Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 7 - Copyright in film to be included in effective life depreciation
7.1 Schedule 4 to this Bill amends Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) to include copyright in a film in the general effective life depreciation of the uniform capital allowances provisions. Also included in this Schedule are amendments to Division 10B of the Income Tax Assessment Act 1936 (ITAA 1936) which ensure appropriate interaction between Division 10B of the ITAA 1936 and Division 40 of the ITAA 1997.
7.2 The capital allowances provisions contained in Division 40 allow taxpayers a deduction equal to the decline in value of a depreciating asset they hold during an income year. That decline in value is worked out by reference to the effective life of the asset. The effective life of an asset is the length of time over which any entity can use the particular asset for taxable purposes (broadly, producing assessable income) or for the purpose of producing exempt income.
7.3 Under Division 40 the Commissioner of Taxation (Commissioner) makes 'safe harbour' effective life determinations for a wide range of assets. Taxpayers may use determined safe harbour effective lives for their assets where there is one in force, or choose to self assess the effective life of their asset having regard to the wear and tear reasonably expected from their circumstances of use and assuming the asset will be maintained in reasonably good order or condition. If a determination is not in force for a particular asset, the taxpayer must self assess the effective life of that asset. Taxpayers have the choice of using either the diminishing value method or the prime cost method to work out the decline in value of the assets.
7.4 In the case of intangible assets, the capital allowances provisions prescribe statutory effective lives. These assets include rights that an entity holds under the Copyright Act 1968 as the owner or a licensee of a copyright. As the law applies a specific statutory rate, taxpayers cannot choose an effective life as determined by the Commissioner or choose to self assess an effective life for these assets.
7.5 The current law provides the following capital allowance treatment for expenditure on films:
- A deduction over 2 years for capital expenditure to acquire rights in or under copyright relating to an 'Australian film' under Division 10B of Part III of the ITAA 1936.
- An immediate deduction under Division 10BA of the ITAA 1936 for investors for capital expenditure to produce a 'qualifying Australian film' that gives those investors an interest in the initial copyright of the film.
7.6 Capital expenditure on a copyright in a film which does not qualify for deduction under these provisions may be deductible under Division 40 if the expenditure forms part of the cost of a depreciation asset you hold and use for a taxable purpose. The current law provides a statutory effective life for such assets of 25 years or the period remaining in the copyright, or the licence relating to a copyright, whichever is the lesser.
7.7 The new law includes a copyright in a film in effective life depreciation provisions of the uniform capital allowances rather than using the existing 25-year statutory life.
|New law||Current law|
|A copyright in a film is excluded from the general category of 'copyright' at item 5 in subsection 40-95(7).||The general category of 'copyright' at item 5 in subsection 40-95(7) includes copyright in a film.|
|A licence to a copyright in a film is excluded from 'a licence relating to a copyright' at item 7 in the above subsection.||The meaning of 'a licence relating to a copyright' at item 7 in the above subsection includes a licence to a copyright in a film which is itself a depreciating asset.|
|These exclusions mean that copyright, or licenses relating to a copyright, in a film will automatically come under effective life depreciation.||No equivalent.|
|Copyright in a film is carved out of the exception category of intellectual property in subsection 40-70(2). The amendment ensures that both prime cost and diminishing value methods will be available to the write-off of depreciating assets which are either copyright, or licenses relating to a copyright, in a film.||Intellectual property, including copyright in a film can only be written-off using the prime cost method (ie, straight line write-off) by the operation of subsection 40-70(2).|
7.8 Copyright in a film is excluded from the general category of copyright at item 5 in subsection 40-95(7) and a licence relating to a copyright subsisting in a film is excluded from a licence relating to a copyright at item 7 in this subsection. [Schedule 4, items 5 and 6, subsection 40-95(7)]
7.9 Copyright in a film is carved out of the exception category of intellectual property in subsection 40-70(2). This ensures that both prime cost and diminishing value methods may apply to copyright in a film write-off under Division 40. [Schedule 4, item 4, paragraph 40-70(2)(b)]
7.10 Subsection 40-100(4) is amended to clarify that paragraphs 40-100(4)(a) to (c) apply only if relevant to a particular asset, as specific factors that the Commissioner must take into account in determining the asset's effective life. These specific factors are not the only factors the Commissioner can take into account. [Schedule 4, item 7, subsection 40-100(4)]
7.11 Subsection 40-105(1) is amended to clarify that paragraphs 40-105(1)(a) and (b) apply only if relevant to a particular asset, as specific factors that a taxpayer must take into account in self assessing the asset's effective life. Other relevant factors that may be taken into account are those the Commissioner takes into account. [Schedule 4, item 8, subsection 40-105(1)]
7.12 Subsection 40-105(4) has been amended to ensure that this subsection does not operate to exclude copyright in a film from the effective life self assessment provision. [Schedule 4, item 9, subsection 40-105(4)]
7.13 Subsection 40-110(5) has been amended to ensure that this subsection does not operate to exclude copyright in a film from the effective life recalculation provision. [Schedule 4, item 11, subsection 40-110(5)]
