House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Film tax offsets

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to relax certain eligibility requirements for the film tax offsets, with the aim of enabling more companies to benefit from these offsets.

1.2 All legislative references in this chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

1.3 Companies may be entitled to one of three refundable tax offsets in relation to qualifying Australian production expenditure they incurred in making films.

1.4 The relevant provisions are contained in Division 376 of the ITAA 1997.

1.5 The three tax offsets are:

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the producer offset, which is available for Australian expenditure incurred in making an Australian film;

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the location offset, which is available for Australian expenditure incurred in making a film; and

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the post, digital and visual effects offset, which is available for Australian expenditure incurred on post, digital and visual effects production for a film.

1.6 The rate of the location and post, digital and visual effects offsets is 15 per cent of qualifying Australian production expenditure. The rate of the producer offset is 40 per cent of qualifying Australian production expenditure for feature films or 20 per cent of qualifying Australian production expenditure otherwise.

1.7 Division 376 of the ITAA 1997 sets out the minimum expenditure thresholds which apply for the offsets and for different types of films. A company's qualifying Australian production expenditure on a film must be at least as much as the relevant threshold for the film to be eligible for a film tax offset.

Post, digital and visual effects offset

1.8 The minimum expenditure threshold for the post, digital and visual effects offset is $5 million (paragraph 376-45(5)(a)).

1.9 The Government has decided to reduce this threshold to $500,000.

Location offset

1.10 The minimum expenditure threshold for the location offset is $15 million (paragraph 376-20(5)(a)).

1.11 An additional requirement applies if the company's qualifying Australian production expenditure on the film is less than $50 million (paragraph 376-20(5)(b)). For such films to be eligible for the location offset, the total of the company's qualifying Australian production expenditure on the film must be at least 70 per cent of the total of all the company's production expenditure on the film.

1.12 No such condition applies to films where the company's qualifying Australian production expenditure is at least $50 million.

1.13 The Government has decided to remove the 70 per cent requirement which applies to films with qualifying Australian production expenditure between $15 million and $50 million. The result will be a single minimum expenditure threshold for the location offset of $15 million.

1.14 For further information refer to the joint Media Release No. 089 of 11 May 2010 from the then Assistant Treasurer and the then Minister for Environment Protection, Heritage and the Arts.

Summary of new law

1.15 A company can be eligible for the post, digital and visual effects offset for a film if it incurs at least $500,000 qualifying Australian production expenditure on that film.

1.16 A company can be eligible for the location offset for a film if it incurs at least $15 million qualifying Australian production expenditure on that film.

Comparison of key features of new law and current law

Detailed explanation of new law

Post, digital and visual effects offset

1.17 The minimum expenditure threshold for the post, digital and visual effects offset is reduced from $5 million of qualifying Australian production expenditure to $500,000 of qualifying Australian production expenditure, to the extent that it relates to post, digital and visual effects production for the film. [ Schedule 1, item 7, paragraph 376-45(5)(a) ]

Example 1.1: Company benefits from the lower post, digital and visual effects threshold

Alpha Film is a small visual effects company based in Australia.

In April 2011, Alpha Film performs some 3D animation work for a popular feature film, and incurs $3 million of qualifying Australian production expenditure.

Because Alpha Film's qualifying Australian production expenditure on this film is not less than $500,000, it is eligible for the post, digital and visual effects offset for its work. The amount of the offset available is $450,000 (15 per cent of $3 million).

If the minimum threshold had instead remained at $5 million of qualifying Australian production expenditure, Alpha Film would not have been eligible for the post, digital and visual effects offset.

