Product Ruling

PR 1999/42

Income tax: consequences for investors in OSSCCA Film Fund No 7

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FOI status:

May be releasedFOI number: I 1019687

Preamble

What this Product Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates. In this Ruling this arrangement is sometimes referred to as 'The OSSCCA Film Fund No 7', 'the Fund', 'the Project' or the 'product'.

Tax law(s)

2. The tax law(s) dealt with in this Ruling are:

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Division 10BA;

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section 26AG; and

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Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).

Unless otherwise stated, all legislative references are in relation to the ITAA 1936.

Class of persons

3. The class of persons to whom this Ruling applies is those who enter into the arrangement described below on or after the date this Ruling is made. They will have a purpose of staying in the arrangement until it is completed (i.e., being a party to the relevant agreements until their term expires) and deriving assessable income from this involvement as set out in the description of the arrangement.

4. The class of persons to whom this Ruling applies does not include persons who intend to terminate their involvement in the arrangement prior to its completion, or who otherwise do not intend to derive assessable income from it.

Qualifications

5. The Ruling provides this specified class of persons with a binding ruling as to the tax consequences of this product. The Commissioner accepts no responsibility in relation to the commercial viability of this product and gives no assurance the prices charged for the product are reasonable, appropriate or represent industry norms. A financial (or other) adviser should be consulted for such information.

6. The Commissioner rules on the precise arrangement identified in the Ruling.

7. The class of persons defined in the Ruling may rely on its contents, provided the arrangement (described below at paragraphs 12 to 26) is carried out in accordance with details described in the Ruling. If the arrangement described in the Ruling is materially different from the arrangement that is actually carried out:

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the Ruling has no binding effect on the Commissioner, as the arrangement entered into is not the arrangement ruled upon; and

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the Ruling will be withdrawn or modified.

8. A Product Ruling may only be reproduced in its entirety. Extracts may not be reproduced. As each Product Ruling is copyright, apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth, available from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra ACT 2601.

Date of effect

9. This Ruling applies prospectively from 2 June 1999, the date this Ruling is made. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

10. If a taxpayer has a more favourable private ruling (which is legally binding), the taxpayer can rely on the private ruling if the income year to which the private ruling relates has ended, or has commenced but not yet ended. However, if the arrangement covered by the private ruling has not begun to be carried out, and the income year to which it relates has not yet commenced, the product ruling applies to the taxpayer to the extent of the inconsistency only (see Taxation Determination TD 93/34).

Withdrawal

11. This Product Ruling is withdrawn and ceases to have effect on 1 July 2001. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who enter into the specified arrangement during the term of the Ruling. Thus, the Ruling continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement.

Arrangement

12. The arrangement that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents, or parts of documents, incorporated into this description of the arrangement are:

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Application for a Product Ruling lodged by Cinevest Limited ('Cinevest'), dated 4 February 1999, together with the application's attachments listed below ('the Application'):

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Attachment 'A' - Information requirements as referred to in Product Ruling PR 98/1, and the annexures accompanying Attachment 'A':

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Annexure A - A copy of the Trust Deed, dated 15 April 1994 constituting the Osscca Film Group Trust Deed;

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Annexure B - First Supplemental Deed to the Osscca Film Group Trust Deed, dated 26 October 1995;

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Annexure C - Second Supplemental Deed to the Osscca Film Group Trust Deed, dated 23 April 1997;

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Annexure D - Memorandum of Commencement for the Osscca Film Fund No 7, dated 29 May 1998 ('the Memorandum of Commencement');

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Annexure E - Production Agreement between Cinevest, Cinematic Services Pty Limited ('Services') and John Gordon McCormack ('the Representative'), dated 29 May 1998 ('the Production Agreement');

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Annexure F - Distribution Agreement for the Osscca Film Fund No 7 between Cinevest, Services, Open Eye Pty Limited ('Open Eye') and the Representative, dated 29 May 1998('the Distribution Agreement');

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Annexure G - Copy of a Prospectus Insert titled 'A Commercial and Tax Deductible Film Investment Opportunity', dated 27 January 1999, signed by the Managing Director of Cinevest ('Prospectus Insert No 1');

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Annexure H - Copy of the Prospectus issued in relation to the Osscca Film Fund No 7, dated 25 June 1998 ('the Prospectus');

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Annexure I - Copy Certificate No P2925 issued under section 124ZAB for the proposed mini-series 'Silvertail', with an annotation that states the said certificate now relates to the proposed mini-series 'Okka';

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Annexure J - Copy Certificate No P05377 issued under section 124ZAB for the proposed film 'Wrong Way';

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Annexure K - Copy Certificate No P05374 issued under section 124ZAB for the proposed film 'Up There - Down Under';

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Annexure L - Copy Certificate No P03760 issued under section 124ZAB for the proposed film 'Inconceivable';

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Annexure M - Copy Certificate No P05351 issued under section 124ZAB for the proposed film 'The Glass Blower';

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Annexure N - Copy Certificate No P05390 issued under section 124ZAB for the proposed film 'Doing the splits';

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Annexure O - A chart illustrating the structure of the Osscca Film Fund No 7;

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Annexure P - A chart titled 'Companies Chart';

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Attachment 'B' - Draft of the proposed Product Ruling;

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letter to Cinevest from the Australian Taxation Office ('the ATO'), dated 29 March 1999;

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letter to the ATO from Cinevest, dated 31 March 1999, and its annexure; and

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copy of an unexecuted schedule titled 'Supplementary Information for the OSSCCA Film Fund No 7 Prospectus' received by facsimile in the ATO on 19 April 1999 from the Managing Director of Cinevest ('Prospectus Insert No 2').

