Second Reading Speechby the Treasurer, the Hon. John Howard, M.P.
This Bill contains measures to give effect to the income tax concessions for investors in Australian films that the Prime Minister first outlined in the policy speech for the election last October.
A joint statement by myself and the then Minister for Home Affairs and Environment on 18 December last set out details of the concession in a comprehensive way.
In those circumstances, I think it is sufficient in this introductory speech to draw attention to the key points of the legislation now brought forward.
The Bill will amend the Income Tax Assessment Act to provide a deduction equal to 150 per cent of capital expenditure on the acquisition of the initial copyright in a new Australian film.
Also to be provided by the Bill is a tax exemption for an investor's net earnings from such a film.
The maximum exemption is an amount equal to 50 per cent of the capital expenditure that qualifies for the 150 per cent deduction.
To be entitled to the deduction, an investor must become the first owner, or one of the first owners, of the copyright in a film that the Minister for Home Affairs and Environment certifies to be an eligible Australian film.
The Bill contains extensive guidelines that the Minister is required to have regard to in deciding whether or not to certify a film as eligible.
Primarily, a film must have an appropriate Australian content.
Tests in existing legislation authorising a deduction over two years for investment in films will be used for that purpose.
The Minister's function will, however, go further than the process of certification of Australian content.
As set out in the Bill he will also have the responsibility of determining whether a particular film is one produced for exhibition to the public in cinemas or by way of television broadcasting.
To qualify a film must be a feature film, a documentary or a mini-series of television drama.
Day-to-day productions, such as commercials, variety programs and films of sporting or other public events will not be eligible.
I turn now to the classes of expenditure that will be eligible for the special deductions and the time at which the deductions will be available.
The legislation will, of course, express the deductions to be available to companies and individuals who incur eligible expenditure.
Partnerships are, however, a common vehicle for film production arrangements and the legislation therefore contains some special provisions in this respect.
The Bill provides that each partner is to be taken to have personally incurred his or her share of expenditure incurred by the partnership.
As is usual in the tax content, expenditure will qualify only if incurred with a view to production of assessable income.
Only expenditure outlaid directly in the production of a film will qualify, but the legislation is framed so that, again taking into account practices in the film industry, individuals or partners whose expenditure is in the form of a contribution to a production account will enjoy the deduction to the extent that the moneys contributed are so outlaid.
Among safeguards necessary to protect these generous concessions from unintended exploitation are measures to counter inflation of film production costs above the levels which persons dealing at arm's length would pay.
Another key provision is based on the concept that, if taxpayers are to enjoy a deduction of 150 per cent of their outlays, they should only do so for moneys in respect of which they are at risk of a true economic loss.
The "at-risk" requirement in the legislation will limit the special deduction to expenditure that is not greater in amount than that for which the person is at risk of loss in relation to the film.
To illustrate, if a person is protected against loss because the financier who has supplied moneys to expend on the film has recourse only against the film, or income from it, that person will not be at risk.
Nor will a partner in a limited partnership be regarded under the legislation as at risk for a share of expenditure out of borrowed funds which, because it exceeds capital personally contributed, represents money for which, under the rules of such partnerships, the partner is not liable.
People whose risk of loss is removed or abated simply because they are able, before the film is made, to find a market for it will not run foul of the at-risk test.
However, a person who, under one and the same arrangement, borrows money to expend on a film and is guaranteed a flow of income from the film is in a different situation.
To the extent of the guaranteed income the investment of the borrowed funds is in no way at risk.
In these cases, the special deduction will not be available for any amount not really at risk.
I come now to the question of when the special deduction is to be available.
When details of the concession were announced last December it was indicated that the deduction would be available in the year of income in which the investor expends capital moneys in or towards the production of the film.
Measures of a safeguarding kind that were foreshadowed then were to operate so that deductions were, however, not allowable if the film was not completed and marketed to produce a yield for investors.
In settling details of the legislation the Government has come to the conclusion that it would be appropriate to vary these rules.
I stress at this point that only a change in the time for taking deductions under the scheme is involved in this variation.
I note that there has been very strong response to the Government's initiative.
To the end of April, application for certification as Australian films had been made in respect of 170 films.
It has been practicable so far to process only some of these.
The total budgeted cost for the 170 films is some $130m and income tax deductions for 150 per cent of that amount will no doubt be sought.
Unhappily, there has also been noted some intervention by elements whose only concern appears to be exploitation of the concession in unacceptable ways.
Responsible film authorities have registered their concern about that.
The safeguarding measures I referred to a moment ago would not have been completely effective in closing off avenues for exploitation and would, if persisted with, have significantly further complicated an already complex piece of legislation.
Accordingly, the Government has decided that, with effect from the commencement of the scheme on 1 October 1980, deductions are not to be available until the year in which the relevant film has both been completed and used to produce income.
The Bill is framed accordingly.
The change will bring the new concession into line with the existing Income Tax Law that provides deductions over two years for the cost of acquiring a film copyright.
Under the existing provisions - which also apply to the capital costs of acquiring units of industrial property generally - deductions become available in the year in which the copyright in a completed film is first used for income-producing purposes.
For some investors, the change will not have any practical effect.
That will be the case for investors in a film that is both completed and productive of income in the same year as that in which capital expenditure on it is incurred by them.
For other investors, the effect will be that a deduction can be taken later rather than sooner.
But I stress that no more than a change in timing is involved - a change that will mean that allowance of deductions and assessment of related income will more closely coincide.
I turn now to the exempt income side of the new concessions.
A person eligible for the deduction will be exempt from tax on proceeds from the film, with an exemption limit of 50 per cent of the qualifying amount expended in producing the film.
Reflecting this, there are in the Bill previously foreshadowed measures that set out what are to be regarded as proceeds from a film for this purpose.
In brief, all proceeds - whether technically of a capital or income kind - are to be taken into account, as well as foreign- source income, otherwise exempt from tax, that does not flow from the overseas country in which the film is exhibited.
These rules are, of course, of an anti-avoidance kind.
Related and previously foreshadowed provisions of the Bill require that expenditure of a revenue nature be set off only against film income and that film losses arising in one year be carried forward only for deduction against film income.
Mr Speaker, I do not think that I need say more at this stage.
The Bill is lengthy and, as I have said, complex.
Those features of it may help critics to an understanding of why, in the context of other tax legislation now before the Parliament, it has taken some little time to produce.
A memorandum has been prepared to explain the detailed provisions of the Bill, and is being circulated to Honourable Members.
I commend the Bill to The House.