• Legal database
Legal database

GROSS v FC of T

Judges:
Wilcox J

Court:
Federal Court

Judgment date: 20 December 1996

Wilcox J

Victor Peter Gross has commenced three proceedings challenging amended assessments to income tax made against him by the respondent, the Commissioner of Taxation. The relevant assessments related to the financial years ended 30 June 1989, 1990 and 1991. The issue in relation to each assessment is the deductibility of certain expenditure incurred by Mr Gross in connection with the making of films. Mr Gross does not claim deductibility under Division 10BA of Part III of the Income Tax Assessment Act 1936, the Division commonly used in respect of film investments, but rather under Division 10B.

At the parties' suggestion, Hill J directed the trial, as preliminary issues, of two questions. The parties apparently thought that, if answered in favour of the Commissioner, these questions would determine their dispute. If the questions were answered in favour of Mr Gross, other issues would need to be considered.

When the trial of the preliminary issues came before me, it became apparent that the form of the questions was unsatisfactory. Consequently, with the assistance and consent of counsel, I reformulated the questions to make them read as follows:

  • 1. Is an election under s 124ZAE of the Income Tax Assessment Act a condition precedent to the applicant being entitled to claim a Division 10B film industry deduction in respect of any of the films in any of the income years ended 30 June 1989, 1990 or 1991?
  • 2. If the answer to 1 is ``yes'':
    • (a) Does this apply to each of the films and for each income year? If not, which films and which years are excluded?
    • (b) Has the time for making a s 124ZAE election in relation to each such film expired?
    • (c) If, in the case of any film, the answer to (b) is no, when in respect of that film must the s 124ZAE election be made?
    • (d) Does the signed statement giving details of the film industry incentive deduction and forming part of the 1989 return, constitute the making of an election in relation to the film ``Toddler Taming'' as contemplated by s 124ZAE of the Act? If the answer is, ``yes'', was that election made within the time allowed by s 124ZAE?

The facts

The relevant facts are few. In his 1989 tax return, Mr Gross claimed a deduction of $17,000 for ``Film Industry Incentives and Management and Investment coys AS ATTACHED - `TODDLER TAMING'''. A note to the return explained:

ATC 5262

``THE TAXPAYER INVESTED $17,000 WITH TRAINER FILM PRODUCTIONS (COPY OF INVESTMENT CONTRACT ATTACHED) IN AN ELIGIBLE AUSTRALIAN FILM - ``TODDLER TAMING'' - A FILM CERTIFIED BY THE MINISTER FOR THE ARTS. THE INVESTMENT MADE PURSUANT TO DIVISION 10B OF THE INCOME TAX ASSESSMENT ACT IS A 100% ALLOWABLE DEDUCTION. 

THE AMOUNT CLAIMED IS:-         $17,000
PROVISIONAL CERTIFICATE NO:     P2927
AMOUNT OF INCOME DERIVED:       $36.95
LIFE OF THE COPYRIGHT:          364 DAYS''

Attached to the return was a deed relating to an investment of $17,000 by Madeleine Gross in a film called ``Toddler Taming''. It appears from the return that Madeleine Gross is the applicant's wife. It is not apparent to me how this deed is relevant to Mr Gross' tax position, but that matter falls outside the preliminary questions now under consideration.

In 1990 Mr Gross again claimed a deduction of $17,000 for ``Film Industry Incentives''. The return did not identify the film or give any other information. In 1991 $45,000 was claimed under the same heading, again without other information. However, it appears the Australian Taxation Office obtained information from another source. On 7 December 1994, Mr JM Brady, Deputy Commissioner of Taxation, wrote a letter to Mr Gross relating to all three years. He commenced by identifying the relevant films, all of which were said to be produced by companies promoted by one Robert Macleod. Mr Brady proceeded:

``Film deductions are allowable under the provisions of Divisions 10B and/or 10BA of the Income Tax Assessment Act. An investigation into investments in Macleod's promotions found that the conditions for deductibility under Division 10BA were not satisfied in respect of any film. Some investments satisfied the provisions of Division 10B. These provisions require that the following two conditions be met in the year that the deduction is claimed:-

  • (a) the film must be completed and be ready for use; and
  • (b) the film must have been used or made available for use.