13. For the purposes of describing the arrangement to which this Ruling applies, except for the agreements reflected by the documents listed at paragraph 12, there are no other agreements, whether formal or informal, and whether or not legally enforceable, to which an Investor, or an associate of an Investor, is or will be, a party.

14. The arrangement is called 'the Osscca Film Fund No 7'.

The Deed of Commencement

15. The Osscca Film Fund No 7 was established by a Memorandum of Commencement dated 29 May 1998 ('the Commencement Deed') executed by Cinevest and the Representative. The Commencement Deed recites and stipulates , among other things, that, pursuant to powers conferred under the Osscca Film Group Trust Deed dated 15 April 1994, as amended by the First Supplemental Deed to the Osscca Film Group Trust Deed dated 26 October 1995 and the Second Supplemental Deed to the Osscca Film Group Trust Deed dated 23 April 1997 ('the Trust Deed'), Cinevest and the Representative have decided to establish a new film fund and that:

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the new film fund will be known as 'the Osscca Film Fund No 7' ('the Fund');

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each Unit of the Fund will have a value of $1,000;

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there will be a minimum subscription requirement for the Fund, namely, that investors must hold a minimum of 5 Units in the Fund;

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Cinevest appoints the Representative to that role and the Representative accepts such appointment upon the terms and conditions contained in the Trust Deed and this Commencement Deed;

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the Representative is appointed as agent of the Investors on all matters relevant or pertaining to the Copyright of the films of the Fund, and to the granting of the exclusive licence to market each film's Copyright on behalf of each Investor in the Fund;

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the Representative shall be paid either one percent (1%) of the total subscriptions for the Fund but subject to a $30,000 minimum and a $100,000 maximum;

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Cinevest shall be paid either two percent (2%) of the total amount raised for the Fund or $30,000, whichever is the greater; and

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the Fund will terminate on 30 June 2005 unless extended in accordance with Clause 30.2 of the Trust Deed.

The Trust Deed

16. The Trust Deed, which Cinevest and the Investor's Representative executed, among other things, recites and stipulates as follows:

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that Cinevest proposes to establish a number of funds in accordance with this Deed;

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that the funds will be for the making and marketing of one or more Qualifying Australian Films or Australian Films;

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that Cinevest proposes to seek subscriptions from the public for these funds;

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that the Trust Deed will be made with the intent that the terms and conditions and benefits and obligations set out in it will be binding on and will enure to Cinevest and the Investor's Representative and, to the extent provided in and subject to the provisions of the Deed, to each Investor severally who is a party to the Deed;

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that Cinevest will enter into a Production Agreement with the appointed Principal Production Company concerning the making and producing of the films;

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that Cinevest will enter into a Distribution Agreement with the Principal Distributor (Open Eye) concerning the marketing and distribution of the films;

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that a Fund will relate to the making of one or more films;

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that Cinevest and the Investor's Representative can establish more than one Fund at any time in accordance with this Deed by means of a Memorandum of Commencement for each Fund;

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that Cinevest intends, after 15 April 1994, to accept subscriptions from Investors accompanied by Subscription Applications for Units in the Fund to be established under this Deed;

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that Cinevest has a discretion to accept or reject the whole or part of any Subscription Application;

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that, subject to Cinevest's right of rejection and clearance of any cheque containing the Applicant Investor's contribution, acceptance of the Subscription Application will occur upon receipt by Cinevest of the Subscription Application and the deposit of the required amount of the Applicant Investor's Contribution;

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that Cinevest can declare the offer of Units in any Fund closed on any date upon being satisfied that the Minimum Subscription has been attained;

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that, with effect from 23 April 1997, Cinevest can re-open any Fund at any time during the life of the Fund for any reason whatsoever;

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that Cinevest and the Investor's Representative have a discretion to decrease any Fund but not lower than the Minimum Subscription;

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that Cinevest and the Investor's Representative have a discretion to increase any Fund;

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that, unless the Trust Deed or any agreement regulating the Production Agreement so requires, Cinevest, or its assignee, has the discretion to determine the order of priority of the films to be produced;

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that, with effect from 23 April 1997, on the attaining of the Minimum Subscription, Cinevest, at its sole discretion, can direct the Investor's Representative to transfer Subscription monies received for the Fund to either the Production Account or the Non-Deductible Account, and this direction must be complied with immediately upon its receipt by the Investor's Representative;

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that separate bank accounts will be established in relation to:

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the Deductible Moneys of the Fund;

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the Non-Deductible Moneys of the Fund; and

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the receipt and disbursement of proceeds from the exploitation of the film Copyrights;

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that Investors will not have to make further contributions to the Fund should it be later found that Fund liabilities exceed Fund assets;

