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House of Representatives

Film Licensed Investment Company Bill 2005

Film Licensed Investment Company Act 2005

Explanatory Memorandum

(Circulated by authority of Senator the Hon. Rod Kemp, Minister for the Arts and Sport)

Outline and financial impact

Outline

The Film Licensed Investment Company Bill 2005, together with the Film Licensed Investment Company (Consequential Provisions) Bill 2005 (FLIC (CP) Bill), provides for an extension of the pilot Film Licensed Investment Company (FLIC) scheme to promote investment in the Australian film industry by allowing a 100% income tax deduction for taxpayers investing funds in the company (the FLIC) licensed to raise capital under the proposed Act. The up-front 100% income tax deduction will only be available to the initial purchasers of shares from the company and not if shares are subsequently on-sold. The FLIC will be required to invest the funds raised (less a specified percentage determined by the Minister to allow for the FLIC to meet its administrative expenses) in the production of qualifying Australian films. The scheme will support the continuing development of a uniquely Australian film industry by encouraging investment in the production of high quality, commercially viable films which portray Australian perspectives and Australia's cultural diversity. Purchase of shares in the FLIC is intended to provide an alternative method of investing in the Australian film industry.

The FLIC licence will be allocated following a competitive process. Applications for the licence will be sought from companies which meet certain conditions intended to ensure Australian involvement in the management of the applicant companies. For example, the directors of the company must be Australian citizens and the management and control of the company will be required to be ordinarily exercised in Australia. Selection criteria, which will provide a mechanism for the comparative assessment of applications, will be set out in a legislative instrument made by the Minister.

The FLIC will be licensed to raise $10 million in concessional capital in each of the 2005-2006 and 2006-2007 financial years and must invest the amount raised (less a determined amount for administrative costs) on or before 30 June 2008. The concessional capital must be invested in provisionally certified Australian films, each of which must receive a final certificate issued under s124ZAC of the Income Tax Assessment Act 1936 (ITAA 1936) by 30 June 2009. To encourage the development of a broader based Australian film industry, the FLIC cannot invest in films developed or produced by licensees under the Broadcasting Services Act 1992 or by the national broadcasters. Limitations will be imposed on the power of the FLIC to borrow money during the licence period and on the level of share ownership by an individual or single entity and on foreign ownership. Detailed ownership rules, including the setting of a maximum individual, single entity or foreign shareholding at 33%, are set out in the Schedule to the Bill. The FLIC licence will not be transferable.

The Bill gives the Minister power to deal with breaches by the FLIC of the statutory conditions imposed on it. The Minister may decide not to take any action in respect of a breach, give the FLIC a notice that the breach must be remedied, revoke the licence (if the breach occurs during the licence period) or remove the concessional status of the shares. Where a decision to remove the concessional status is made, the FLIC (CP) Bill will provide that shareholders will lose their entitlement to a tax deduction for the shares. Division 7 also makes provision for the FLIC to be given an opportunity to make submissions before a decision is taken, for the FLIC to be given a statement of reasons for the Minister's decision and for the Commissioner of Taxation to be notified of the Minister's decision.

Division 9 of Part 2 provides for the FLIC to report regularly for the purposes of monitoring and evaluation of the scheme. The reports provided by the company will be important in monitoring compliance with conditions of the scheme and evaluating its success. Provision is also made for certain information to be passed to the Commissioner of Taxation.

The Bill contains penalties for the acquisition of shares in excess of acceptable levels for individual and foreign ownership and for the deliberate actions of shareholders designed to avoid the limitations on the ownership of shares. The FLIC will also be advised that the penalties in the Criminal Code Act 1995 will apply for providing false or misleading information to the Minister.

Financial impact statement

The Film Licensed Investment Company (FLIC) scheme will allow $10 million of concessional capital to be raised for investment in qualifying Australian film in each of the 2005-2006 and 2006-2007 financial years. The cost to the Commonwealth in revenue forgone will be a maximum of $4 million in each of the 2006-2007 and 2007-2008 financial years.

Notes on clauses

Part 1 - Preliminary

Clause 1 - Short title

Clause 1 provides that the Bill, when enacted may be cited as the Film Licensed Investment Company Act 2005.

Clause 2 - Commencement

Clause 2 of the Bill provides that the Act will commence on the day after it receives the Royal Assent. This provision avoids retrospective operation of the Act on the day it receives the Royal Assent, which would otherwise occur because of the effect of subsection 3(2) of the Acts Interpretation Act 1901.

Clause 3 - Overview

Clause 3 explains briefly what the scheme is about to assist readers. The scheme in the Bill is intended to encourage investment in qualifying Australian films. Under the scheme companies can apply for, and one company will be granted, the concessional capital licence to raise $10 million in each of the 2005-2006 and 2006-2007 financial years for investment in qualifying Australian films. (The scheme begins on the day the Minister grants the licence and ends of 30 June 2009, by which date all films must have been completed). Shareholders who purchase shares during the period the concessional capital licence is in force (i.e. the period commencing on the date the Minister grants the licence and ending on 30 June 2007) will be entitled to a 100% tax deduction for their investment.

The Film Licensed Investment Company (Consequential Provisions) Act 2005 amends the Income Tax Assessment Act 1997 to provide for the operation of the concession.

Clause 4 - Objects of the scheme

Clause 4 sets out five objects of the scheme. It is envisaged that these criteria could be relevant to the Minister's determination of the decision-making criteria to be determined by the Minister under clause 9. For example, the decision-making criteria could include a comparative assessment of the extent to which each applicant would, if granted the licence, further one or more of these objects.

Paragraph 4(a) clarifies that the Bill is intended to further the Commonwealth's objective of developing an unique Australian identity by encouraging the production of qualifying Australian films (within the meaning of that term in Division 10BA of Part III of the ITAA 1936) which portray Australian perspectives and reflect Australia's cultural diversity. Encouraging investment in film production is the focus of the scheme, though investment in marketing and distribution is allowed.

Paragraph 4(b) articulates the intention that the FLIC will source films of a high standard which are likely to be commercially successful. Commercial success will boost the status of the Australian film industry, benefit those involved in the industry and investors in the FLIC. Paragraph 4(b) also clarifies the restriction to investment by the FLIC in qualifying Australian films.

Paragraph 4 (c) notes that the scheme intends to encourage Australian creative potential and expertise that exists amongst players in the Australian film industry.

Paragraph 4(d) clarifies that the relatively simple mechanism of direct purchase of shares in an Australian company combined with the incentive of the tax concession, is intended to facilitate and encourage private sector investment in the Australian film production industry.

