates to expenditure incurred by a partnership, to the individual partners in that partnership.

Section 124ZAO : Limitation on deductibility of revenue expenses

Section 124ZAO will give effect to the proposed limitation on the deductibility of revenue expenses. This is relevant to the proposed exemption of certain of the net proceeds from a qualifying film investment under new section 23H (clause 3).

The broad effect of the section is that revenue expenses associated with an eligible film investment that are incurred in an income year are to be deductible only to the extent of the amount of the proceeds derived from the film in that year that is assessable under new section 26AG (or that would be assessable under that section but for the exemption proposed by new section 23H). Should the deductions otherwise available on this basis exceed the amount of that film income, the excess deductions are to be carried forward for deduction on the same basis in the following income year.

Sub-section (1) identifies in relation to a film those deductions of a year of income that are to be subject to the restriction to be imposed by the section. Broadly, deductions to which the section is to apply are those deductions that would be allowable to the taxpayer in the year of income in respect of non-capital expenses incurred in deriving income from the film that is to be included in the taxpayer's assessable income under new section 26AG (or that would be so included but for section 23H).

Sub-section (2) ensures that where in a particular year those film related deductions exceed the amount of the assessable income to which section 26AG applies, the deductions allowable are to be limited to the amount of that assessable income.

Sub-section (3) operates in a case where sub-section (2) applies to limit the availability of deductions in a particular year of income to ensure that the excess falls for deduction in the succeeding year of income. The availability of deductions in that succeeding year will in turn be subject to the operation of sub-section (2).

Section 124ZAP : Special provisions relating to partnerships

As noted previously, the new concessions are not to apply so as to confer a deduction entitlement on partnerships that is then, under Division 5 of Part III of the Act effectively distributed to the partners. Rather, by section 124ZAP, the expenditure of a partnership will be attributed directly to its partners. Sub-section (1) gives effect to this intention by indicating that proposed new Division 10BA does not apply in calculating the net income of a partnership, or a partnership loss, for the purposes of the Principal Act.

Sub-section (2) applies to ensure that deductions in respect of any partnership expenditure in or as a contribution to the cost of producing a qualifying film is eligible for deduction in the hands of the individual partners. For this purpose a partner is taken to have expended a portion of the total partnership expenditure determined in accordance with any agreement between the partners as to how the expenditure is to be borne or, in the absence of any such agreement, according to the partner's interest in the partnership income (or in any partnership loss).

Sub-section (3) ensures that the amount of any partnership expenditure on a qualifying film that is to be apportioned between the partners is determined having regard to the operation of sections 124ZAG and 124ZAH (relating to the actual expenditure in the production of a film of amounts contributed to a film production account), section 124ZAJ (relating to non-arm's length transactions) and section 124ZAK (relating to expenditure on the acquisition of assets).

The broad effect of sub-section 124ZAP(3) will be to ensure that only partnership expenditure that is expended directly in the production of a qualifying film will be deemed to have been incurred by the individual partners. The deductibility of any expenditure deemed to be expended by a partner will, as explained in proposed section 124ZAM, be subject to the partner satisfying the general "at-risk" test in relation to that expenditure.

Sub-section (4) will apply where, consequential on the application of the new concessions to individual partners, proposed sub-sections 26AG(9) and (10) (clause 4) apply to attribute film income of a partnership to individual partners. In these circumstances sub-section 124ZAP(4) applies to apportion between the partners any revenue expenses incurred in deriving that income on the same basis as is applied for the purposes of sub-section 124ZAP(2). Deductions in respect of those expenses will be allowable to the individual partners subject, where appropriate, to the limitation on the deductibility of revenue expenses proposed by section 124ZAO.

Clause 14: Credits in respect of overseas tax paid on certain film income

This clause, which will allow a credit against Australian tax for tax of another country on film income, arises from proposed sub-sections 26AG(7) and (8) (clause 4) under which a person may become subject to Australian tax on film income from another country that is taxed in that country.

The background to section 160AGA to be inserted in the Principal Act by this clause is that an Australian resident who derives film income from another country, and who is taxed on it in that other country, may be exempted from Australian tax in respect of that income by paragraph 23(q) of the Act. However, sub-section 26AG(7) will have the effect that income that is otherwise exempt under paragraph 23(q) will be taxable in Australia if the income does not flow from exhibition of the film in the country that taxes the income.

Sub-section 26AG(8) establishes a corresponding position in relation to film income that a non-resident person, previously a resident of Australia, derives from overseas.