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that Cinevest will ensure that a Production Agreement, to be approved by the Investor's Representative, is entered into for each Fund, to be constituted in accordance with this Trust Deed with such provisions as Cinevest considers necessary;

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that Cinevest will ensure that a Distribution Agreement, to be approved by the Investor's Representative, is entered into for each Fund with the Principal Distributor, to be constituted in accordance with this Trust Deed with such provisions as Cinevest considers necessary;

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that Cinevest and the Investor's Representative agree that all proceeds from the relevant films of a Fund will be disbursed in accordance with the provisions of the Distribution Agreement for the relevant Fund;

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that Cinevest will decide whether a Completion Guarantee Agreement will be entered into in respect of each film of the Fund;

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that Cinevest will create and maintain throughout the term of the Trust Deed a Register of Unit Holders;

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that Investors may transfer their Units so long as the transfer occurs according to the approved format;

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that, in certain specified circumstances, Cinevest and the Investor's Representative can effect alterations, modifications, additions or cancellations to the Trust Deed;

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that, subject to Clause 30.2 and the Corporations Law, the Fund will be terminated upon:

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a date five years after the end of the Financial Year in which the Completion of the last film of the Fund occurred; or

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a date agreed by resolution at a meeting of Investors and between Cinevest and the Investor's Representative; or

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within 180 days of the office of Manager of the Fund becoming vacant and a new Manager not having been appointed (Clause 30.1);

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that any Fund can continue for a further Financial Year beyond a date five years after the end of the Financial Year in which the Completion of the last film of the Fund occurred if, within the preceding Financial Year, proceeds have been disbursed to Investors in excess of $50,000 (Clause 30.2);

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that any Fund can continue for such periods as are agreed upon by the Investor's Representative and Cinevest but in no event later than ten years after the end of the Financial Year in which Completion of the last film of the relevant Fund occurred (Clause 30.2);

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that, depending upon the ownership of the film Copyright set out in any Production Agreement, and unless the Investors during the term of the Fund, by unanimous agreement, have sold, gifted or otherwise disposed of the film Copyright, Services will be the sole and absolute owner of the Copyright of the films of that Fund on the expiry of the Fund; and

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that the terms and conditions of the Trust Deed will be binding on Cinevest, the Investor's Representative and each Investor in the Fund.

The Production Agreement

17. Pursuant to its obligations under the Trust Deed, Cinevest caused a Production Agreement dated 29 May 1998 to be entered into between itself, the Representative and Services in relation to the Osscca Film Fund No 7. The Production Agreement, among other things, recites and stipulates that:

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Cinevest hereby appoints Services to produce, make or license to make, by way of moneys raised through the Osscca Film Fund No 7, one or a number of Qualifying Australian Films pursuant to the film schedule attached to it;

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subject to certain conditions set out in the Production Agreement, Services can reject or replace the films referred to in the film schedule;

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the Investors in the Osscca Film Fund No 7 will become the first owners of an undivided share in the Copyright of the films in the Fund;

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Services will acquire rights in partially or wholly developed Works, which have been granted a Provisional Certificate , to develop and produce the films from the Works;

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upon completion of the films, Services will deliver the completed films and relevant additional material to Open Eye for the purpose of marketing and distributing the completed films world-wide;

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Services agrees to make or cause the making of the films;

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Services agrees to faithfully and continuously produce the films until completion thereof in accordance with this agreement and to the extent possible in accordance with the Production Particulars and the Budget of each film;

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Services must not depart from the Production Particulars without the prior written consent of Cinevest;

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Services will have control of all artistic and associated technical aspects of the film;

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upon the Fund reaching Minimum Subscription, Services will prepare the total expected cost (including both the Division 10BA Deductible and Non-Deductible Moneys) for each film that is adequately funded;

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upon production start, the Producer shall provide a Budget cash-flow for each film (i.e., a cash-flow in respect of the Deductible Moneys referred to in 'the total expected cost' calculation to be prepared by Services for each film that is adequately funded);

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Services will use its best endeavours to produce the films in accordance with each Budget (i.e., the Deductible Moneys referred to in 'the total expected cost' calculation to be prepared by Services in relation to each film that is adequately funded);

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Services and the Producer must not depart from any Budget in a material way without the prior consent of Cinevest (Clause 3.4);

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Services may revise, reduce or increase the Budget of any film selected for production with the prior written consent of Cinevest and Open Eye;

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Services can reduce the Budget of any film, provided that such reduction is not less than the Minimum Subscription of the Fund and that certain technical standards are maintained;

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subject to certain conditions, Services will select and secure, or cause the Producer to select and secure the services of principal crew and of a suitable cast for the production of the films;

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Services will complete the films by the Completion Date specified for each film but in no event later than two Financial years after the end of the Financial Year in which the first Investor's Contribution was accepted by Cinevest;

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Services may subcontract all or any of its obligations under this agreement;

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Services and the beneficial owners of the shares in Services are all residents of Australia;

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Services will effect certain specified insurances prior to the commencement of principal photography;

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as soon as Production Assets are no longer necessary for the purposes of production, all Production Assets purchased shall be sold, if possible, and the proceeds of the sale will be applied in meeting the costs of the sale and then in meeting costs of production;

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in the event that there is an Overage for any film of the Fund, Services can utilise any one or a combination of the following methods to raise moneys to complete the film:

