House of Representatives

Explanatory Memorandum

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

Outline and financial impact

Outline

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

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

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

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

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

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

Financial impact statement

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