Foreign source income - limitation of Division 10B and Division 10BA deductions
Receipts from the exploitation of a film overseas are foreign income. Any intention to receive foreign income could make a Division 10B or a Division 10BA deduction that would otherwise be allowable a 'foreign income deduction' and subject to quarantining measures. Taxation Determination TD 2004/29 - Can section 79D of the Income Tax Assessment Act 1936 operate to limit deductions available under Division 10B or Division 10BA of Part III of the Income Tax Assessment Act 1936? outlines the Tax Office's position on the limitation of Division 10B or Division 10BA deductions in these cases.
Deduction safeguards
There are safeguard provisions to ensure that Australian film industry incentives are not exploited. Two examples are:
- Expenditure qualifying for the Division 10BA deduction is limited to amounts that the investor may lose if the film venture fails.
- The Tax Office must be satisfied that the deductions claimed under Division 10B or Division 10BA have not been inflated as part of a non-arm's length transaction.
Tax offset for film production in Australia
Under Division 376 of ITAA 1997 companies can claim tax offsets for qualifying Australian production expenditure on films completed during the year. The offset is available for feature films and television miniseries produced for cinemas, television or other forms of public release (including satellite, cable, tapes and DVDs) and amounts to 12.5% of the company's qualifying expenditure on each film project.
The eligibility requirements include a film having:
- certification by the Arts Minister that it was completed on or after 4 September 2001
- a minimum qualifying expenditure of A$15 million, and
- 70% of the total expenditure spent on production activity in Australia - where qualifying expenditure was between A$15 million and A$50 million.
Films with Australian production expenditure over A$50 million will automatically qualify for the offset.
If the tax offset is claimed, other incentives, such as funding from the Film Finance Corporation or deductions under Division 10B or Division 10BA, are not available. The tax offset is not available if deductions are claimed under Division 10B by the company or someone else, or if a provisional certificate or final certificate for the film has been issued under Division 10BA. However, eligibility for the tax offset is restored if the issued provisional Division 10BA certificate for the film has been revoked under subsection 124ZAB(6A) of ITAA 1936. A film licensed investment company (FLIC) cannot invest any of its concessional capital in a film production that will claim the tax offset.
To access the tax offset, film production companies must apply to the Department of Communications, Information Technology and the Arts for a certificate of eligibility from the Arts Minister.
For a fact sheet about the tax offset, visit the website of the Department of Communications, Information Technology and the Arts at www.dcita.gov.au/filmtaxoffset
On 13 April 2005, the Government announced that the tax offset for film production would be extended to big-budget television series. The change applies for expenditure incurred on eligible television series from 1 July 2004. Full guidelines and eligibility criteria are available on the Department of Communications, Information Technology and the Arts' website.
Film licensed investment company 2006 and 2007 deductions
Under Subdivision 375-H of ITAA 1997 taxpayers are able to claim deductions for amounts paid by them, or for their proportion of amounts paid by a partnership in which they are a partner, for shares in a company which has been granted a license to raise concessional capital under the Film Licensed Investment Company Act 2005. If the shares are paid for and issued in the same income year the deductions are available in that year. If the shares are paid for in an income year and are issued in a later income year the deductions are available for the later income year. Deductions are not available for shares issued after 30 June 2007.
Deductions are available for the income years ending 30 June 2006 and 30 June 2007 only.
Film licensed investment company returns of franked dividends
The film licensed investment company (FLIC) tax concession allows certain returns of concessional capital (that is, capital invested in a FLIC during its licence period) to be treated as franked dividends. If you are an investor in a FLIC, you may have received a notice from the company advising that it is returning to you an amount of concessional capital that is, for tax purposes, a franked dividend. The FLIC will advise you of the amount of your dividend and the franking credit.
Note: To provide greater certainty for investors, the Tax Office has introduced a product rulings system. Promoters of an investment can apply to us for a ruling on the availability of the tax benefits claimed by the investment. Potential investors may wish to approach their film promoter for details of any applicable product ruling.
More information about the product rulings system is in Product Ruling PR 1999/95 - Income tax and fringe benefits tax: Product Rulings system