The films, Toddler Taming and Health Promotion Series, did not satisfy these conditions until during the year ended 30 June 1991, so that is the first year in which a deduction is allowable. Deductions claimed in earlier years are not allowable in those years but are allowable in the 1991 year.

The films, The Nymph and The Paradise Kids, did not and still do not satisfy these conditions so no deduction for them is allowable to the present time.''

The letter went on to indicate what deductions were being allowed and to amend the assessments for 1989, 1990 and 1991 accordingly. The effect of the amendments was to increase the tax payable in each year. The amendments gave rise to these proceedings.

The legislation

Division 10B was inserted into Part III of the Act in 1956. It is entitled ``Industrial Property'' and is important beyond the world of films. But it confers benefits that extend to films. Put simply, the scheme of the Division is to allow the deduction from assessable income of capital moneys expended on the production or acquisition of a ``unit of industrial property''. The deduction is effected by amortising the expenditure over the life of the unit. The term ``unit of industrial property'' is defined by the opening subsection in the Division, s 124K(1), as including ``rights possessed by a person as... the owner of a copyright subsisting in Australia''. Obviously, this includes copyrights in Australian films. However, s 124K(2) provides that, subject to subs (2A), ``... a reference in the Division to expenditure of a capital nature does not include a reference to-

  • (a) expenditure in respect of which a deduction has been allowed or is allowable under a provision of the previous Act or of this Act, other than a provision of this Division, or which has been or is taken into account in ascertaining the amount of an allowable deduction under such a provision; or
  • (b) the expenditure of moneys by a taxpayer, under a contract entered into on or after 1 October 1980, in producing, or by way of

    ATC 5263

    contribution to the cost of producing, a film where-
    • (i) the expenditure of the moneys was expenditure of a capital nature;
    • (ii) at the time when the moneys were expended, the taxpayer was a resident;
    • (iii) at the time when the moneys were expended, a certificate under section 124ZAB or 124ZAC was in force in relation to the film;
    • (iv) the Commissioner is satisfied, in relation to the expenditure of those moneys by the taxpayer, as mentioned in paragraph 124ZAF(1)(c) or 124ZAFA(1)(c); and
    • (v) the taxpayer has not made an election under section 124ZAE in relation to that film.''

Subsection (2A) provides:

``Where a taxpayer has expended moneys as mentioned in paragraph (2)(b) and, by reason of the operation of section 124ZAM, the taxpayer is deemed, for the purposes of Division 10BA, not to have expended those moneys or not to have expended part of those moneys, paragraph (2)(b) does not apply in respect of the expenditure of those moneys or of that part of those moneys, as the case may be.''

Section 124ZAM provides for the disallowance of a deduction to the extent that the taxpayer was not ``at risk'' in relation to it.

I understand it is common ground between the parties, in relation to each of the deductions claimed, that the requirements of s 124K(2)(b)(i) to (iv) were satisfied.

Division 10BA was inserted in Part III in 1981. It concerns only Australian films. The term ``Australian film'' is defined in s 124ZAA(1). Leaving aside films made pursuant to an intergovernmental agreement, an ``Australian film'' is one ``made wholly or substantially in Australia'' with ``a significant Australian content''. The criteria for determining whether a film has a significant Australian content are set out in s 124ZAD. The Act provides for the Minister to give provisional certificates (s 124ZAB) and final certificates (s 124ZAC) that a particular film will be, or is, a ``qualifying Australian film''. As it is agreed that s 124K(2)(b)(iii) was satisfied in relation to each of the subject films, there must have been provisional or final certificates in force when the claimed moneys were expended.