For these cases, section 160AGA confers an entitlement to a tax credit against Australian tax, to relieve the resulting double taxation. (Where film income flows from a country with which Australia has concluded a double taxation agreement, and paragraph 23(q) is, by reason of section 12 of the Income Tax (International Agreements) Act 1953 inapplicable, a credit for foreign tax on the income is available under the terms of the relevant agreement. A similar position exists in relation to income from Papua New Guinea - Division 18 of Part III of the Principal Act.)

Under sub-section (1) of proposed new section 160AGA a credit for overseas tax is to be allowed where section 26AG applies to the income and it is income which sub-sections 26AG (7) and (8), referred to above, cause to be made liable to Australian tax. A further condition is that the taxpayer has paid foreign tax, for which he or she was personally liable, in the country in which the income has its source.

By sub-section (2), the credit is not available if another provision of the Act allows credit for the overseas tax.

Under sub-section (3) the credit allowable is the lesser of the foreign tax borne by the taxpayer and the amount of Australian tax in respect of so much of the foreign-source film income as is (taking new section 23H - clause 3 - into account) effectively taxed in Australia.

Sub-section (4) adopts for these purposes the rules for calculating how much Australian tax is payable on particular income that are applicable for purposes of Australia's double taxation agreements with other countries.

Clause 15: Interpretation

The amendments being made by this clause are designed so that the machinery provisions of Division 19 of Part III of the Principal Act that govern the allowance of credits for tax of other countries are applicable in relation to the credit provisions being introduced by clause 14.

Clause 16: Amendment of assessments

This clause will amend section 170 of the Principal Act which governs the power of the Commissioner of Taxation to amend income tax assessments. Sub-section 170(10) provides that nothing in the section is to prevent the amendment of an assessment at any time for the purpose of giving effect to specified provisions of the Act.

Paragraphs (a), (b) and (c) of clause 16 will insert in sub-section 170(10) of the Principal Act references to the new sections 23H and 26AG which are proposed by clauses 3 and 4 of the Bill respectively, and the new Division 10BA of Part III proposed by clause 13.

As amended, sub-section 170(10) will allow the Commissioner to give effect to the nominated provisions by amending the assessments of taxpayers at any time. When facts emerge which require it, the Commissioner will be authorised to amend assessments to disallow deductions for moneys expended in producing a film that have previously been allowed under new section 124ZAF of Division 10BA. This could occur, for example, if a deduction had been allowed on the basis of a provisional certificate issued under proposed section 124ZAB and the Minister for Home Affairs and Environment decides not to issue a final certificate in respect of the completed film in accordance with proposed section 124ZAC. Similarly, facts may emerge in relation to the operation of the various safeguarding provisions in Subdivision B of Division 10BA that justify that course.

In the overall operation of the incentive scheme for investment in Australian films any adjustment that is required to be made to a deduction allowed under Division 10BA may result in an adjustment to an amount that has been included as assessable income under proposed section 26AG or that has been exempted from tax under proposed section 23H. The amendments made by clause 16 will facilitate such adjustments.

Clause 17: Interpretation

This clause will amend section 221YA of the Principal Act to include a new sub-section (5A) which will affect the application of the definition of "provisional income" in sub-section 221YA(1) where, in accordance with the proposed Division 10BA of Part III (clause 13), a deduction is allowed in respect of capital moneys expended in producing a qualifying Australian film.

In broad terms, provisional tax payable in respect of a year of income is calculated by reference to the "provisional income" in respect of that year. This is basically the taxable income of a taxpayer for the next preceding year of income. The effect of proposed sub-section 221YA(5A) will be to substitute for this purpose for the taxable income of the preceding year, the amount that would have been the taxable income for that year but for the allowance of a deduction under proposed Division 10BA. In other words, provisional tax will be calculated as if no deductions were allowable under Division 10BA.

However, if in relation to a year of income, a taxpayer incurs eligible film expenditure in that year, he or she will be eligible, by the "self-assessment" procedure, to have a deduction for it taken into account in the calculation of provisional tax for the year.

Clause 18: Additional amendments

This clause proposes that the Principal Act be amended as set out in the Schedule to the Amending Act. These amendments are purely consequential on the proposed insertion in the Principal Act of new section 80AAA to provide a basis for the carry-forward of losses incurred in a year of income in consequence of investment in an eligible film and which has been explained in the notes on clause 7.

Clause 19: Application of amendments

This clause governs the application of the amendments to the Principal Act proposed by this Bill.

The amendments will have effect in relation to assessments made at any time. Although the deduction proposed to be allowable under Division 10BA of Part III will apply only to moneys expended under a contract entered into on or after 1 October 1980, the allowance of a deduction under that Division in a year of income may have an effect in certain situations in respect of the assessment or exemption of income derived in an earlier income year, e.g., where income has been derived under a pre-sales arrangement related to the expected production of a film. The operation of clause 19 will permit the appropriate application of the new scheme in such situations.