This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attention
Under repealed (but saved) Division 376 of the ITAA 1997 a company can claim a refundable tax offset in its income tax return for an income year for qualifying Australian production expenditure (QAPE) on certified films completed during that year. The amount of the tax offset is 12.5% of the total of the company's QAPE on the film.
The tax offset provisions apply to eligible films completed on or after 4 September 2001. From 1 July 2004 a qualifying television series is an eligible film and the tax offset provisions apply to eligible production expenditure incurred on or after 1 July 2004 on a qualifying television series.
The eligible films are:
- feature films
- television series which have been produced for:
- exhibition to the public in cinemas
- exhibition to the public by way of television broadcasting, or
- distribution to the public as a video recording (on tapes, DVDs etc)
and in respect of which the Minister for the Environment, Heritage and the Arts has issued a certificate.
A pilot to a television series is taken to be an episode of the television series. However, if the pilot is produced overseas, then all the expenditure reasonably attributable to the production of the pilot episode is ignored in the calculation of total production expenditure
End of attention
What is qualifying Australian production expenditure?
A company's QAPE on a film is the company's production expenditure on the film that is incurred on, or is reasonably attributable to:
- goods and services provided in Australia
- the use of land located in Australia
- the use of goods that are located in Australia at the time they are used in the making of the film.
There are a number of specific inclusions and exclusions to this broad test of QAPE.
The specific inclusions:
- Australian development expenditure
- Australian copyright acquisition
- Australian business overheads (there are limits on the amount claimable)
- Australian copyrighted promotional material, and
- travel to Australia where that travel relates to incoming journeys for film personnel whose remuneration qualifies as QAPE, and if other than a cast member, whose stay in Australia is for a period of more than two consecutive calendar weeks.
The specific exclusions:
- the remuneration and the cost of other benefits in relation to short-term visits, by non cast members, of less than two consecutive calendar weeks
- the cost of services that are predominantly performed outside Australia but are embodied in the cost of goods that are delivered to and used by the production company in making the film in Australia - for example the cost of animation or special effects work undertaken outside of Australia is not QAPE, and
- legal expenses except those which relate to writers' contracts or copyright issues including chain of title.
Key expenditure threshold levels
The tax offset is not available where the company's QAPE on an eligible film does not exceed A$15 million.
Where the company's QAPE on an eligible film is at least A$15 million but less than A$50 million, the tax offset is available where the QAPE is at least 70% of the film's total production expenditure.
Where the company's QAPE on an eligible film is A$50 million or more, the tax offset is available regardless of the film's total production percentage ratio.
In relation to an eligible film that is a television series, the tax offset is not available unless the average QAPE per hour of the series' duration is at least A$1 million.
The tax offset can only be claimed by the film production company where:
- the value of QAPE is at least A$15 million but less than A$50 million, is responsible for carrying out, or making arrangements to carry out, all the activities worldwide that are necessary for the making of the film
- the value of QAPE is A$50 million or more, is responsible for carrying out, or making arrangements to carry out, all the activities in Australia that are necessary for the making of the film.
The production company must be an Australian resident company or a non-Australian resident company operating in Australia through a permanent establishment which has an Australian business number (ABN) both when the company lodges its income tax return and when the tax offset is due to be credited to the company.
Where several companies are involved in the making of a film, only one company can be eligible for the tax offset. Accordingly, it will be necessary to adopt structures whereby one company is responsible for all the film production activities or the Australian activities depending on the value of QAPE to be incurred.
Where a production company has taken over the making of the film from another company (which may itself have taken over the making of the film from another company, and so on), each company making the film is taken to have incurred the production expenditure of the previous company. However, any expenditure incurred to enable the takeover is not production expenditure.
Total film production expenditure
A film's total production expenditure is defined as so much of a company's expenditure as is incurred in, or is reasonably attributable to, the making of the film from pre-production up to the point when the film is ready to be distributed, broadcast or exhibited to the general public.
The following expenditure is not production expenditure:
General Australian business overheads
Where overheads are not directly incurred or attributable to the making of the film and represent a combination of other activities undertaken by the company, a proportion of the expenditure may be claimed as QAPE but limited to the lesser of:
- two per cent of the total of the company's production expenditure on the film, or
Only the decline in value of the asset is treated as production expenditure for the purposes of the tax offset. The company can either accept the effective life determinations of the Commissioner or self-assess on the basis of their particular circumstances.
The Commissioner's determinations regarding effective life of depreciating assets used in film production can be found in Taxation Ruling TR 2008/4 - Income tax: effective life of depreciating assets.
Goods and service tax (GST)
For purposes of the tax offset the amount of total production expenditure and QAPE is the GST inclusive cost irrespective of whether the company is able to claim input tax credits under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999.
Accruals basis of accounting
Expenditure that has been incurred but not actually paid will count as production expenditure.
All production expenditure incurred in foreign currencies must be converted into Australian dollars using an average rate of exchange commencing from the start of principal photography and ending when the film is completed.
For television series the rate of exchange must be averaged across the production period commencing when QAPE began to be incurred and concluding with the completion of the television series. The time period includes pilot episodes of a television series if expenditure on the pilot is QAPE.
Arm's length principle
All transactions between any two or more parties under which a company directly or indirectly incurs film production expenditure must be worked out on the basis that each party was dealing with each other at arm's length. This includes both domestic and international arrangements.
The Commissioner has stated in Taxation Determination TD 2002/20 - Income tax: if an Australian film production company alters its method of charging for film production services supplied to a foreign associate to account for the impact of the tax offset scheme under Division 376 of the Income Tax Assessment Act 1997, will the Commissioner apply Division 13 of Part III of the Income Tax Assessment Act 1936 or the Associated Enterprises article of a relevant double tax agreement to increase the charge? that he accepts that the tax offset scheme may produce a relatively reduced transfer price for production services rendered and will not seek to apply the transfer pricing rules under Division 13 of the ITAA 1936 provided the production company's profit outcomes make commercial sense and accord with what an independent party would do to protect its own economic interest.
Only qualifying television series must be completed within a given timeframe which depends on whether the series is predominantly animation or live action. In relation to animation this is 36 months from the time production expenditure begins to be incurred. For live action or other non-animated series principal photography must be completed within 12 months of commencement. Pilot episodes are excluded from the timeframe as well as any second-unit photography.
Choice of benefits
If the tax offset is claimed, other incentives, such as funding from Screen Australia 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 an issued Division 10BA provisional certificate for the film has been revoked under subsection 124ZAB (6A) of the ITAA 1936. A FLIC cannot invest any of its concessional capital in a film production that will claim the tax offset.
Last modified: 07 Aug 2009QC 21782