The objective in paragraph 4(e) is reflected in the capping of concessional capital to $10 million in each of the 2005-2006 and 2006-2007 financial years. The government has budgeted to forego revenue of $4 million in each of the 2006-2007 and 2007-2008 financial years - the caps on concessional capital ensure that the support which the government budgeted to provide to the industry are not exceeded. The mechanism of providing support through a budgeted concession on capital investment makes the quantum of support transparent to the Australian public.

Clause 5 - Extra-territorial operation

Clause 5 provides that the proposed subparagraph 25(a)(v), section 27, Part 3 and the Schedule would apply within and outside Australia and in a foreign country. Those provisions relate to limitations imposed on investment in films developed or produced by the associates of licensees or providers of broadcasting services in accordance with a class licence determined under the Broadcasting Services Act 1992 and the limitations imposed on ownership of shares in the FLIC by foreign persons and their associates. This clause is necessary to enable the application of the provisions to persons who are not in Australia. This is because it is foreseeable that offences provided for in the Bill, especially in relation to levels of foreign ownership, but also conceivably in relation to levels of individual ownership, could be committed by foreign persons entering into arrangements overseas.

The provision in clause 5 is the same as the extra-territorial provision in the pilot scheme provided for in the Film Licensed Investment Company Act 1998. It was considered appropriate to maintain consistency with the pilot scheme, unless experience gained from the operation of the pilot scheme indicated otherwise. Like the pilot scheme, the extended scheme provided for in the Bill will also operate only for a limited period i.e. from the date the Minister issues the concessional capital until 30 June 2009.

Clause 6 - Definitions

This clause contains definitions of key terms used in the Bill.

The term, "concessional capital" is money paid to the FLIC by a person for the issue, of shares to that person during the FLIC's licence period. Only concessional capital can be raised during the licence period.

The term, "film licensed investment company", refers to the company granted the licence to raise concessional capital under the scheme. That company will continue to be referred to as the film licensed investment company or FLIC, even after the licence has ceased being in force.

The term, "non-concessional capital" refers to the capital that is raised after the end of the licence period, the investment of which in the FLIC does not attract an upfront concession under the scheme.

The definition of "qualifying Australian film" has the same meaning as it has in Division 10BA of Part III of the ITAA 1936.

Part 2 - The scheme

Division 1 - Overview

Clause 7 - Overview of Part

Clause 7 provides an overview of Part 2 to assist readers.

Part 2 of the Bill sets out details of the scheme under which companies will be able to apply for the non-transferable licence (the concessional capital licence) to raise capital for investment in qualifying Australian films. The licence will be allocated by means of a competitive process. There will only be one licence issued. On this point the scheme differs from the pilot scheme provided for in the Film Licensed Investment Company Act 1998 which allowed for the issue of more than one licence. (Two were ultimately issued under the pilot scheme). The concessional capital licence would be valid from the date on which it is issued until 30 June 2007, during which time the licensed company (FLIC) would be authorised to raise $10 million in concessional capital in each of the 2005-2006 and 2006 -2007 financial years by issuing shares in the company. Initial purchasers of those shares in the company would be entitled to an up-front tax deduction of 100%.

Division 2 provides for the Minister to determine rules concerning the application process and decision-making criteria (including the weight to be given to each criterion) and procedures for allocating the licence.

Division 3 sets out the application process and provides for the Minister to call for further rounds of applications, if the licence is not allocated after the first round.

Division 4 provides that after receiving the applications, the Minister may, consistent with the decision-making criteria and procedures determined under clause 9 and having regard to the recommendations of the Selection Advisory Panel, grant the concessional capital licence to a company that complies with the conditions set out in clause 13. To be eligible for the grant of the licence a company would be required to meet certain conditions. Those conditions include that it is a company registered under the Corporations Law that has not commenced business nor exercised any borrowing power, that its directors are Australian citizens, that management and control of the company will be required to be ordinarily exercised in Australia and that all shares in the company are fully paid shares of the same class. Unsuccessful applicants will be provided with a statement of reasons.

Division 5 provides for the maximum amount of concessional capital that the FLIC can raise during the licence period. Because a 100% tax deduction is available for capital invested in the FLIC, the cap on concessional capital is critical in ensuring that Government support for the scheme is confined to the $4 million in revenue that the Government has budgeted to forego in each of the 2006-2007 and 2007-2008 financial years.

Division 6 defines the licence period during which the FLIC can raise concessional capital. This is the period beginning on the day the concessional capital licence comes into force and ending on 30 June 2007, unless the licence is revoked earlier.

Division 7 sets out the conditions of the scheme, including the fundraising and investment conditions. The investment conditions include the condition that the FLIC must invest in two or more qualifying Australian films and that the FLIC must not invest before it has raised $5 million in concessional capital, unless 12 months have passed since the issue of its licence. These provisions are intended to ensure that the FLIC has sufficient capital to invest in quality productions and that more than one film benefits from the injection of capital. Division 7 also ensures that shareholders who invested concessional capital and those who invested non-concessional capital in the FLIC are treated equally. It attempts to ensure that financial assistance is directed primarily to the independent production sector by providing that films in which the FLIC invests must not have been directed or produced by certain persons. It also imposes limits on individual and foreign ownership.

Division 8 sets out matters relating to breach of conditions of the scheme. The Minister is required to follow certain procedures if he thinks that there are grounds for deciding that the FLIC is in breach of a condition. If the Minister is satisfied that the FLIC has breached a condition, he is empowered to decide not to take any action or to give the FLIC notice that the breach must be remedied by a specified date, to revoke the licence (if the breach occurred during the licence period) or to decide to remove the concessional status of shares issued during the licence period. It is intended that revocation of the licence will not of itself remove the concessional status of shares issued by the FLIC before the revocation. If the Minister decides to remove the concessional status of shares, he will be required to notify the Commissioner of Taxation of his decision.

Division 9 sets out reporting requirements for the purposes of monitoring compliance with the Act and evaluating the scheme. The FLIC will be required to provide information to the Minister at six monthly intervals, commencing on 30 June 2006. The nature of the information that the FLIC is required to provide will be determined by the Minister. The Secretary to the Department of Communications, Information Technology and the Arts will be required to provide certain information to the Commissioner of Taxation, including information about the shareholders, the number of shares issued by the FLIC, any breach of conditions by the FLIC and the actions taken by the Minister in response to any such breaches.

Division 10 renders void a purported transfer of the FLIC's licence and provides for the determination by the Minister of the percentage of concessional capital that may be used by the FLIC for administrative costs.

Division 2 - Minister to make certain determinations concerning the application process and decision-making criteria

Clause 8 - Application rules

Clause 8 requires the Minister to determine Application rules to apply to the process of making applications for the concessional capital licence under the scheme.