Sections 124ZAF and 124ZAFA deal with the amount of the permissible deduction under Division 10BA. The deduction from assessable income was initially 150% of expenditure but this was progressively reduced to 100%. Under each section, the Commissioner must be satisfied that, when the moneys were expended, the taxpayer expected to become the first owner, or one of the first owners, of the copyright in the film and to use that copyright for the purpose of producing assessable income from the public exhibition of the film in cinemas or from television broadcasting. This is the requirement stipulated in s 124K(2)(b)(iv).

Section 124ZADA permits a person to lodge a declaration with the Commissioner that a contract for the production of a film has been entered into, under which a person has, or persons have, agreed to expend an amount that is specified as the estimated cost of producing the film. The declaration must be lodged by an appropriate person (see subs (2)) within one month after the end of the relevant financial year and must contain other specified information (see subs (1)). It is not necessary to go into the detail of the section. It is sufficient to say the parties agree that declarations were not lodged in respect of the subject films. This omission is apparently one reason why it is thought Mr Gross cannot rely on Division 10BA as a basis for deducting his expenditure on the production of the films.

Section 124ZAE of the Act, the provision referred to in preliminary question 1, takes this form:

``(1) A taxpayer may elect that this Division shall not apply in relation to the taxpayer in relation to a film and, where such an election is made, this Division does not apply in relation to the taxpayer in relation to that film.

(2) An election under subsection (1) in relation to a film-

  • (a) shall be exercised by notice in writing to the Commissioner signed by or on behalf of the taxpayer; and
  • (b) shall be lodged with the Commissioner on or before the date of lodgment of the return of income of the taxpayer of the first year of income in respect of which a deduction would, but

    ATC 5264

    for this section and the provisions of Subdivision B other than sections 124ZAF and 124ZAFA, be allowable to the taxpayer in relation to that film.''

The necessity for an election

The first preliminary question is whether an election under s 124ZAE is a condition precedent to the applicant being entitled to claim a deduction under Division 10B in respect of any film. Counsel for Mr Gross, Dr H Sorenson and Mr D Raphael, say this question should be answered in the negative. Mr S W Gibb, counsel for the Commissioner, contends for an affirmative response.

The argument presented by Dr Sorenson commences with the proposition that the Act generally prohibits an amount being an allowable deduction under more than one provision. He refers to the general discretion given to the Commissioner under s 82(1) of the Act. That subsection provides:

``Where in respect of any amount, a deduction would but for this section be allowable under more than one provision of this Act, and whether it would be so allowable from the assessable income of the same or different years, the deduction shall be allowable only under that provision which in the opinion of the Commissioner is most appropriate.''

Dr Sorenson says that, consistent with that scheme:

``s 124ZAE effectively precludes a double deduction where the same capital expenditure would give rise to an allowable deduction under both Div. 10B and Div. 10BA. In default of an election being made by the taxpayer, the Act appoints Div. 10BA as the applicable provision - presumably Div. 10BA was regarded (at least when it conferred a 150% deduction) vis-a-vis Div. 10B as the more favourable deduction.''

The purpose of s 124ZAE, according to Dr Sorenson, ``is to quarantine a claim for a film deduction to one or other of Div 10B and Div 10BA, and not to deny a legitimate claim''. He contends the section provides for an election only where Division 10BA applies; the words ``where such an election is made, this Division does not apply'' indicate an assumption that, in the absence of an election, the Division will apply. Dr Sorenson argues the section has no application to a case where the taxpayer always intended to rely on Division 10B, and claimed a deduction under that Division. He refers to s 124ZAE(2), noting that it requires a notice of election to be lodged on or before the date of lodgment of the taxpayer's return for the first year of income ``in respect of which a deduction would, but for this section and the provisions of Subdivision B other than sections 124ZAF and 124ZAFA, be allowable to the taxpayer in relation to that film''. The subsection assumes a deduction is otherwise available under Division 10BA, not under another Division. Substituting a positive statement for a negative in the subsection, the relevant deduction is one that would be allowable but for, one, an election that the Division not apply (s 124ZAE itself) and, two, various provisions designed to safeguard the revenue and the integrity of the statutory scheme. Those provisions are ss 124ZAG, 124ZAGA, 124ZAH, 124ZAJ, 124ZAK, 124ZAL, 124ZAM and 124ZAN. The Subdivision B provisions not excluded from s 124ZAE(2)(b), ss 124ZAF and 124ZAFA, are the provisions that allow deduction of the expenditure. They are in similar form, the difference between them being the relevant contract date.

Section 124ZAFA, which applies to contracts made after 13 January 1983, permits a deduction where certain conditions are satisfied. The conditions include, by subs (1)(d)(iii):

``there is in force a declaration lodged in respect of the film in accordance with subsection 124ZADA(1) by a person who has been notified by the Commissioner under subsection 124ZADA(2) that the person is considered by the Commissioner to be an appropriate person to lodge the declaration in respect of the film''

In the present case, says Dr Sorenson, this condition is unsatisfied. Consequently, s 124ZAFA does not make the relevant expenditure deductible under Division 10BA. Dr Sorenson points out that s 124ZADA is contained in Subdivision A of Division 10BA, not Subdivision B. It not one of the ``but for'' provisions referred to in s 124ZAE(2). Therefore, he argues, it is to be taken into account; moreover, it has a critical effect in these cases because it precludes the deductibility of the expenditure under Division 10BA. It follows, according to Dr Sorenson, that, irrespective of the provisions referred to in

ATC 5265

the words ``but for this section and the provisions of Subdivision B other than sections 124ZAF and 124ZAFA'', the deductions would not be allowable under Division 10BA. Accordingly, s 124ZAE is irrelevant; without the necessity of making any election, the applicant is entitled (if he can) to make good his claim for a deduction under Division 10B.

In response to this argument, Mr Gibb drew attention to the Explanatory Memorandum for the 1981 Bill that enacted Division 10BA and made consequential amendments to Division 10B. In relation to clauses 10, 11 and 12 of the Bill, the memorandum said:

``These clauses propose amendments to the provisions of Division 10B of Part III of the Principal Act consequential on the introduction of the new concessions for investment in Australian films.

Division 10B presently applies to allow a deduction for certain capital expenditure incurred by a taxpayer, either as an owner or a licensee, in acquiring rights in respect of a patent granted in Australia, a design registered in Australia or a copyright subsisting in Australia. The broad plan of the Division is to allow the owner or licensee of rights in respect of an Australian patent, design or copyright (referred to as a 'unit of industrial property') to deduct the cost of the unit over the period during which the owner or licensee may exercise rights in respect of the unit.

In respect of a film classified as an `Australian film' the Division attributes to a unit of industrial property that relates to the copyright in the film an effective life of two years, with the result that one-half of the cost to a taxpayer of acquiring an interest in the copyright is deductible in the year of income during which the unit is first used for the purpose of producing assessable income and the remaining half is deductible in the following year of income. The definition of `Australian film' for the purposes of Division 10B is wider than that applicable for purposes of the new concessions, but would include films that are to qualify under the proposed new Division 10BA.

The amendments proposed by these clauses will apply to ensure that capital expenditure that falls for deduction under the new concession under proposed new section 124ZAF (clause 13) is excluded from the operation of Division 10B. Further amendments will modify the operation of Division 10B with respect to partnerships, consequential on the application of the new concessions to individual partners.

Clause 10: Interpretation

Clause 10 proposes the substitution of new sub-sections in section 124K to exclude from the operation of Division 10B amounts that fall for deduction under new Division 10BA.

Existing sub-section 124K(2) applies to exclude from the operation of Division 10B expenditure which is otherwise deductible under the Principal Act. Existing sub-section 124K(2) would therefore apply to exclude any expenditure in respect of which a deduction is allowable under proposed new Division 10BA. However, the existing sub- section would not apply to exclude from the operation of the Division the amount of any expenditure that fails to qualify for deduction under new Division 10BA by reason only of the safeguards to be incorporated in that Division. Thus, in the absence of the amendments proposed by clause 10, an amount of expenditure that failed to qualify under Division 10BA by reason, for example, of the arm's length test to be applied to amounts of film expenditure under proposed new section 124ZAJ, might fall for deduction under Division 10B.

The revised sub-section 124K(2) will, in paragraph (a), re-enact the existing sub- section (2) and, by paragraph (b), apply to exclude amounts that fail to qualify for deduction under Division 10BA by reason of the safeguarding provisions to be incorporated in that Division.

Proposed new sub-section 124K(2A) will apply an exception to the rule outlined above. As explained in the notes on proposed section 124ZAM (clause 13) a general 'at risk' safeguard is to apply under Division 10BA to limit the availability of the new 150 per cent deduction 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 satisfy that test is to be eligible for deduction under Division 10B, but subject to existing

ATC 5266

safeguards applying to deductions under that Division. Proposed sub-section 124K(2A) will give effect to that intention.''

(Emphasis added.)

Mr Gibb says this explanation makes clear that s 124K(2)(b) was intended to prescribe criteria excluding particular expenditure from qualifying for deductibility under Division 10B; it is wrong to say that, if a claim fails under Division 10BA, it must be able to be made under Division 10B. He argues that, if the expenditure falls within s 124K(2)(b), the claim is excluded from Division 10B, whatever the fate of the claim for deductibility under Division 10BA. In relation to s 124K(2)(b)(v), Mr Gibb says the subparagraph is not concerned with the actual availability of a deduction under Division 10BA. It is concerned with the question whether the taxpayer has given a notice electing to exclude the expenditure from a deduction under that Division.

I agree with elements of both arguments. Dr Sorenson is correct in saying that s 124ZAE assumes the applicability of Division 10BA. The relevant election is an election that the Division ``shall not apply'' in relation to the taxpayer in relation to a film. Where such election is made, the Division ``does not apply''. Unless Division 10BA already had potential application to the case, there would be nothing to elect; in such a case the Division would not apply because of its terms, not because of an election. On the other hand, Mr Gibb is correct in arguing that expenditure is excluded from Division 10B if it meets the conditions specified in s 124K(2), whether or not it achieves deductibility under Division 10BA.

The critical question is whether the requirement of s 124K(2)(b)(v), ``the taxpayer has not made an election under section 124ZAE in relation to that film'', applies only where deductibility would otherwise have been achieved under Division 10BA, but for s 124ZAE and the specified provisions of Subdivision B, or whether it applies wherever the nature of the expenditure was such that, in general terms, deductibility might have been expected to be available, but for those provisions.

I do not think this question is to be resolved by saying that the purpose of s 124ZAE is to quarantine a claim for a film deduction, rather than to deny a legitimate claim. That statement begs the question. Moreover, it is plain that Parliament did not intend to make the two Divisions symmetrical. It could easily have done so. Parliament could have retained the old form of s 124K(2), or framed the new provision in such a way as to exclude from Division 10B only expenditure that achieved deductibility under Division 10BA. It would have been easy to make subpara (iv) of s 124K(2) refer to all the conditions of s 124ZAF(1) and s 124ZAFA(1), not just the Commissioner's satisfaction under subpara (c) in each case. Parliament chose not to do any of these things. Section 124K(2) clearly spells out that choice. The reason emerges from the Explanatory Memorandum. That document says s 124K(2)(b) will ``apply to exclude amounts that fail to qualify for deduction under Division 10BA by reason of the safeguarding provisions to be incorporated in that Division''. Unfortunately, however, the Explanatory Memorandum did not identify the ``safeguarding provisions''. On one view, they are all the provisions in Division 10BA that impose conditions or restrictions on the deductibility of expenditure. On that view, they include subpara (iii) of s 124ZAFA(1)(d). However, with some hesitation, I have come to the conclusion that I should not accept that view. It seems more likely that the ``safeguarding provisions'' the author had in mind were those identified in s 124ZAE(2); that is, the provisions of Subdivision B other than ss 124ZAF and 124ZAFA.

The Explanatory Memorandum is only that; it is not the document the construction of which is conclusive. Where there is uncertainty about the proper construction of an Explanatory Memorandum itself, it is of little assistance in relation to the interpretation of the statute.

In coming to the conclusion that s 124K(2)(b)(v) does not cover a situation where a deduction under Division 10BA was unavailable for a reason unrelated to any of the provisions specified in s 124ZAE(2), I am influenced by the fact that this is a taxing Act. Any uncertainty in the operation of the statute should be resolved in the taxpayer's favour. Unless a deduction otherwise provided by the Act is clearly excluded by s 124K(2)(b)(v), it should be regarded as potentially available.

It will be apparent that it is not possible to give a simple ``yes/no'' answer to preliminary

ATC 5267

question 1. I think this question should be answered by saying that an election under s 124ZAE of the Act is a condition precedent to the applicant being entitled to claim a deduction under Division 10B of the Act in respect of expenditure on any of the relevant films if, but only if, the expenditure, in the absence of an election:
  • (i) would have been deductible under Division 10BA of the Act; or
  • (ii) would have been deductible under Division 10BA but for the operation of one or more of the provisions of Subdivision B of Division 10BA, other than ss 124ZAF and 124ZAFA.

If the only reason why the expenditure was not deductible under Division 10BA was non- compliance with the requirements of s 124ZAFA(1)(d)(iii), an election under s 124ZAE was not a condition precedent to the applicant being entitled to claim a deduction under Division 10B.

The subsidiary questions

Having regard to my answer to question 1, the subsidiary issues raised by question 2 may have little practical importance. But I will deal with each briefly. As to (a), my statement in connection with question 1 applies generally to each film in respect of each income year. It is possible that the significance of the statement will vary from film to film, and even from year to year. That matter was not investigated at the hearing of the preliminary questions.

Question 2(b) asks whether the time for making a s 124ZAE election in relation to each film has expired. If this question has any relevance, the answer must be ``yes''. Section 124ZAE(2)(b) requires the notice of election to be lodged with the Commissioner on or before the date of lodgment of the return of income of the taxpayer for ``the first year of income in respect of which a deduction would [otherwise] be allowable to the taxpayer in relation to that film''. The relevant year of income is the year in which the first expenditure was incurred. If s 124ZAE has any application to this case, it will have required a notice of election to be lodged in the first year of expenditure by Mr Gross in connection with the relevant film; 1989, 1990 or 1991, as the case may be. Question 2(c) does not arise.

Question 2(d) may not be relevant, having regard to the answer to question 1. Assuming it is, I answer it by saying that, although the contrary view is arguable, and was pressed by Mr Gibb, I think the words contained in Mr Gross' 1989 tax return were an adequate compliance with the requirements of s 124ZAE(2) in relation to ``Toddler Taming''. It is true that Mr Gross did not expressly say he elected that Division 10BA shall not apply in relation to his expenditure on that film. But he did say the investment was made pursuant to Division 10B of the Act. As it seems to be accepted that a particular item of expenditure cannot be made deductible under more than one provision, the implication of this statement was that the taxpayer was not relying on Division 10BA. The relevant statement was included in Mr Gross' tax return for the first year of expenditure in connection with ``Toddler Taming''. If an election was needed, it was, therefore, made within the time required by s 124ZAE.

Orders

I will not make any formal orders today. I think the preferable course is for me to allow the parties an opportunity of considering their next moves, in light of these reasons. I will stand over all three matters, and four other matters associated with these that were not argued, for mention at 9.30am on Thursday, 6 February 1997.

THE COURT ORDERS THAT:

1. The matter stand over for mention at 9.30am on Thursday, 6 February 1997.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.