House of Representatives

Explanatory Memorandum

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

Chapter 2 - Refundable film tax offset - extension to high budget television series

Outline of chapter

2.1 Schedule 2 to this Bill contains amendments to include high budget television series as an eligible format for the purposes of Division 376 of the Income Tax Assessment Act 1997 (ITAA 1997). This will enable certain eligible television series to apply for the Division 376 refundable film tax offset.

Context of amendments

2.2 The refundable tax offset for large scale films, contained in Division 376 of the ITAA 1997, was introduced with effect from 4 September 2001. The offset applies at a rate of 12.5 per cent of qualifying Australian production expenditure on the film.

2.3 The Division 376 offset is designed to encourage large scale film productions to locate in Australia, and is aimed at providing greater economic, employment and skill development opportunities. The current formats eligible for the offset are feature films, telemovies and television mini-series.

2.4 These amendments expand eligibility to include high budget television series as an eligible format. Unless otherwise stated, all relevant existing eligibility requirements in Division 376 will apply to television series.

Summary of new law

2.5 These amendments will extend the application of the Division 376 offset to include high budget television series as an eligible format. Television series which meet the new thresholds and requirements of the offset will qualify to claim the refundable 12.5 per cent offset for qualifying Australian production expenditure.

2.6 The broad intent behind this measure is to attract new large scale high budget television series to locate in Australia.

2.7 Specific conditions including production timeframes, thresholds and definitions for qualifying television series are included to ensure that the Division 376 offset is appropriately targeted.

2.8 It is not intended that low budget productions bundled together be able to access the Division 376 offset. The new television series specific conditions are aimed at ensuring this bundling is not possible.

2.9 These amendments ensure that a television series is eligible to apply for the Division 376 offset where it meets specific conditions. These specific conditions require that a series meet:

•

the expenditure thresholds, including the new minimum average A$1 million of qualifying Australian production expenditure per hour

•

the definition of a 'television series' for the purposes of the offset, this excludes and includes certain genres

•

certain specific timeframes for the completion of production.

2.10 In addition, previous conditions for access to the Division 376 offset continue to apply. Specifically:

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the total of the company's qualifying Australian production expenditure must be at least A$15 million

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where the value of the qualifying Australian production expenditure is at least A$15 million but less than A$50 million, this expenditure must be at least 70 per cent of total production expenditure for the series. (It is intended that this will encourage the production of the majority of a television series in Australia)

•

where the value of the qualifying Australian production expenditure is A$50 million or more, the production will qualify regardless of the percentage ratio of Australian expenditure to total production expenditure.

Comparison of key features of new law and current law

2.11 These amendments will add a new eligible format for certification to access the Division 376 offset. A television series not otherwise covered by subparagraph (i) or (ii) of paragraph 376-15(1)(d) will be eligible to apply for certification under the offset. A mini-series of television drama may effectively qualify for certification either under the previous rules for mini-series or through the new rules for television series. [Schedule 2, items 1 and 2, subparagraph 376-15(1)(d)(iii)]

2.12 A television series will not be excluded from certification for access to the offset if it is of a documentary-like nature. However, documentaries will continue to be an excluded genre for films eligible under the previous rules (those covered by subparagraph (i) or (ii) of paragraph 376-15(1)(d)). [Schedule 2, item 3, subparagraph 376-15(1)(e)(i)]

2.13 Similarly, the exclusion for 'a film forming part of a drama program series that is, or is intended to be, of a continuing nature' continues to apply to films covered by subparagraph (i) or (ii) of paragraph 376-15(1)(d). A television series however, will not be excluded from certification for access to the offset under this criterion. Also see section 376-17 which defines 'television series'. [Schedule 2, item 4, subparagraph 376-15(1)(e)(v)]

2.14 There are timeframes for the completion of a television series production. Where a television series is predominantly a digital animation or other animation it must be made within a period of 36 months. This period commences once production expenditure begins to be incurred. The commencement of the 36 month period is not triggered by either pre-production or pilot production activities. Effectively, the 36 month period excludes pre-production activities as mentioned in paragraph 376-25(3)(a), as well as activities associated with the production of a pilot (if there is one). Due to the nature of digital or other animation series, they are given a longer timeframe for completion. [Schedule 2, item 5, subparagraph 376-15(1)(ea)(i)]

2.15 As a guide, 'animation' may be an animated sequence or production that is a series of two-dimensional or three-dimensional images rendered in sequence to create artificial moving images (but does not include a live action sequence or production that records live subjects in motion). 'Digital animation' may be an animation created primarily with the use of digital technology (including computer animation hardware and software).