The Application rules may provide for all or only some of the following:

the method to be employed in calling for applications;
the closing date for a round of applications;
the format of the application and the material that an applicant is required to submit in support of an application. (It is intended that the information to be submitted would include details about the company and its directors and staff, its business plan and investment policy and strategy, as well as information necessary to enable a thorough assessment of the merits of the application against the decision-making criteria, including in comparison with other applicants.)

In addition, it is intended that the Application rules would make provision for the establishment and rules governing the operation of a Selection Advisory Panel (SAP), including who could serve as a member of the SAP and the length of membership of the SAP. (Clause 16 requires the Minister to consider the recommendations of the SAP in deciding whether to grant the concessional capital licence to a particular applicant). It is envisaged that the SAP would include people who have expertise in commercial investment and/or different aspects of the film industry. The Minister may also determine other matters relevant to the application process under the scheme.

The Application rules will be a legislative instrument.

Clause 9 - Minister must determine decision-making criteria and procedures

Clause 9(1) requires the Minister to determine criteria to be applied, and procedures to be complied with, in deciding whether, and to whom, to grant the concessional capital licence under the scheme. The determination is to be a legislative instrument.

It is intended that the decision-making criteria determined under this clause will enable a thorough assessment of each application in its own right and as compared with other applications. It is intended that the decision-making criteria will, amongst other things, include one or more criteria relating to a comparative assessment of the extent to which each applicant would, if granted the licence, further the objects of the scheme set out in clause 4. It is also intended that the decision-making criteria will include one or more criteria relating to the expertise of the key personnel of the applicant in, for example, the film industry or investing in commercially successful projects.

Clause 9(2) requires the Minister to determine the weight to be given to each decision-making criterion. It is intended that different criteria may be given different weight and also that equal weight may be given to two or more criteria. The purpose of this provision is to assist applicants to understand the relative importance of different criteria in the decision-making process and enable them to frame their applications accordingly.

Division 3 - The application process

Clause 10 - Rounds of applications

Clause 10(1) provides for the Minister to call for applications for the concessional capital licence under the scheme.

Clause 10(2) provides that, if the Minister decides not to allocate the concessional capital licence in the first round of applications, a second or subsequent application round or rounds may be held. In the event of the licence not being allocated in the first round and subsequent applications being called for, an applicant who was unsuccessful in the first round would not be disqualified from submitting another application. In fact, as the Minister is required by clause 17 to provide reasons to unsuccessful applicants, applicants who have the opportunity to reapply might benefit from the statement of reasons in reframing their applications.

Clause 11 - Applications

Clause 11 provides that a company may apply for the concessional capital licence and that applications must be in the specified form and include the required information. Applications must be given to the Minister.

Because it is a condition of the grant of licence that a company must not have started business, it is envisaged that companies will be incorporated specifically to apply for the concessional capital licence. In order to avoid excluding potential applicants who are experiencing delays in registering under the Corporations Act 2001, clause 11(3) allows persons who have applied to register a company under the Corporations Act to apply as long as the company will meet the conditions in clause 13, if it is registered.

It is intended that section 137 of the Criminal Code Act 1995 will apply to the process of making an application for the concessional capital licence. This means that it will be an offence to make a statement in an application or in response to a request for further information in clause 12 that the person knows is false or misleading in a material particular. This includes the omission of information in a way that is misleading. These offence provisions are intended to ensure that the Minister has complete and accurate information upon which to make a comparative assessment of applications.

Clause 12 - Further information

Clause 12(1) empowers the Minister to seek further information from an applicant about its application and to specify the period within which the information is to be provided. The purpose of this provision is to ensure that all necessary information is available to the Minister. For administrative efficiency, clause 43 enables the Minister to delegate this power to the Secretary and SES employees or acting SES employees of the Department of Communications, Information Technology and the Arts.

Clause 12(2) confers on the Minister a discretionary power to refuse to consider an application if the information requested is not provided within the specified period. The purpose of this provision is to ensure that the decision-making process is not unduly delayed by the failure of applicants to provide information in a timely fashion.

Division 4 - Grant of licence

Clause 13 - Conditions on grant of licence

Clause 13 provides for conditions that must be met before the Minister is able to grant the concessional capital licence to an applicant. The company must be registered under the Corporations Act 2001. The condition in paragraph 13(b) is intended to ensure that licences are granted to new companies, set up specifically to invest in the Australian film industry. The conditions in paragraphs 13(c) and (d) are intended to ensure that the company is predominantly Australian in character by imposing a requirement that it have its headquarters in Australia and Australian directors. The condition in paragraph 13(e) is intended to ensure that every shareholder in the FLIC has an equal opportunity to vote and that control of the company cannot be distorted by manipulation of share classes with differing rights attached.

Another condition is effectively imposed by section 703-20(2) of the Income Tax Assessment Act 1997 (the ITAA 1997) which provides that the FLIC cannot be part of a consolidated group.

Clause 14 - Grant of concessional capital licence

Clause 14 confers on the Minister a discretionary power to grant the licence to raise concessional capital to a company.

Clause 15 - Form of licence

Clause 15 provides that the licence must be in writing. The licence must also explain the effect of clause 18 - that the FLIC is licensed to raise $10 million in the financial year commencing on 1 July 2005 and $10 million in the financial year commencing on 1 July 2006. It must set out the conditions of the scheme with which the FLIC must comply. These are contained in clauses 22 to 28 and in the determination made under clause 21. The licence must also contain a statement that the conditions of the scheme determined by the Minister under clause 21 may be altered at any time after consultation with the FLIC. The purpose of this provision is to ensure that the FLIC has a clear statement about the scheme that can be made available to potential investors to assist them (and the FLIC) to comprehend the operation of the scheme.

Clause 16 - Minister is to have regard to recommendations of Selection Advisory Panel

Clause 16 obliges the Minister to have regard to the recommendations of the Selection Advisory Panel in deciding whether to grant the licence under the scheme to a particular company. The purpose of the clause is to ensure that the Minister has the benefit of the views of people with appropriate expertise when making the decision to grant the concessional capital licence.

Clause 8 requires the Minister to determine rules concerning the application process and allows the rules to provide for the establishment and operation of a Selection Advisory Panel (SAP).

Clause 17 - Notice of refusal to grant licence

Clause 17 provides that the Minister must notify an unsuccessful applicant of his decision and provide reasons for the refusal to grant the licence. Section 25D of the Acts Interpretation Act 1901 provides that where an Act requires a person making a decision to give written reasons for the decision, the instrument giving the reasons shall also set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based. Accordingly, the Minister must, in giving the reasons for the decision to refuse to grant the licence to a particular applicant, set out those elements.

The provision of reasons for a decision to refuse an application in the first round will assist applicants to consider whether or not to make an application in a second application round (if any) (see clause 10) and to address any perceived shortcomings in their proposal.

Refusal to grant the licence is not subject to merits review because there is only one licence to be granted under the scheme for the total amount of concessional capital to be raised. The Administrative Appeals Tribunal may not therefore be in a position to grant an appropriate remedy.

Division 5 - Amount of concessional capital FLIC is licensed to raise

Clause 18 - Amount of concessional capital FLIC is licensed to raise

Clause 18 provides that the FLIC will be licensed to raise $10 million in concessional capital in the financial year that begins on 1 July 2005 and concludes on 30 June 2006 and $10 million in the financial year commencing on 1 July 2006 and concluding on 30 June 2007. The amount of concessional capital is capped at $10 million in each of those two financial years because the Government has budgeted to forego $4 million in revenue in each of the 2006-2007 and 2007-2008 financial years. One of the fundraising conditions imposed on the FLIC is not to raise capital in excess of the cap (see clause 22).

Division 6 - Licence period

Clause 19 - Licence period

Clause 19 provides for the concessional capital licence to come into force when it is granted and to remain in force until 30 June 2007, unless it is revoked beforehand under clause 32. In the latter case, the licence will stop being in force on the day specified by the Minister in the notice of revocation. The licence period is the period the licence is in force.

Division 7 - Conditions of Scheme

Clause 20 - General

Clause 20 summarises the conditions that apply for the period of the scheme i.e. from the date the Minister grants the licence under the scheme until 30 June 2009. Those conditions are contained in clauses 22 to 28 and in the determination made under clause 21. The conditions are intended to be additional to the provisions of the Corporation Act 2001. They are not intended in any way to modify the operation of the Corporation Act in relation to the FLIC.

Clause 21 - Conditions in a disallowable instrument

Clause 21(1) provides that the Minister may determine, by legislative instrument, conditions that are to apply to the FLIC under the scheme. The purpose of the clause is to enable the Minister to impose additional conditions on the FLIC if he should consider it necessary or desirable for the proper operation of the scheme.

Clause 21(2) allows the Minister to revoke or vary conditions determined under clause 21(1), including imposing new conditions at any time after the grant of the licence, after first consulting the FLIC. The purpose of this provision is to ensure that the FLIC is given the opportunity to make a submission to the Minister in connection with a proposed revocation or variation of the conditions. No obligation is imposed on the Minister to consult with applicants or potential applicants about proposed conditions before the FLIC licence is granted.

Clause 22 - Fundraising conditions

Clause 22 will impose restrictions on the fundraising of the FLIC. The condition in clause 22(a) is intended to provide some impetus to the scheme by requiring the FLIC to raise $5 million in concessional capital within 12 months from the day the licence is granted. Because the FLIC will be licensed to raise capital only in the 2005-2006 and 2006-2007 financial years, it is important that the FLIC actively engages in fundraising from the outset. If the FLIC does not do so, there will be a loss of potential financial support for the film industry within the period of the scheme.

Clause 22(b) ensures that the FLIC does not raise more than the $10 million in concessional capital that it is licensed to raise in each of the 2005-2006 and 2006-2007 financial years. This is because the Government has budgeted to forego $4 million in each of the 2006-2007 and 2007-2008 financial years by way of tax deductions allowed to initial purchasers of shares in the FLIC. If the cap on concesssional capital raising were exceeded, there would be an increase in the cost to the Government.

Clauses 22(c) and (d) are intended to ensure that concessional capital raised by the FLIC is available for investment in qualifying Australian films and not diverted to debt servicing. Clause 22(d), however, provides that the FLIC may borrow funds in the 2005-2006 financial year solely for the purpose of meeting administrative costs. This provision recognises that the FLIC is likely to incur administrative expenses before it has raised any or sufficient concessional capital to meet those expenses.

Clause 22(e) is intended to prevent the FLIC from raising capital other than concessional capital during the period in which it is licensed to do so but to allow the FLIC to raise non-concessional capital after the end of the licence period. The purpose of clause 22(e) is to separate the periods in which concessional and non-concessional capital may be raised in order to prevent a mixing of those funds and possible confusion amongst potential shareholders. (Clause 28(d) requires the FLIC to hold concessional capital and non-concessional capital in separate accounts). Clause 22(e) will also facilitate an assessment of whether the scheme is effective in attracting investment in the film industry.

Clause 23 - Investment conditions

Clause 23 imposes conditions on investments that may be made by the FLIC.

Clause 23(1)(a) imposes a condition that concessional capital raised by the FLIC, less an amount for administrative expenses, must be invested in two or more provisionally certified films. Provisionally certified film is defined in clause 6 as a film that has received a provisional certificate under section 124ZAB of the ITAA 1936. This will have the effect of ensuring that financial support is available to more than one film and also spread investor risk across a range of productions. The allowable deduction percentage by which the amount to be invested may be reduced is defined in clause 37(2) as the percentage of the concessional capital raised by the FLIC that may be used to meet its costs of administration. The percentage is to be determined by the Minister for the FLIC under clause 37(1). Interest earned on concessional capital prior to investment will also be invested in qualifying Australian film.

Clause 23(1)(b) imposes a condition that non-concessional capital raised by the FLIC must also be invested in two or more provisionally certified films. Clauses 23(1)(a) and (b) require both concessional and non-concessional capital to be invested on or before 30 June 2008. The purpose of these provisions is to ensure that investment of capital cannot be deferred indefinitely and that the film industry can benefit from the investment during the period of the scheme. Providing for concessional capital investment to be completed one year after the final date on which the capital is raised, recognises that investment cannot necessarily be completed as soon as the funds are raised.

Clause 23(1)(c) provides that the FLIC must have raised $5 million in concessional capital before it begins to invest. This is to ensure that the FLIC has a sufficient amount to invest and that investments are not spread too thinly across productions. However, if 12 months have passed from the beginning of the licence period and the FLIC has not raised $5 million in concessional capital, the FLIC may still begin to invest. This allows capital raised to be invested, even if the projected level of capital raising is not reached.

Clause 23(1)(d) allows the FLIC to invest in the marketing and distribution of films as well as production. However, as the film industry is in greater need of financial support for production than for marketing and distribution, limits are imposed on the amount of capital that can be invested in marketing and distribution. The FLIC can only invest up to half as much concessional or non-concessional capital in marketing and distribution of films as it does in production. By way of example, this provision would allow an amount of capital to be invested in marketing and distribution as long as twice the amount of capital, whether concessional or non-concessional capital, was invested in production of the film.

Clause 24 - Conditions relating to returns to shareholders

Clause 24(1) provides that returns from concessional and non-concessional capital invested by the FLIC in provisionally certified films must be distributed to shareholders in equal proportion to the shares held by them. This provision is intended to ensure that investors of concessional and non-concessional capital are treated equally by the FLIC.