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if applicable, cause the Completion Guarantor to fund any Overage, provided that a third party Completion Guarantor has been contracted;

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if Services has acted as its own Completion Guarantor, with the prior approval of the Representative and Cinevest, then its net fees as the Completion Guarantor will be utilised for any Overage;

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if Services does not have the resources available, it may take out a loan to pay for any Overage, provided that such a loan does not encumber the film or the Copyright in any way;

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Services may use its contacts in the film industry to have facilities and services discounted or deferred against the proceeds;

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Services may utilise any Underage from another Production of the same Fund;

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Services may approach any exempt body as specified in section 66A of the Corporations Law for investment or a loan to pay for any Overage; or

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Services can utilise any Ancillary Rights revenue;

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where there is an Overage, Services will be entitled to recoup moneys raised to complete a film plus any interest or costs incurred from the Proceeds Account of the Fund in accordance with the Disbursements Schedule of the Distribution Agreement;

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any Underage in relation to any film of the Fund will be applied to any Overage in any film of that Fund and, if not so required, it shall be paid to Services as an additional consideration for its obligations under this Production Agreement;

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Services will comply with the terms of any Completion Guarantee Agreement which shall reflect film industry standards;

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with the approval of the Representative and Cinevest, Services has the option to act as Completion Guarantor itself for any relevant film of the Fund;

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if Services declines the chance to act as Completion Guarantor, it will procure, under a specified time-frame, Completion Guarantee Agreements with a competent Australian based or represented Completion Guarantor company on contractual terms acceptable to the Representative and Cinevest;

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Services is entitled to the following amounts under the Production Agreement ('Services's remuneration'):

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executive producer fees and expenses, as set out in the Budgeted Cost of each film of the Fund;

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subject to there being no Overage of any film of the Fund, any Underage amount for any film of the Fund;

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revenues from the exploitation of Ancillary Rights (as that term is defined in the Project documents listed at paragraph 12);

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30% of net proceeds (excluding proceeds from any guarantee) according to the Disbursement Schedule of the Distribution Agreement;

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reimbursement of its overhead costs, as set out in the Budgeted Cost of each film of the Fund;

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reimbursement of moneys it expended for production together with interest; and

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100% of the Copyright of each film in the Fund, upon the expiry of the Fund;

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Services's remuneration under the Production Agreement will be reduced by any expenses, deferments, bonuses for cast and crew, overheads and taxes in relation to Services remuneration;

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upon completion of the films, the Copyright will be owned absolutely and beneficially by the Investors in the Fund until the Expiry of the Fund;

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upon Expiry of the Fund, the ownership of the Copyright of the films in the Fund will pass to Services, insofar as the Investors have not sold or otherwise disposed of the Copyright before the Expiry Date;

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Services is acknowledged to be the sole owner of all Ancillary Rights to the films of the Fund; and

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the Expiry Date of the Fund will be 30 June 2005, or as determined by Clause 30 of the Trust Deed.

The Distribution Agreement

18. Pursuant to its obligations under the Trust Deed, Cinevest caused a Distribution Agreement dated 29 May 1998 to be entered into between itself, the Representative, Services and Open Eye in relation to the Osscca Film Fund No 7. The Distribution Agreement, among other things, recites and stipulates that:

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Cinevest hereby appoints Open Eye to market and distribute the films and Ancillary Rights of the Fund world-wide;

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the Representative and Services hereby grant Open Eye the sole and exclusive licence to distribute, exhibit and exploit the Films and Ancillary Rights of the Fund on the terms set out in the Distribution Agreement;

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this Distribution Agreement automatically terminates:

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if the Fund fails to reach the Minimum Subscription;

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if the Non-Deductible Moneys raised are not released by the Representative;

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if the films do not reach completion; or

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if the films together with the Delivery Materials are not delivered to Open Eye by the Delivery Date;

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Open Eye agrees:

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to diligently market the film Copyrights and the Ancillary Rights;

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to establish a Non-Deductibles Account for the payment of all marketing and other Non-Deductible items in relation to each film of the Fund;

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to provide moneys to the Non-Deductibles Account as it deems necessary and prudent for the proper marketing of the films and the associated rights; and

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to collect or cause the collection of all proceeds, and after the withholding of all marketing expenses, moneys paid for marketing enhancements by Open Eye to sub-distributors and fees pursuant to Clause 8 of this agreement together with interest, to pay the balance into the Proceeds Account;

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Open Eye can appoint sub-licensees or agents in relation to any of its rights and benefits under this agreement on terms it deems appropriate;

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Open Eye is entitled to the following amounts under the Distribution Agreement ('Open Eye's remuneration'):

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fees or commissions payable to Open Eye and its appointed sub-licensees or agents (which in aggregate shall not exceed 40% of the contracted amount of any Marketing Agreement);

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after other disbursements have been made pursuant to the Disbursement Schedule attached to this agreement, 15% of the net proceeds received;

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fees and commissions payable to Open Eye in relation to the exploitation of any Ancillary Rights up to a specified percentage of such exploitation receipts;

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any outstanding fees and commissions accumulated and still to be paid, together with interest;

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excluding moneys from the Non-Deductibles Account used for marketing expenses, reimbursement of all reasonable and proper marketing expenses;

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any reimbursements for costs incurred and expenses payable still outstanding, together with interest; and

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reimbursement of expenses incurred in the exploitation of any Ancillary Rights; and

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the Representative, subject to Open Eye's prior consent, will disburse proceeds from the Proceeds Account in the order and priority as set out in the Disbursements Schedule attaching to the Distribution Agreement.