Location offset

1.18 The minimum expenditure threshold for the location offset is $15 million of qualifying Australian production expenditure. No additional requirements apply regarding the ratio of a company's qualifying Australian production expenditure to all of its production expenditure on the film. The additional requirement which can apply under the existing law is repealed. [ Schedule 1, item 3 ]

1.19 To be eligible for the location offset, a company must have either carried out, or made the arrangements for the carrying out of, all the activities in Australia that were necessary for the making of the film. It is not necessary for the company to be responsible for the entire production. This condition applies to all films and not just to those with at least $50 million of qualifying Australian production expenditure as under the existing law. [ Schedule 1, item 4, paragraph 376-20(5)(c) ]

1.20 The notes to subsection 376-20(5) and section 376-130 are amended to reflect that the total amount of all production expenditure is no longer relevant to a company's eligibility for the location offset. For the same reason, the note to section 376-140 is deleted. [ Schedule 1, items 5, 8 and 9 ]

1.21 Similarly, paragraph 376-180(1)(d) is amended to reflect the deletion of paragraph 376-20(5)(b). [ Schedule 1, item 10, paragraph 376-180(1)(d) ]

Example 1.2: Company benefits from removal of the 70 per cent test in the location offset

Omega Film is a company established in Australia to carry out the Australian component of a feature film, Sigma Sun . This film is shot in 2011 in both Australia and New Zealand, taking account of the scenery requirements of the script.

Omega Film incurs $80 million of expenditure in making the film, comprising $40 million of qualifying Australian production expenditure and $40 million of other production expenditure.

Because the amount of qualifying Australian production expenditure is at least $15 million, Omega Film is eligible for the location offset for this film. The amount of the offset is $6 million (15 per cent of $40 million).

If the 70 per cent test had continued to apply, Omega Film would not have been eligible for the location offset. This is because its qualifying Australian production expenditure is less than $50 million and the ratio of its qualifying Australian production expenditure to the total of all its production expenditure on the film is less than 70 per cent

($40m / $80m = 50%). Further, because Omega Film is responsible only for the Australian component of the film and not for the entire production, it would have been unable to benefit from the location offset.

1.22 As discussed in paragraph 1.18, there are no longer any requirements relating to the ratio of a company's qualifying Australian production expenditure to the total of its production expenditure on the film. Accordingly, the provision for a company to nominate one individual whose remuneration is to be disregarded for the location offset (that is, their remuneration is not included in either the numerator or the denominator of the fraction used to determine whether the film satisfies the 70 per cent rule) is now redundant, and therefore is repealed. [ Schedule 1, item 6, section 376-25 ]

1.23 The removal of the 70 per cent test also means it is no longer necessary to require that all of a company's production expenditure on a film (including production expenditure incurred outside of Australia) be completed before it can be eligible for the location offset. [ Schedule 1, items 1, 2 and 11 ]

1.24 However, it remains the case that, under paragraph 376-10(1)(b) and subsection 376-230(1), a condition of a company being entitled to the location offset for a film for an income year is that the company's qualifying Australian production expenditure on the film ceased being incurred in that income year.

Example 1.3: A company receives the location offset before the film is completed

Building on Example 1.2, Omega Film finishes shooting the Australian component of Sigma Sun in November 2011. That is, Omega Film ceases to incur qualifying Australian production expenditure on the film in the 2011-12 income year. Post-production work on the film is undertaken outside of Australia and is finalised in August 2012. That is, Omega Film ceases to incur production expenditure on the film in the 2012-13 income year.

Omega Film is eligible to receive the location offset in the year it ceases to incur qualifying Australian production expenditure on the film, 2011-12.

Prior to the amendments in this Schedule, Omega Film could only receive the location offset once it had ceased to incur all production expenditure on the film. In this example, this would mean that Omega Film could not receive the offset until the 2012-13 income year.

Application and transitional provisions

1.25 The amendment which relates to the post, digital and visual effects offset applies to films which commence post, digital and visual effects production in Australia on or after 1 July 2010. [ Schedule 1, subitem 12(2) ]

1.26 The amendments which relate to the location offset apply to films which commence principal photography or production of the animated image in Australia on or after 1 July 2010. [ Schedule 1, subitem 12(1) ]

1.27 As the changes broaden access to the offsets, this retrospectivity is beneficial for affected taxpayers.

1.28 No transitional provisions are required.