7.14 This measure will apply to film copyright acquired on or after 1 July 2004.
7.15 Currently a taxpayer can elect that the 2-year write-off provided in subsection 124UA(1) does not apply in which case a 25-year write-off applies under that Division. As amended, a taxpayer will make to an election such that the Division does not apply. [Schedule 4, item 3, subsection 124UA(2)]
7.16 Section 124U of the ITAA 1936 is repealed as the section is no longer required to provide a 25-year write-off for copyright in a film as an alternative to the 2-year write-off. [Schedule 4, item 2]
7.17 Paragraph 124PA(4)(b) is amended to reflect the repeal of section 124U. [Schedule 4, item 1, paragraph 124PA(4)(b)]
7.18 These consequential amendments will effectively align the Division 10B election with the current Division 10BA election. The effect of either the amended election in Division 10B or the current Division 10BA election is that taxpayers would no longer be considered as being able to deduct an amount under the relevant Division. This ensures that taxpayers are able to write-off copyright in a film under Division 40 of the ITAA 1997 where no deduction has been claimed under Division 10B or Division 10BA.
7.19 The examples in subsection 40-110(1), describing the circumstances where a taxpayer may choose to recalculate their asset's effective life, have been repealed. The same examples and an example to include a changed circumstance when a taxpayer would choose to recalculate the effective life of their copyright in a film have been inserted. [Schedule 4, item 10, subsection 40-110(1)]
7.20 Write-offs for copyright in films which do not qualify as Australian films should be based on the copyright's economic life rather than the current 25-year statutory life or the period until the copyright ends, whichever is the less. The Treasurer announced the new tax treatment for copyright in films as part of the 2005-06 Budget on 10 May 2005.
7.21 There are two options to implement the policy objective under the capital allowances provision of the income tax law:
- introduce a shorter statutory write-off period for copyright in a film; or
- include copyright in a film in effective life depreciation.
7.22 Both options above would replace the current 25-year write-off period with a period that more closely reflects the economic life of the film copyright. Both options would advantageously affect the same relatively small number of taxpayers and effectively reduce compliance costs due to the shorter write-off period.
7.23 This measure impacts on film producers and investors, of films that do not qualify as Australian films. These taxpayers will be allowed to write-off the capital cost of their copyright in their film based on either the Commissioner's safe harbour effective life determination or their self assessment of their film's effective life. Should taxpayers choose to self assess, they will need to have regard to, and keep a record of, their particular circumstances in determining their film's effective life.
7.24 The measure has a small impact on the Australian Taxation Office (ATO) as the Commissioner is required to issue a safe harbour effective life determination for film copyright as soon as possible after the enactment of this measure.
7.25 Under both options, the impact on film producers and investors would be similar as both options replace a statutory write-off period with another period. Under Option 1, there would have been no impact on the ATO as one statutory period would have merely been replaced with another. However, the Option 1 would not have offered taxpayers the choice of self assessment and may not reflect the economic life for some films. This would have resulted in an implementation shortfall of the policy objective.
7.26 Option 2 will require the Commissioner to issue a safe harbour effective life determination. The Commissioner has a dedicated team that considers effective lives of numerous assets across numerous specific industries. Including film copyright in effective life depreciation will have a negligible effect on resources. For the cost of this minimal impact on the ATO, Option 2 will effectively satisfy the policy objective by offering taxpayers the choice of effective lives, that is, the Commissioner's determined safe harbour effective life or a self assessed effective life reflecting the taxpayer's particular circumstances.
7.27 Consultation was undertaken with both the Department of Communication, Information Technology and the Arts and the ATO to achieve a broad consensus for this proposal.
7.28 Both options address the Government's policy objective, both options have similar impact on film producers and investors. Although Option 2 will have a small impact on the Commissioner, this concern would be largely cancelled by the increased benefit this option provides. Option 2 is the more effective option in implementing the Government's policy objective. Accordingly the second option is the preferred option. The Treasury and ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis.