Senate

Explanatory Memorandum

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

Chapter 2 - Regulation impact statement

Policy objective

The objectives of the offset for film production in Australia

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

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

•

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

•

showcase Australian talent.

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

Implementation

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

•

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

•

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

•

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

•

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

•

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

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

Offset for film production

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

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

Assessment of impacts

Impact group identification

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

•

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

•

film producers;

•

the Australian film industry; and

•

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

Benefits

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

•

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

•

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

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

•

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

•

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

•

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

•

an increase in investment in Australian infrastructure; and

•

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

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

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

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

Analysis of costs

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

Compliance costs

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

Administration costs

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

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

•

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

•

costs associated with the Board;

•

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

•

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

Government revenue

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

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

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

Other issues - consultation

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

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

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

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

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

Conclusion

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

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