It is intended that all of the FLIC's returns on a film, including the investment (if any) made after a film has received final certification must be returned to shareholders. Therefore, the provisions of clause 24(1) could apply to returns from investment e.g. in marketing and distribution after a final certificate has been issued for a film.

Clause 24(2) clarifies that returns can be invested in an account with an approved deposit taking institution for a reasonable period while arrangements are put in place to distribute returns. This would be in accord with normal business practice.

Clause 25 - Film conditions

Clause 25 imposes conditions in respect of films in which the FLIC may invest.

Clause 25(a) prevents the FLIC from investing in a film developed or produced by licensees under, or providers of, broadcasting services in accordance with a class licence determined under the Broadcasting Services Act 1992 or their associates or by the national broadcasters. The purpose of this provision is to ensure that, consistent with the objectives of the scheme and other existing assistance to the film industry, assistance is primarily directed to the independent production sector.

Clause 5 of the Schedule to the Bill provides a definition of "associates" for the purposes of the ownership provisions in the Bill. This definition also applies to associates under clause 25 due to the extended meaning of "ownership provisions" in Clause 2 of the Schedule to the Bill. "Ownership provisions" means subparagraph 25(a)(v), section 27, Part 3 and this Schedule.

Clause 25(b) imposes the condition that the films in which the FLIC invests must receive a final certificate under section 124ZAC of the ITAA 1936 on or before 30 June 2009. The purposes of this condition are to facilitate evaluation of the scheme and to ensure that, in accordance with the objectives of the scheme, investment is made in qualifying Australian films.

Clause 26 - Preconditions and conditions in the Minister's determination under section 21

Clause 26(a) imposes the condition that the FLIC continue to comply with conditions on grant of the licence set out in clause 13 (other than the condition that the company not have commenced business or have exercised any borrowing power, which can have no application beyond the initial application and grant of the licence). The purpose of this condition is to ensure that the conditions imposed in respect of the grant of the licence continue to apply to the FLIC for the duration of the scheme.

Clause 26(b) imposes the condition that the FLIC comply with the conditions determined by the Minister under clause 21.

Clause 27 - Ownership condition

Clause 27 provides that the FLIC must not have an unacceptable level of foreign or individual ownership. The purpose of the clause is to restrict the level of foreign and individual ownership of the FLIC, so that the FLIC cannot be dominated by one individual or one entity or by overseas interests.

An "unacceptable level of foreign-ownership" exists in relation to the FLIC if a group of foreign persons hold, in total, a particular type of stake in the FLIC of more than 33%.

An "unacceptable level of individual ownership" exists in relation to the FLIC if one or more persons (this included bodies corporate) holds a particular type of stake in the FLIC of more than 33%.

Clause 27(4) provides that the Schedule sets out definitions of expressions used in this clause.

The expression "foreign person" is defined in clauses 2 and 3 of the Schedule to mean a foreign citizen not ordinarily resident in Australia; a company in which any individual foreign person or company holds more than a 33% ownership stake; a company in which an ownership stake of more than 33% is held by two or more foreign persons or foreign companies; and a trustee of a trust estate in which foreign persons or foreign companies hold, either individually or together, a substantial interest.

Clauses 11 and 12 of the Schedule define the different types of stake in the FLIC to which the ownership limits would apply. Clause 11 provides that a person's stake in the FLIC is the aggregate of "direct control interests" held by the person and by the person's associates. Clause 12 enables "direct control interests" to be measured as a percentage of paid up share capital, voting power, rights to distribution of capital or profits on winding up and rights to distribution of capital and profits otherwise than on winding up.

Clause 5 of the Schedule provides that persons will be taken to be an "associate" of another person if they are a relative, partner, employee of the person; a company in which the person is an officer, or an officer in the same company; a co-employee, trustee of a trust where the other person benefits from the trust; a company in accordance with whose directions the directors are accustomed to act; a company in which the person has an ownership stake of more than 33%; and a person who holds more than a 33% stake in another company.

Clause 28 - Other conditions

Clause 28 imposes additional conditions on the FLIC.

Clause 28(a) prohibits any purported transfer of the FLIC's licence. This clause operates in conjunction with clause 38 which renders any purported transfer of a licence void. The purpose of the clauses is to ensure that the concessional capital licence granted by the Minister remains with the company that was granted the licence following the comparative assessment and decision-making process.

Clause 28(b) requires the FLIC to comply with the reporting requirements set out in a determination made by the Minister under clause 35 and with any request made under clause 35(4) for additional information about a report made by the FLIC. The purpose of this clause is to ensure that required information is provided to the Minister. Provision of adequate information will be essential to the proper monitoring and evaluation of the scheme.

Clause 28(c) requires the FLIC to notify each shareholder of any decision of the Minister under clause 32 in respect of a breach of condition. The purpose of this clause is to ensure that shareholders are kept informed of any decisions that may affect the concessional status of their investment and are afforded the opportunity to take action in connection with that status.

Clause 28(d) requires the FLIC to maintain separate account in an approved deposit taking institution for its concessional capital and its non-concessional capital. The purpose of this provision is to facilitate monitoring of the investments made by the FLIC and to reduce the opportunities for the scheme to be used for tax avoidance.

Division 8 - Breach of conditions

Clause 29 - Minister to notify FLIC of suspected breach of conditions

Clause 29 requires the Minister to notify the FLIC in writing if he is of the opinion that it may have breached a condition of the scheme, giving his reasons and inviting the FLIC to make a written submission to him within 28 days. The conditions of the scheme are set out in clauses 22 to 28 and a determination made under clause 21. The purpose of the provision is to ensure that the FLIC has the opportunity to make a submission to the Minister in relation to a suspected breach of a condition before the Minister makes a decision under clause 32.

Clause 30 - Minister may seek information

This clause empowers the Minister to seek further information from the FLIC for the purposes of making a decision under clause 32. The purpose of the provision is to ensure that all necessary information is provided to the Minister before a decision is made. For administrative efficiency, clause 43 enables the Minister to delegate this power to the Secretary and SES or acting SES employees of the Department of Communications, Information Technology and the Arts.

Section 137 of the Criminal Code Act 1995 is intended to apply to the provision of such information and this will be made clear to the FLIC. This means it will be an offence to provide information that the FLIC knows is false or misleading in a material particular or to omit information in a way that is misleading. These offence provisions should assist in ensuring that the Minister has complete and accurate information upon which to make a decision.

Clause 31 - Minister must consider FLIC's submission and information

Clause 31 provides that, in making a decision under clause 32, the Minister must have regard to the matters raised in a submission made by the FLIC (if any) and any further information received following a request made under clause 30. The purpose of the provision is to ensure that the Minister is required to consider the available information and make a fully informed decision on the course of action to take under clause 32.