2.16 A television series other than a series which is predominantly a digital animation or other animation is subject to a different timeframe for completion. Such a series, most likely a 'live action' series, must complete all principal photography within a period of 12 months. This period again excludes activities associated with the production of a pilot episode (if there is one). It is intended that the certification process will verify whether a television series is 'predominantly' an animation or otherwise. Principal photography does not include second unit photography. 'Second unit photography' means the filming of less important scenes in a screen production, including crowd scenes, scenery and stock inserts which do not involve the main characters of a screen production and which are filmed by a secondary or subordinate crew. [Schedule 2, item 5, subparagraph 376-15(1)(ea)(ii)]

2.17 There is an additional expenditure threshold specific to television series. A television series will be required to have a minimum average of at least $1 million of qualifying Australian production expenditure per hour. The intent of this threshold is to ensure low-value series and series which would have been produced in Australia regardless of the extension of the offset, are excluded. The amount of qualifying Australian production expenditure per hour for a television series is worked out by using the formula in subsection 376-15(3). This formula requires that the total qualifying Australian production expenditure for the television series be divided by the total length of the series measured in hours. [Schedule 2, items 5 and 6, paragraph 376-15(1)(eb ) and subsection 376-15(3)]

2.18 The amount worked out by way of the formula in subsection 376-15(3) is an average. Individual episodes of a television series do not need to have a minimum of $1 million of qualifying Australian production expenditure per hour. A series may have a number of relatively inexpensive episodes below the $1 million threshold and a few very expensive episodes above it. As long as the series has a minimum average of at least $1 million of qualifying Australian production expenditure per hour then it may qualify.

2.19 Note, a television series must still meet the minimum total qualifying Australian production expenditure threshold of $15 million.

Example 2.1

A television series titled 3001 Tech Planet intends to claim the Division 376 offset. It contains 26 half-hour episodes for a total of 13 hours. Note, in order to meet the $15 million threshold the series must also spend an average of approximately $1,153,847 of qualifying Australian production expenditure (QAPE) per hour. The series has the following QAPE per episode:

Episode	QAPE (A<$m)
1	$0.1
2	$0.2
3	$0.3
4	$0.4
5	$0.5
6	$0.6
7	$0.7
8	$0.8
9	$0.9
10	$1.0
11	$1.1
12	$1.2
13	$1.3
14	$1.3
15	$1.2
16	$1.1
17	$1.0
18	$0.9
19	$0.8
20	$0.7
21	$0.6
22	$0.5
23	$0.4
24	$0.3
25	$0.2
26	$0.1
Total QAPE	$18.2
Average / hour	$1.4

This series may qualify for the Division 376 offset as it has a total qualifying Australian production expenditure in excess of $15 million, as well as an average qualifying Australian production expenditure per hour exceeding the $1 million threshold.

2.20 The amendments include a definition of 'television series'. A television series must be a film made up of two or more episodes. This multiple-episode film must also be:

•

produced wholly or principally for exhibition to the public on television under a single title

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contain a common theme or themes

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contain dramatic elements that form a narrative structure.

[Schedule 2, item 7, subsection 376-17(1)]

2.21 Examples of the types of television series which may fall within this definition are as follows. As a guide, a television series may be:

•

a traditional drama series of two or more episodes where individual episodes contain differing plots but key elements of the show, for example the characters, locations or the occupation of the characters remain the same. The narrative structure may develop as the central concern across the duration of the series or individual episodic plots may be tied together by a secondary narrative stream involving key characters which continue throughout the series

or

•

a television series of two or more episodes where real people are asked to assume contemporary or historical roles in a manufactured setting and the results of this role play are filmed for a specified period. Each episode may include separate scenarios which the participants engage in, but over the length of the series common elements of theme (be they the historical setting or the people or characters) will remain and a narrative will develop, be it imposed by producers or merely developed by documenting the relationships between the participants (see also the explanation of subsection 376-17(3) below).

2.22 A documentary is not excluded from being a television series. It is intended that where a documentary television series also meets the expenditure and other thresholds, it may qualify to access the Division 376 offset. As an example, a television series may be a documentary series of two or more episodes, linked in theme and narrative by ongoing investigations, such as similar events, lives or things, to develop an overall hypothesis. [Schedule 2, item 7, subsection 376-17(1)(note)]

2.23 The definition of 'television series' includes a requirement under subsection 376-17(2) that all of the episodes must be produced wholly or principally for exhibition together, for a national market or national markets. This requirement is designed to prevent the bundling of episodes that were not designed to be exhibited together. (The word 'together' should not be taken to imply that the episodes are broadcast on the same day.) An example of such excluded bundling may be where two series are produced, with the same title, for broadcast in two different national markets, say a French version and an English version. In this case a French episode may not be included with an English episode for the purposes of the offset, as the episodes were not intended to be broadcast together in the same market. [Schedule 2, item 7, paragraph 376-17(1)(d ) and subsection 376-17(2)]

2.24 It is intended that reality television be an eligible genre for qualifying television series. Subsection 376-17(3) provides a specific definition of such reality television series. This definition does not limit the requirement under paragraph 376-17(1)(c) that series contain dramatic elements that form a narrative structure. However, it does specify that a series may meet the requirements under paragraph 376-17(1)(c) if:

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the depiction of actual events, people or situations is the sole or dominant purpose of the television series

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the television series depicts those events, people or situations in a dramatic or entertaining way, with a heavy emphasis on dramatic impact or entertainment value.

Nonetheless, whether or not a particular reality television series may be eligible may depend upon the facts of the particular series when considered against the overall interpretation of the definition of 'television series'. [Schedule 2, item 7, subsection 376-17(3)]

2.25 A pilot to a television series (where there is one), is taken to be a part of that television series. [Schedule 2, item 7, subsection 376-17(4)]

2.26 The current section 376-35 will be retitled subsection 376-35(1), with the necessary references updated. [Schedule 2, items 8 to 10, subsection 376-25(5 ), subsection 376-25(6)(note ) and section 376-35 ]

2.27 In relation to a pilot to a television series, where that pilot is shot overseas, production expenditure associated with that pilot is excluded from the calculation of total production expenditure (see subsection 376-35(2)). In effect, if a pilot is produced overseas and the series is subsequently produced as an eligible television series in Australia, then all expenditure reasonably attributable to the production of that pilot episode is to be excluded from the calculation of total production expenditure for the purposes of the offset. The expenditure that is reasonably attributable to the pilot episode is expenditure that is not qualifying Australian production expenditure, and would otherwise be production expenditure but for subsection 376-35(2) (ie it is most likely to be overseas expenditure). The intent of this provision is to encourage series that have already shot a pilot overseas to consider relocating to Australia. This provision enhances Australia's attractiveness as a location, as the exclusion of overseas pilot expenditure lessens the impact of the 70 per cent criterion applicable to the entire series (for series with qualifying Australian production expenditure between $15 million and $50 million). [Schedule 2, item 11, subsection 376-35(2)]

2.28 In relation to a pilot to a television series produced in Australia, the new provisions operate such that pilots shot in Australia will have relevant expenditure counted towards qualifying Australian production expenditure for the purposes of the offset if and only if the television series is an eligible series. In other words the Division 376 offset will not be available on the pilot alone. In order for any qualifying Australian production expenditure on a pilot to be considered, an eligible series which includes the pilot, and which meets all the requirements of the offset, must be submitted for certification. It is intended that this will encourage the production of pilots in Australia.

2.29 The term 'television series' will be included in the Dictionary definitions in Division 995, with the meaning given by section 376-17. [Schedule 2, item 12, subsection 995-1(1 ) definition of ' television series' ]

Application and transitional provisions

2.30 These amendments apply to eligible production expenditure incurred on and after 1 July 2004. Effectively, expenditure incurred on television series on or after 1 July 2004 may be eligible under Division 376 of the ITAA 1997. The application date is consistent with the announcement of the measure in the 2004-05 Budget. [Schedule 2, item 13 ]