The Prospectus

19. The Prospectus is dated 25 June 1998 and expires on 24 June 1999.

20. Investors participating in the Osscca Film Fund No 7 will fill in an application form attached to the back of the Prospectus titled 'An Application Form for Units in the Osscca Film Fund No 7'. Unless Cinevest rejects the application, by signing the application the Investor, among other things, irrevocably:

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acknowledges and accepts the appointment of the Representative as the Investor's Representative under the Trust Deed;

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adopts and ratifies the Representative's actions in entering into, on behalf of Investors, certain material contracts identified in the Prospectus that have already been entered into, and authorises and directs the Representative to enter into, on behalf of the Investor, those additional agreements contemplated by the Project that have not as yet been entered into;

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appoints the Representative as the Investor's agent, in particular, to accept an assignment of future Copyright in each film on the Investor's behalf for the relevant period ending 30 June 2005 and to license such rights exclusively to Open Eye indefinitely;

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agrees to be bound by the terms of the Trust Deed and all the Material Contracts specified in the Prospectus entered into, or to be entered into, by the Representative as Trustee of the Fund or agent of the investor (as the case may be);

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acknowledges that the Representative acts as Trustee of the Fund, holding all property of the Fund for the benefit of the Investors and other beneficiaries, and as agent of the Investors (as the case may be); and

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acknowledges that the entitlement of the Investor to receive proceeds is governed by the provisions of the Material Contracts specified in the Prospectus.

21. The Prospectus, among other things, contains the following information:

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that 10,000 Units of $1,000 each are being offered to Investors;

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that each film must be completed by the Completion Date, 30 June 2000;

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that a secured Minimum Commitment for each film to be produced will be in place prior to any production moneys being released to the Producer;

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that a Minimum Commitment, equal to 100% of Investors' Subscriptions, is payable by the Expiry Date of the Fund;

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that the films proposed to made for the Fund are as follows:

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'Okka' - Total Budgeted Cost for 12 programs is $3,200,000;

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'Wrong Way' - Total Budgeted Cost is $1,400,000;

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'Up There - Down There' - Total Budgeted Cost is $1,500,000;

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'Inconceivable' - Total Budgeted Cost is $1,200,000;

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'The Glassblower' - Total Budgeted Cost is $1,100,000; and

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'Doing The Splits' - Total Budgeted Cost is $1,600,000;

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that the Manager of the Fund is Cinevest, a fund management company specialising in the film and television industry, which was incorporated in 1982;

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that the Representative of the Fund is John Gordon McCormack, a Chartered Accountant in practice for 23 years and a licensed investment adviser;

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that the Principal Production Company for each Film is Services, a wholly owned subsidiary of Cinevest;

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that at the date of the Prospectus, no Completion Guarantee Agreements had been entered into by any of the parties;

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that in order to produce each film, Services will contract with individual producers either directly or through their service company;

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that the Principal Distributor for the films will be Open Eye, a wholly owned subsidiary of Cinevest incorporated in 1974;

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that the Minimum Subscription for this Prospectus is $356,000; and

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that the Material Contracts referred to in the Prospectus are:

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the Trust Deed;

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the Production Agreement;

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the Distribution Agreement;

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the Completion Guarantee Agreement;

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the Insurances taken out;

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the Feature Film Writers and Assignment Agreement;

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the Producer's Agreement; and

•

the Provisional Certificates for each Film.

Prospectus Insert No 1

22. This insert is signed by the Managing Director of Cinevest and is dated 27 January 1999. It states, among other things, that:

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no funds have been raised in the period from 25 June 1998 to 27 January 1999, the date of Prospectus Insert No 1;

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the Completion Date of the films will be 30 June 2001;

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it is not expected that a Minimum Commitment can be obtained for all the films in the Prospectus by 24 June 1999 and, therefore, Investors will be expected to invest without a Minimum Commitment being in place; and

•

certain changes will be made to the Disbursement Schedule as a result so that Investors will receive, after expenses (if any), 100% of their investment in the earliest position possible.

Prospectus Insert No 2

23. Although unsigned by any authorised officer of Cinevest, Prospectus Insert No 2 was transmitted by facsimile to the ATO on 19 April 1999 by the Managing Director of Cinevest on the basis that the statements it contained represented the latest changes to the Osscca Film Fund No 7, and that before the issue of any Units in the Fund, all prospective Investors would be required to forward to the Representative a written consent to the effect that they accept the said changes.

24. Among other things, Prospectus Insert No 2 states that:

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the Completion Date for the films listed in the Prospectus will now be 30 June 2001;

•

the Expiry Date of the Fund will now be 30 June 2006;

•

there will now be no Minimum Commitment in place for the films of the Fund; and

•

the Disbursement Schedule will change so that Investors will receive, after expenses listed at points 1, 2, 3, 4 and 5 (if any) on page 33 of the Prospectus, 100% of their investment, prior to any pari-passu payments to the principal participants (i.e., Cinevest, Services, Open Eye and the Representative), cast and crew.