Clause 32 - Powers of the Minister in relation to breaches of conditions

Clause 32 sets out the powers of the Minister to take action once he is satisfied that the FLIC has breached a condition of the scheme. The clause makes a range of options open to the Minister, which vary in the severity of their impact. The purpose of making a range of options available is give the Minister a discretion to decide on the appropriate action according to the type and severity of the breach of condition under consideration, and taking into account any mitigating factors.

Clause 32(1) empowers the Minister to decide to take no action in respect of the breach or to take action under the succeeding subsections. The purpose of the provision is to enable the Minister to decide that a breach of a condition will be overlooked. It is anticipated that a decision to take no action would be made, for example, where a breach is of a minor or inconsequential nature or where it has already been remedied by the FLIC. If the Minister decides to overlook a breach of a condition, it is nevertheless open to him to take that breach into account in deciding whether to take action in respect of a further breach. The purpose of this latter provision is to ensure that the Minister can consider appropriate action in circumstances where the FLIC has breached the conditions on two or more occasions, even if those individual breaches are of a minor or inconsequential nature.

Clause 32(2) empowers the Minister to require the FLIC, by written notice, to remedy a breach of condition (paragraph 32(2)(a)) or to revoke the licence (if the breach occurred during the licence period) (paragraph 32(2)(b)) or to decide to remove the concessional status of the shares issued during the licence period (paragraph 32(2)(c)). It is intended that it be open to the Minister to decide to take one or more of the available actions under this clause. (Clause 33(4) means that revocation of the licence does not of itself remove the concessional status of shares issued before the revocation.) Section 375-865 of the ITAA 1997 provides for the loss of entitlement to a deduction where the concessional status of the shares is removed.

Decisions under clauses 32(1)(a) and 32(2)(a), (b) or (c) are reviewable by the Administrative Appeals Tribunal (see clause 42).

Clause 32(3) provides for the Minister to make a further decision under clause 32(2) if the FLIC fails to remedy a breach of a condition by the date specified in a notice under paragraph 32(2)(a). The actions available to the Minister include issuing a further notice under paragraph 32(2)(a) as well as revocation of the licence or removal of the concessional status of shares.

Clause 32(4) provides that the Minister must notify the Commissioner of Taxation if he decides either not to take any action in respect of a breach, to revoke the FLIC's licence or to remove the concessional status of shares in the FLIC. The purpose of the provision is to ensure that the Commissioner of Taxation is provided with information relevant to the proper administration of Subdivision 375-H of the ITAA 1997 (see the accompanying FLIC (CP) Bill).

Clause 32(5) provides that the Minister must give to the FLIC written notice of a decision under this clause together with reasons for the decision. Section 25D of the Acts Interpretation Act 1901 provides that where an Act requires a person making a decision to give written reasons for the decision, the instrument giving the reasons shall also set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based. Accordingly, the Minister must, in giving the reasons for the decision, set out those elements.

Clause 28(c) requires the FLIC to notify its shareholders of any decision by the Minister under clause 32 in respect of a breach of a condition by the FLIC.

Clause 33 - Revocation of licence

Clause 33(1) provides that, if the Minister decides to revoke the FLIC's licence, the notice is to include the date on which revocation is to take effect.

Clause 33(2) provides that the date of effect of revocation must be at least 7 days after the date of the Minister's decision to revoke the licence. The purpose of this clause is to ensure that there is adequate time for the FLIC to be notified of the revocation decision before it takes effect.

Clause 33(3) provides that the licence is revoked on the day specified by the Minister.

Clause 33(4) makes it clear that a decision to revoke the FLIC's licence does not of itself remove the concessional status of shares issued by the FLIC before the revocation. The concessional status of such shares would only be removed by a decision under paragraph 32(2)(c) or under paragraph 34.

Clause 34 - FLIC must invest in provisionally certified films within 6 months if licence revoked

Clause 34(1) provides that if the Minister revokes the FLIC's licence under section 32 but does not remove the concessional status of the shares in the FLIC, the FLIC has to ensure that the concessional capital is invested in one or more provisionally certified films (depending on the amount of capital available for investment) within 6 months from the date of the effect of the licence's revocation. If a large amount of capital is available, it may be appropriate to invest in more than one film. If only a small amount is available, it may be inappropriate to spread the capital across two or more films.

Clause 34(2) allows the Minister to ask the FLIC, in writing, to give him information for the purposes of deciding whether or not to remove the concessional status of the shares under clause 34(4), if the Minister thinks the FLIC has not invested the concessional capital it holds, as required by clause 34(1). The FLIC must provide the information within the period specified by the Minister.

Clause 34(3) requires the Minister, in the interests of natural justice, to have regard to any information provided by the FLIC under clause 34(2) in making a decision under clause 34(4) about removal of the concessional status of the shares.

Clause 34(4) gives the Minister a discretion to remove the concessional status of shares issued by the FLIC during its licence period if the Minister is satisfied that the FLIC has not invested the concessional capital in provisionally certified film within 6 months from the date of revocation of its licence. The purpose of the scheme is to promote investment in Australian film. Allowing the Minister a discretion to remove the concessional status of the shares, puts in place a mechanism to protect public revenue, if capital is not invested in the Australian film industry as intended. The decision to remove the concessional nature of shares is reviewable by the Administrative Appeals Tribunal.

Clause 34(5) requires the Minister to give the FLIC notice of any decision he makes to remove the concessional status of the FLIC's shares and to include the reasons for his decision.

Clause 34(6) requires the Minister to notify the Commissioner of Taxation within 28 days of his making a decision to remove the concessional nature of the FLIC's shares. This would allow the Commissioner to take appropriate action in relation to any taxpayer who had invested in the FLIC.

Division 9 - Information and reporting requirements

This Division contains other requirements in relation to the operation of the scheme.

Clause 35 - Reporting requirements

Clause 35(1) provides that the Minister may determine, by legislative instrument, the reporting requirements that the FLIC must comply with. The reports are a necessary part of the scheme to facilitate monitoring of compliance by the FLIC with the conditions of the scheme. The reports will also provide valuable information to the Minister in relation to the scheme, including whether the scheme is meeting its objectives and resulting in a broader base of investors and more investment in commercially viable qualifying Australian films.

Clause 35(2) places a restriction on the frequency with which the FLIC can be required to provide reports. The FLIC will be required to provide a report by 30 June 2006 and then at six monthly intervals afterwards. These requirements are not intended to distract the FLIC from the task of seeking investors and raising concessional capital by frequent requests for information. However, the requirement for six monthly reports is in recognition of the fact that, if there are any problems with the scheme or compliance, it is essential for the FLIC and the Minister to be aware of the problems and resolve them as quickly as possible.

Clause 35(3) provides for the eventuality of the licence being revoked. The reporting requirements determined under proposed subsection 35(1) for the purposes of monitoring whether or not the FLIC has complied with requirements imposed on it under clause 34 (as a consequence of its licence being revoked under clause 32) may require the FLIC to report to the Minister within 6 months of the date the Minister revoked the FLIC's licence. The Minister may require, for example, a report on whether the concessional capital has been invested in any provisionally certified films.

Clause 35(4) empowers the Minister to seek additional information from the FLIC in relation to the FLIC's reports. This clause is necessary so that the information in the reports can be fully understood and any misunderstanding or confusion clarified.

Clause 36 - Provision of information to the Commissioner for Taxation

Clause 36(1) provides for the Secretary to the Department of Communications, Information Technology and the Arts to provide certain specified information to the Commissioner of Taxation in writing as soon as possible after the end of the 2005-2006 and 2006-2007 financial years. This includes the details of any breach of conditions by the FLIC and the details of any action taken by the Minister under clause 32 in respect of the breach, other matters that the Secretary and the Commissioner agree between them are to be provided and are necessary for the administration of Subdivision 375-H of the ITAA 1997.

Clause 36(2) requires the Secretary to advise the Commissioner in writing of specified information about shares issued in the FLIC and details of the shareholders as soon as possible after the end of the 2005-2006 and 2006-2007 financial years.

The purpose of this provision is to authorise and require disclosure to the Commissioner of information necessary for the proper administration of taxation matters connected with the scheme.

Division 10 - Other requirements

Clause 37 - Minister may determine allowable percentage for administrative costs

Clause 37(1) empowers the Minister to determine in writing the FLIC's allowable deduction percentage.

Clause 37(2) provides that the allowable deduction percentage is a proportion of concessional capital that the FLIC is authorised to raise and that may be expended in meeting the costs of the administration of the FLIC. Clause 23(1)(a) requires the FLIC to invest the amount of concessional capital raised less the allowable deduction percentage in provisionally certified films. The FLIC is therefore restricted in its spending for administration costs to the allowable deduction percentage.

It is anticipated that the determination will take into account any matters raised by the company in relation to administrative costs in its application for a concessional capital licence. The purpose of clause 37, together with clause 23, is to ensure that expenditure on administration is limited to maximise the amount of concessional capital available for investment in qualifying Australian films.

Clause 37(3) allows the Minister to consult with the FLIC and to amend the determination made under clause 37(1) to increase the allowable deduction percentage. The kind of situation where it is envisaged an amendment might be appropriate is where the FLIC failed to raise the projected amount of concessional capital. Administration costs might remain relatively constant but if less concessional capital was raised than anticipated, the FLIC could experience financial difficulties. Such a situation would not be in the interests of the scheme. An amendment to the determination could only be made on the basis of a submission by the FLIC to the Minister. Such an amendment could only be made to increase the allowable deduction percentage.

A determination under proposed subsection 37(1) is not a legislative instrument. The determination is, in effect, an administrative decision which applies to only one company, the FLIC licensed under the scheme.

Clause 38 - Transfer of licence void

Clause 38 renders any purported transfer of a licence void. This clause operates in conjunction with clause 28(a) to prohibit any purported transfer of a FLIC licence. The purpose of the clauses is to ensure that the concessional capital licence granted by the Minister remains with the company that was granted the licence following the comparative assessment and decision-making process.

Part 3 - Offences concerning ownership restrictions

Clause 39 - Meaning of terms used in this Part

This clause notes that the Schedule sets out definitions of expressions used in this Part.

Clause 40 - Acquisition of shares

Clause 40 creates an offence if a person or persons acquire shares in a company either knowing, or reckless as to whether, the acquisition would create or exacerbate an "unacceptable level of foreign ownership" in relation to the FLIC, as defined by clause 27. On conviction, a fine not exceeding $44,000 for individuals or $220,000 for corporations would apply, at the current conversion rate for penalty units (see sections 4AB and 4B of the Crimes Act). The fault elements are consistent with Chapter 2 of the Criminal Code.

Clause 41 - Anti-avoidance

Clause 41(1) applies where one or more persons enter into, or begin to carry out, or have carried out a scheme, where it would be concluded that this action was taken for the sole or dominant purpose of avoiding the application of the ownership levels in clause 27. In these circumstances, the Minister would be empowered under clause 41(1) to give the stakeholder a written direction to cease holding that ownership stake within a reasonable time that is specified in the direction.

Clause 41(2) requires the Minister to include in the notice the reasons for the Minister's decision in giving the notice. Requiring the Minister to give reasons for issuing a notice and allowing a specified reasonable time for the recipient of the notice to take appropriate action in relation to the stake held in the FLIC, incorporates safeguards in the administrative decision-making process. Further, if a recipient of a notice under this section were aggrieved by the decision to issue the notice, it would be open to the recipient to lodge an application under the Administrative Decisions (Judicial Review) Act 1977 to review whether or not the legal requirements for the issue of the notice were satisfied.

Clause 41(3) establishes an offence, if the person has been given a notice and the person engages in conduct which breaches the direction. At the current conversion rate for penalty units (see sections 4AB and 4B of the Crimes Act) an offence under clause 41 would be punishable on conviction by a fine not exceeding $44,000 for individuals or $220,000 for corporations, if a person contravened a direction under clause 41(1). The fault elements of the offence are consistent with Chapter 2 of the Criminal Code. The same offence was provided for in the pilot FLIC scheme.

Clauses 11 and 12 of the Schedule define the different types of stake in the FLIC to which the ownership limits would apply. Clause 11 provides that a person's stake in a FLIC is the aggregate of "direct control interests" (clause 12 of the Schedule) held in the FLIC by the person and by the person's "associates" (defined in clause 5 of the Schedule).

Part 4 - General administrative matters of the scheme

Clause 42 - Review of decisions

Clause 42 provides for the review of certain decisions by the Administrative Appeals Tribunal. Review is available where the Minister decides not to take any action except to consider the breach in deciding on a course of action in the event of any future breach (paragraph 32(1)(a)), where the Minister imposes a time-frame within which the breach has to be remedied (paragraph 32(2)(a)), where the Minister, during the licence period, revokes the licence (paragraph 32(2)(b)) and where the Minister decides that the breach warrants the removal of the concessional status of the shares (paragraph 32(2)(c)) and where the Minister decides to remove the concessional status of shares issued to the FLIC during the licence period (clause 34(4)).

Clause 43 - Delegation

Clause 43 allows the Minister to delegate some of his powers under the Act to the Secretary to the Department of Communications, Information Technology and the Arts or a person holding or performing the duties of a Senior Executive Office or equivalent in that Department.

The powers that may be delegated are all information gathering powers in relation to the application process (clause 12), possible breaches (clause 30) and information gathering (clause 34(2) and clause 35(4)).

Schedule 1 - Ownership Definitions

The Schedule defines terms relevant to the ownership restrictions in clauses 25(a)(v), 27 and Part 3 of the Bill.

Clause 1 - Object

This clause notes that the object of the Schedule is to define terms used in clauses 25(a)(v), clause 27 and Part 3. Clause 25(a)(v) deals with the restrictions imposed on the FLIC in relation to the associates of a licensee or a holder of a class licence under the Broadcasting Services Act 1992. Clause 27 and Part 3 deal, respectively, with ownership restrictions and offences associated with the ownership restrictions.

Clause 2 - Definitions

The clause defines terms used in clause 25(a)(v), clause 27, Part 3 and the Schedule, in particular the terms "associate", "foreign persons" and "ownership provisions".

"Associate" has the meaning given by clause 5.

"Foreign person" is defined as a foreign citizen not ordinarily resident in Australia; a company in which a natural foreign person or a foreign company holds more than a 33% ownership stake; a company in which natural foreign persons or foreign companies hold more than a 33% ownership stake; and a trustee of a trust estate in which foreign persons or foreign companies hold, either individually or together, a substantial interest. (The term "not ordinarily resident in Australia" is defined in Clause 3 of the Schedule. Clause 11 of the Schedule defines "a particular type of stake" in a company).

"Ownership provisions" is defined as the provisions in proposed paragraph 25(a)(v), clause 27, Part 3 and this Schedule.

Clause 3 - When foreign citizens are ordinarily resident in Australia

The clause specifies, for purposes of the foreign ownership limits in clause 27, when a foreign citizen would be taken to be "ordinarily resident in Australia".

Clause 1 of the Schedule defines a "foreign person" to include a foreign citizen not ordinarily resident in Australia.

The effect of clause 3 is that a foreign citizen will be taken to be ordinarily resident in Australia at a particular time if he or she either has been in Australia on 200 or more days during the last 12 months; and either is in Australia and has permission to remain in Australia indefinitely, or is not in Australia but has a right to re-enter Australia and on re-entry to be granted the right to remain indefinitely; or the foreign citizen is in Australia and has a special category visa under section 32 of the Migration Act 1958 or, if not in Australia, has a right to be granted one.

Clause 4 - Entering into an agreement or arrangement

The clause defines, for purposes of the ownership provisions, the expression "entering into an agreement". This expression is used in:

Clause 5 of the Schedule, which defines "associates" of a person to include another person who enters, or proposes to enter, into certain arrangements with the first person; and
Clause 11 of the Schedule which defines a "stake" of a person in a company to include certain interests not only of that person but also of associates of the person.

Clause 5 - Associates

This clause defines, for purposes of the ownership provisions, the term "associates" of a person. The clause provides that associates of a person include, among other specified persons:

a company whose directors are accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the person;
a company where the person is accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the company;
a company in which the person has a particular type of stake of more than 33%;
if the person is a company, a person who holds a particular type of stake in the company of more than 33%; and
the trustee of a trust.

The clause specifies that associates of a person include associates of the person's associates.

One of the effects of this definition of "associates" is to provide a mechanism for tracing interests through a series of companies, for the purpose of determining whether there is a breach of the ownership limits in section 27. For example, if company A held a 0.5% ownership stake in the FLIC and also held more than a 33% ownership stake in company B that itself held a 0.5% ownership stake in a FLIC, then company A would be taken to hold a 1% stake in a FLIC, comprising the direct 0.5% stake and the 0.5% stake attributed to company A by virtue of company B being an associate of company A.

Clause 6 - Power to appoint director

This clause specifies circumstances in which, for purposes of the ownership provisions, a person would be taken to have "power to appoint a director". The latter expression is used in clause 5, under which persons are associates of each other if they enter, or propose to enter, into an arrangement with each other related to their power, by acting together, to appoint or remove a director of a company.

Clause 7 - Meaning of entitled to acquire

This clause provides that, for purposes of the ownership provisions, a person is "entitled to acquire" anything that the person is absolutely or contingently entitled to acquire, for any reason. The expression "entitled to acquire" is used in clause 8.

Clause 8 - Meaning of interest in a share

This clause specifies the circumstances in which a person is taken to hold an "interest in a share". Under clause 12, the interest of a person in a share is relevant to determining the "direct control interest" of the person in a company, which in turn is relevant to determining under clause 11 the stakes a person holds in the company.

Clause 9 - Certain interests in shares to be disregarded

Clause 9(1) enables interests in FLIC shares to be disregarded for the purposes of the ownership provisions if they are held by a lender in the ordinary course of business.

Clause 9(2) enables an interest in a FLIC share to be disregarded for a period of 90 days or such longer period approved by the Minister, if it is held by a lender in the ordinary course of business who holds the share for a continuous period by reason of enforcement of the loan security.

Clause 10 - Voting power

The clause defines, for purposes of the ownership provisions, the expression "voting power" in a company. Under clause 12, voting power in a company is relevant to determining the "direct control interest" of the person in a company, which in turn is relevant to determining under clause 11 the stakes a person holds in the company.

Clause 11 - Stake in a company

Subclause (1) provides that a particular type of stake that a person holds in a company at a particular time is the aggregate of the direct control interests of that type that the person and associates of the person hold at that time. Clause 12 specifies the types of direct control interests.

Subclause (2) prevents double counting in determining a particular type of stake a person holds in a company.

Subclause (3) prevents double counting in determining the total of the stakes of a particular type that are held by foreign persons.

Clause 12 - Direct control interests in a company

This clause defines four types of direct control interests in a company.

The clause provides that a person holds a direct control interest in a company at a particular time equal to the percentage:

of the total paid-up share capital of the company in which the person holds an interest at that time (subclause (1));
of the voting power in the company that the person is in a position to control at that time (subclause (2));
that the person holds, or is entitled to acquire, at that time of the total rights to distributions of capital or profits of the company to its shareholders on winding-up (subclause (3)); or
that the person holds, or is entitled to acquire, at that time of the total rights to distributions of capital or profits of the company to its shareholders otherwise than on winding-up (subclause (4)).

Subclause (5) provides for the tracing of direct control interests in a company.

Subclauses (6) and (7) have the effect of ensuring that double counting of foreign interests, held through an interposed foreign company, does not occur as a result of the fractional tracing rule in subclause (5).

Clause 13 - Substantial interests in trust estates

The clause defines the circumstances in which a person is taken to hold a "substantial interest", or two or more persons are taken to hold an "aggregate substantial interest", in a trust estate. The expressions "substantial interest" and "aggregate substantial interest" are used in the definition of "foreign person" in clause 2 of the Schedule.


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