Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)
The Bill will put in statutory form the taxation concessions for capital investment in new Australian films that were foreshadowed in the Prime Minister's Policy Speech for the last elections. The concessions were the subject of a detailed ministerial statement on 18 December 1980.
Broadly, the concessions provide for 150 per cent of capital expenditure in the production of an Australian film to be eligible for deduction where that expenditure results in the acquisition of the initial copyright in the film. In addition, an amount of net earnings by an investor in such a film of up to 50 per cent of the amount of his or her investment in it is to be exempt from tax. The deduction will be available after the copyright in the relevant film comes into existence and in the year of income in which that copyright is first used for the purpose of producing assessable income.
The concessions are to be available to a person who is a resident and who outlays capital expenditure on, or as a contribution towards, the production of a qualifying Australian film where, as a consequence of that expenditure, the person becomes the first owner, or one of the first owners, of the copyright in the film. A further requirement for eligibility is that the copyright or interest therein is acquired and used in the production of assessable income through the exhibition of the film to the public in cinemas or by way of television broadcasting.
To qualify for the new concessions the relevant investment must be in a film that is certified by the Minister for Home Affairs and Environment -
- as being a feature film (including animated feature length movies and telemovies), a documentary or a mini-series of television drama, produced for exhibition to the public in cinemas or by way of television broadcasting; and
- as having been made wholly or substantially in Australia (or an external Territory) and as having a significant Australian content or as being a film made pursuant to an agreement between the Australian government and another government.
Provisional certificates of qualification may be obtained from the Minister for Home Affairs and Environment prior to the completion of a film. However, eligibility for the concessions is to be dependent on a final certificate being given by the Minister on the film's completion.
A person qualifying for the concessions is to be entitled to a deduction equal to 150 per cent of the amount of his or her capital expenditure in or by way of a contribution to the production of a qualifying Australian film where that expenditure is made under a contract entered into on or after 1 October 1980.
The deduction will be available after the film is completed and in the year in which the person first uses the copyright or his or her interest therein in the production of assessable income through exhibition of the film.
Expenditure will qualify for deduction only to the extent that it is expended directly in the production of the film. In circumstances where money is expended by way of contribution to the production of a film, the expenditure will qualify for deduction only to the extent that the moneys so contributed are applied directly in the production of the film.
A person who incurs expenditure to which the deduction concession applies is also to be entitled to an exemption of his or her net receipts from the film, up to an amount equal to 50 per cent of his or her qualifying expenditure.
The exemption is to apply to net receipts from the film after reduction for deductions available to the investor in respect of revenue expenses incurred in deriving those receipts, for example, interest on borrowed funds.
Generally, all receipts from the film, including amounts received on the disposal of the whole or a part of a person's interest in the copyright, will be treated as assessable income, subject to the income exemption conferred by the concessions. Where an individual or company has obtained a deduction under the new rules as a resident of Australia and subsequently becomes a non-resident, the person's income from the film will generally continue to be assessable in Australia.
An exception to the general inclusion of receipts in assessable income will apply in the case of income derived from and taxed in a country outside Australia where that income is otherwise exempt from Australian tax. Such income is to remain exempt from Australian tax to the extent that the income relates to the exhibition of the film in that other country. Where, by the operation of this rule, overseas income is subject to tax in Australia and is also subject to tax in its country of source, a credit in respect of the overseas tax will be available.
Losses generated in a previous year by deductions conferred by the concessions will be available to be carried-forward for deduction, but only against income derived from qualifying Australian films. As in the case of carry-forward losses generally, such film investment losses will be capable of being carried-forward for deduction for a maximum of seven years.
The new concessions will not apply directly with respect to film investments made by partnerships. Rather, the concessions will be allowed to the individual partners.
For this purpose, any qualifying expenditure by a partnership will be treated as having been expended by the partners either in accordance with any agreement as to how the expenditure is to be borne or, in the absence of any agreement, according to each partner's interest in the partnership income. Any income derived from the film, including amounts in respect of the disposal of the copyright, will be similarly apportioned to each partner.
Where, on the formation or dissolution of a partnership, on a variation in the constitution of a partnership or in the interests of partners, a change occurs in the proprietary interests of persons in a film, the resulting diminution in interest and accretion in interest respectively, will be treated as a disposal and acquisition of a part of the copyright.
Deductions conferred under the new concessions in a year of income will not be taken into account in determining the amount of provisional tax payable in respect of the succeeding year of income.
The Bill incorporates safeguards against arrangements to inflate film production costs and attempts to set a below-arm's length consideration for the disposal in whole or in part of a copyright.
A further general "at-risk" rule is to apply so that expenditure qualifying for the new concessions is to be limited to amounts in respect of which the investor is at risk of loss should the film venture fail. Any amount of expenditure which fails to qualify for the new concessions by virtue of this test will be available for deduction under the existing two year write-off concession for investment in Australian films, subject to the existing safeguards applying with respect to that concession.
Safeguards against the re-arrangement of contracts entered into prior to 1 October 1980 in an attempt to make expenditure qualify for the new concessions are also included.
A person is to be entitled to elect not to take the benefit of the new concessions in relation to investment in a particular film. A person making such an election will be entitled to seek deductions for his or her expenditure under the existing two year write-off provisions.
More detailed notes on the clauses of the Bill are contained in the notes that follow.