Provisional Certificates

25. Provisional Certificates have been issued under section 124ZAB of the ITAA 1936 in respect of the films of the Fund as follows:

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Certificate No P2925 for the proposed mini-series, 'Silvertail' (the Copy of this Certificate submitted with the Application contains an annotation stating the certificate now relates to the proposed mini-series 'Okka');

•

Provisional Certificate No P05377 for the proposed film 'Wrong Way';

•

Provisional Certificate No P05374 for the proposed film 'Up There - Down Under';

•

Provisional Certificate No P03760 for the proposed film 'Inconceivable';

•

Provisional Certificate No P05351 for the proposed film 'The Glassblower'; and

•

Provisional Certificate No P05390 for the proposed film 'Doing the Splits'.

Statements made in the Application, in documents lodged subsequent to the Application and in discussions with the Applicant

26. Cinevest, the Product Ruling applicant, makes the following statements and commitments in support of its application for a Product Ruling:

•

that this Project contains no financing arrangement under which prospective investors will gain access to funds to enable them to make their investment in the Project;

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that Investors must make their own financing arrangements to fund their investment in the Project;

•

that there are no pre-sale arrangements in place, as at the date of the Application;

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that there will be no Minimum Commitment, as that term is defined in the Project documentation listed at paragraph 12, in place in respect of any of the films in the Fund;

•

to the extent that Services is entitled to retain any Underage under Clause 9 of the Production Agreement in relation to a film of the Fund, the term 'Underage' is defined to mean an amount equal to the difference between the aggregate of the Division 10BA Deductible Moneys budgeted for in relation to that film and the actual cost of producing that film for delivery to Open Eye, the Principal Distributor;

•

to the extent that Services is entitled to retain any Underage in relation to a film of the Fund, Cinevest agrees that Services will retain an amount that is limited to 5% of the aggregate of the Division 10BA Deductible Moneys budgeted for in relation to that film ('the 5% amount');

•

Cinevest undertakes that any amount of Underage in excess of the abovementioned 5% amount will be returned to Investors;

•

that no amount will be classified as an Underage until such time as each film has been completed and delivered to Open Eye, the Principal Distributor; and

•

that Services will maintain separate details of all Underages and their ultimate application.

Ruling

27. Subject to the assumptions listed below at paragraph 28 of this Ruling:

(a)

for the year ending 30 June 1999, a deduction is available to Investors under Division 10BA of the ITAA 1936 for capital moneys expended in the year ending 30 June 1999 by way of contribution to the cost of producing the films proposed to be produced by the Osscca Film Fund No 7;

(b)

distribution advances, pre-sale amounts, or any other amounts payable to the Investors for the exploitation of their interests in the film Copyrights and any rights they hold that are attached thereto will be assessable to the Investors as film income under section 26AG, upon receipt; and

(c)

the relevant provisions in Part IVA will not be applied to cancel a tax benefit obtained under a tax law dealt with in this Ruling.

28. The Ruling, at paragraph 27, is made subject to the following assumptions that:

(a)

moneys contributed by the Investors towards the cost of production of the films of the Fund will be directly expended in the production of the said films (paragraph 124ZAFA(1)(a) read in conjunction with subsection 124ZAA(6));

(b)

at the time the moneys are expended by Investors by way of contribution to the cost of producing the films of the Fund ('the relevant time'), all Investors are Australian residents (subparagraph 124ZAFA(1)(b)(i));

(c)

at the relevant time, a provisional certificate (section 124ZAB) or a final certificate (section 124ZAC) is in force in relation to the films of the Fund;

(d)

there is evidence to show that the Investor, at the relevant time, expects to become one of the first owners of the Copyright in the films of the Fund when those Copyrights come into force (subparagraph 124ZAFA(1)(c)(i)).

(e)

there is evidence to show that the Investor, at the relevant time, intends to use his/her interest in the said Copyrights for the purpose of producing assessable income from the exhibition of the films of the Fund to the public in cinemas or by way of television broadcasting (subparagraph 124ZAFA(1)(c)(ii));

(f)

there will be in force a declaration lodged in respect of the films of the Fund in accordance with subsection 124ZADA(1) by a person accepted by the Commissioner under subsection 124ZADA(2) as an appropriate person to make such a declaration (subparagraph 124ZAFA(1)(d)(iii));

(g)

before the end of the financial year ending 30 June 1999, there will be a production contract entered into, under which an amount of capital moneys specified in the production contract as the estimated cost of producing the films in the Fund will be expended in producing, or by way of contribution to the cost of producing the films of the Fund (sub-subparagraph 124ZAFA(1)(d)(iv)(A));

(h)

an application for final certificates in respect of the films of the Fund is made in accordance with section 124ZAC before the expiration of 6 months after the time when each film is completed (subsection 124ZAB(10));

(i)

before 1 July 2001:

•

the Investor will have used his/her interest in the Copyrights of the films of the Fund for the purpose of producing assessable income from the exhibition of the films to the public in cinemas, or by way of television broadcasting, or from the granting of rights to exhibit the films to the public in cinemas or by way of television broadcasting; or

•

the Investor will have derived assessable income under an agreement entered into before the Copyrights in the films came into existence under which the Investor agreed, upon the Copyrights coming into existence, to grant rights to another person to exhibit the films to the public in cinemas or by way of television broadcasting;

(j)

by reason of the said capital moneys being expended, the Investor will become one of the first owners of the Copyrights in the films of the Fund before 1 July 2001;

(k)

in producing a film of the Fund:

•

where an amount is expended by a person ('the film producer') for the supply of goods or the provision of services; and

•

the Commissioner is satisfied that the film producer and the person supplying the goods or providing the services are not dealing with each other at arm's length in relation to the transaction;

that the amount of moneys expended on the supply of those goods or the provision of those services will not exceed the amount of moneys that would have been expended by the film producer if the film producer and the person supplying the goods or providing the services had dealt with each other at arm's length (section 124ZAJ);

(l)

at the time the Investor expends the capital moneys by way of contribution to the cost of producing the films of the Fund, he/she is at risk, according to the definition of 'risk' in subsection 124ZAM(2), with respect to an amount equal to or greater than the amount of those capital moneys expended (subsection 124ZAM(1));

(m)

there is not, and will not be, a 'Minimum Commitment' (as that expression is defined in the Project documentation listed at paragraph 12), in place in respect of any of the films of the Fund;

(n)

no pre-sale arrangements, distribution rights agreements or distribution guarantee agreements, howsoever called, have been, or will be, entered into in circumstances where such agreements would put funds into the hands of Investors, by loan or otherwise, to enable them to expend capital moneys by way of contribution to the cost of producing the films in the Fund;

(o)

Investor subscriptions in respect of the Prospectus for the Osscca Film Fund No 7 reach the Minimum Subscription level set in the Prospectus of $356,000; and

(p)

the dominant purpose of Investors is to make a commercial return from their investment in the films of the Fund and that the arrangements will be executed in the manner described under the Arrangement part of this Product Ruling.

Explanations

The 'directly expended' requirement

29. Subsection 124ZAA(6) requires that capital moneys contributed to the production of a film must be 'expended directly in producing [the] film' in order for a deduction under Division 10BA to be available in respect of them.

30. Paragraph 8 of Taxation Ruling IT 2111 discusses this requirement. It states:

'Direct expenses of a film production which qualify for deduction under section 124ZAFA can generally be described as those relating to the production process as distinct from those associated with the financing or marketing of the film. Such expenses would typically include amounts paid for the acquisition of story rights and the surveying of locations, payments to producers, directors and cast, and the costs of insurance of production associated risks, drawing up performers' contracts and the building of sets and scenery' (emphasis added).

31. Our view is that the 'directly expended' requirement is not met at the point when the Investors, through the Investors' Representative, make payments to Cinevest and Services in respect of the budget for the films of the Fund. Rather, the extent of the application of these moneys by Cinevest and Services to elements of production will ultimately determine the portion of the Investors' contributions that meets this requirement. Generally, this will not be known until after the completion of the films of the Fund.

32. In determining the amount that is 'directly expended' on production of the films of the Fund, we will also consider the ultimate application of any funds obtained by Services as 'Underages'. In this regard, under the arrangement, provided there is no Overage in any film of the Fund, Services will be entitled to retain, with respect to each film of the Fund in which there is an Underage, the 5% amount (as defined in paragraph 26 of this Ruling). Where entitled to be retained, this 5% amount is an additional consideration for Services's performance of its obligations under the Production Agreement. Amounts of Underage in respect of a film of the Fund in excess of this 5% amount will be returned to Investors.

33. Quantification of the amount of moneys directly expended on the production of a film of the Fund and, consequently, the deduction available under Division 10BA can only be determined after each film has been produced. To do this, a full audit of the application of each film's production funds would normally be required. The practice of conducting an audit of the contributions account that is held by the Investors' Representative is considered as inadequate in this regard.

34. Accordingly, while a deduction should be available in respect of capital moneys expended by Investors before the end of the financial year ending 30 June 1999 by way of contribution to the cost of producing the films of the Fund, the deduction will be withdrawn with retrospective effect if the amounts contributed are not directly expended on the film.

The 'at risk' rule

35. Section 124ZAM reduces claims for Division 10BA deductions where the Commissioner is satisfied that a taxpayer was not at risk in respect of any part of the expenditure of capital moneys he/she made by way of contribution to the cost of producing a film. Subsection 124ZAM(2) specifies the amount of risk is the amount of loss that, in the Commissioner's opinion, would be suffered by reason of the taxpayer's said capital expenditure were no income is to be derived from the taxpayer's interest in the copyright of the film, other than excepted income as defined in subsection 124ZAM(3).

36. Paragraph 13 of Taxation Ruling IT 2111 discusses the 'at risk' rule and states the rule:

'does not operate to affect the deductions available to investors where pre-sale arrangements or the sale of distribution rights are effected prior to completion of the film unless the arrangements put funds into the hands of investors - by loan or otherwise - to enable them to make their contributions to the costs of film production. Similar considerations apply in respect of a distribution guarantee arrangement under which an amount may be paid to investors by a producer or another person in exchange for distribution rights, if a specified return is not achieved within a particular period (e.g., a specified percentage of the film budget within 2 years). Payments under an arrangement of that kind would also not offend the 'at risk' rule.'

37. As there are, and will be, no pre-sale arrangements, distribution rights agreements, distribution guarantee agreements or other like agreements, with terms that allow funds to be put into the hands of Investors, by loan or otherwise, to enable them to expend capital moneys by way of contribution to the cost of producing the films of the Fund, there is, and will be, no mechanism in place under which the risk attaching to the contribution of capital moneys by Investors towards the cost of producing the films of the Fund is reduced. Accordingly, on these facts, we consider that subsection 124ZAM(3) does not apply.

Non-arm's length transactions

38. Where, in producing a film, an amount is expended by a person ('the film producer') for the supply of goods or the provision of services, subsection 124ZAJ(1) allows the Commissioner to reduce deductions under Division 10BA for such amounts where he is satisfied that:

•

the film producer and the person supplying the goods or providing the services were not dealing with each other at arm's length in relation to the transaction; and

•

the amount of moneys expended on the supply of those goods or the provision of those services exceeds the amount of moneys that would have been expended by the film producer if the film producer and the person supplying those goods or providing those services had dealt with each other at arm's length.

39. The Commissioner will not be in a position to determine whether his discretion in subsection 124ZAJ(1) ought to be exercised until such time as each film of the Fund has been produced. Furthermore, to make such a determination, a full audit of the application of each film's production funds would normally be required.

40. Accordingly, while a deduction should be available in respect of capital moneys expended by Investors by way of contribution to the cost of producing the films of the Fund before the end of the financial year ending 30 June 1999, the deduction will be reduced with retrospective effect if the Commissioner determines that a producer of a film of the Fund dealt with a supplier of goods or a provider of services, in the course of producing that film, in circumstances where the parties were not dealing at arm's length and the producer paid more for the goods or the services than he/she would have paid had the dealing been at arm's length.

Payment of interest by an Investor where an assessment is amended

41. Section 170AA provides that, where an amendment of an assessment increasing the liability of a taxpayer to tax is made, the taxpayer is liable to pay interest to the Commissioner on the amount by which the tax payable by the taxpayer under the amended assessment exceeds the tax payable by the taxpayer under the assessment that was amended.

42. Investors who expend capital moneys by way of contribution to the cost of producing a film(s) should be aware of this provision because, should the circumstances surrounding the production of a qualifying Australian film require the Commissioner to go back and reduce the deductions claimed by Investors in that film, section 170AA will have application. There is a discretion in subsection 170AA(11) under which the Commissioner can remit, in appropriate circumstances, the whole or part of the interest payable under section 170AA.

Part IVA

43. For Part IVA to apply, there must be a 'scheme' (section 177A); a 'tax benefit' (section 177C); and a dominant purpose of entering into the scheme to obtain a tax benefit (section 177D). The Osscca Film Fund No 7, as outlined at paragraphs 12 to 26 inclusive, will be a 'scheme'. It commenced in the period leading up to the execution of the Memorandum of Commencement dated 29 May 1998. The Investor will obtain, for example, a 'tax benefit' from entering into the scheme, in the form of a deduction allowable under the provisions in Division 10BA, for the amounts referred to in paragraph 27, that would not have been obtained but for the scheme. However, it is not possible to conclude, from the arrangement outlined at paragraphs 12 to 26 inclusive, that the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit.

44. An Investor to whom this Ruling applies intends to stay in the scheme for its full term and derive assessable income from the exploitation of the Copyrights of the films of the Fund. Further, there are no features of the Project, as described in the said arrangement, that might suggest that the Project is so 'tax driven' and 'so designed to produce a tax deduction of a certain magnitude', that the operation of Part IVA is attracted.

Detailed contents list

45. Below is a detailed contents list for this Ruling:

Commissioner of Taxation
2 June 1999

No draft issued

References

ATO references:
NO 99/1537-1

Related Rulings/Determinations:

IT 2111
IT 2476
IT 2629
PR 98/1
PR 98/2
TR 92/20
TD 93/34

Subject References:
Australian films
film income
film industry
interest expenses
Product Rulings
Public Rulings
tax avoidance
taxation administration
tax shelters

Legislative References:
ITAA36 10BA
ITAA36 26AG
ITAA36 124ZAA(6)
ITAA36 124ZAB
ITAA36 124ZAB(10)
ITAA36 124ZAC
ITAA36 124ZADA(1)
ITAA36 124ZADA(2)
ITAA36 124ZAFA
ITAA36 124ZAFA(1)(a)
ITAA36 124ZAFA(1)(b)(i)
ITAA36 124ZAFA(1)(c)(i)
ITAA36 124ZAFA(1)(c)(ii)
ITAA36 124ZAFA(1)(d)(iii)
ITAA36 124ZAFA(1)(d)(iv)(A)
ITAA36 124ZAJ
ITAA36 124ZAM
ITAA36 124ZAM(2)
ITAA36 124ZAM(3)
ITAA36 170AA
ITAA36 170AA(11)
ITAA36 177A
ITAA36 177C
ITAA36 177D
ITAA36 Part IVA