Edited version of private ruling

Authorisation Number: 1011682162575

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Ruling

Subject: Taxation incentives for qualifying Australian films under Division 10BA of the Income Tax Assessment Act 1936

Question 1

Is there a refundable tax offset or rebate available to you in respect of a 10BA certificate?

Answer: No.

Question 2

Can your outstanding liability with the Australian Taxation Office be offset or reduced through a 10BA provisional certificate, pursuant to section 124ZAB of the ITAA 1936?

Answer: No.

This ruling applies for the following periods:

year ended 30 June 2006

year ended 30 June 2007

year ended 30 June 2008

year ended 30 June 2009

The scheme commences on:

1 July 2005

Relevant facts and circumstances

Your main business activity is not in film production.

You paid a writers fee to obtain copyright of the script for a film. You have calculated this as being $X.

You have obtained a Division 10BA provisional certificate. A final certificate has not been issued.

You incurred expenses in the income years ended:

30 June 2006

30 June 2007

30 June 2008

30 June 2009.

These amounts were reflected in the company's profit and loss account and deductions already claimed.

The film is not complete and is still in production. It has not earned any income.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 10BA.

Income Tax Assessment Act 1936 section 124ZAB.

Income Tax Assessment Act 1936 section 124ZAFA.

Income Tax Assessment Act 1936 section 124ZADA.

Income Tax Assessment Act 1997 section 8-10.

Income Tax Assessment Act 1936 section 82.

Income Tax Assessment Act 1997 Division 376.

Income Tax Assessment Act 1997 section 8-1.

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

· The meaning of "100% deduction" in Division 10BA of the ITAA 1936, and

· Australian Film Industry Incentives 2010 facts sheet.

You may apply for another ruling on these or any other matters.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Division 10BA of the ITAA 1936 provides concessional treatment for capital expenditure incurred on or after October 1980 in relation to an Australian Film. Where a taxpayer has, under a contract entered into after 24 May 1988, expended capital moneys in producing, or by way of contribution to the cost of producing an Australian film, an amount calculated as 100% of the capital expenditure incurred is an allowable deduction. The deduction is allowable in the year of income the expenditure is incurred.

A part of the Tax Laws Amendment (2007 Measures No. 5) Act 2007, Division 10BA of the ITAA 1936 was phased out in the following manner:

· applications for certificates under Division 10BA will not be accepted after 25 September 2007, and

· a deduction under Division 10BA is not allowable in relation to the 2009-10 year of income or later.

To qualify for the Division 10BA deduction the following conditions must be satisfied, as outlined by section 124ZAFA of the ITAA 1936:

· an appropriate person (normally the producer) lodged with the Commissioner a declaration stating that a production contract had been entered into and specifying the arrangements (section 124ZADA of the ITAA 1936)

· the taxpayer was a resident of Australia

· the taxpayer outlaid capital expenditure in producing, or as a contribution to the production of, a film and, as a consequence, became the first owner or one of the first owners of the copyright in the film

· the film was completed and the copyright used by the taxpayer for income producing purposes (or the taxpayer must have derived income from pre-sale arrangements) within 2 years after the end of the financial year in which funds were first expended in producing, or by way of contribution to the cost of producing, a film

· a provision or final certificate of compliance was in force at the time when the funds were expended

· in the case of contributions to the production of a film, a production contract securing funds equal to the estimated cost of producing the film was entered into before the end of the financial year in which moneys were first expended. It was not necessary that the taxpayer claiming the deduction was actually party to these contracts. A producer may, for example, have secured funds through an agreement with an underwriter. Provided all the other eligibility requirements were satisfied, investors who come in later in place of the underwriter were entitled to the concessions.

As explained in Australian Film Industry Incentives 2010 (NAT 0954-06.2010), investors and potential investors should be aware that, while an up front deduction on the basis of a provisional certificate can be claimed, this deduction will be later disallowed if the following conditions set out in Division 10BA arise:

· the film does not receive a final certificate from the Minister for the Environment, Heritage and the Arts certifying that the film is a qualifying Australian film

· the film is not exhibited commercially within two years of the end of the income year in which capital monies were first spent to produce the film or were contributed to the cost of producing the film, or

· the copywriter of the film did not come into existence within the relevant two-year period and you have not derived assessable income under an agreement granting another person rights to exhibit the film.

If your film does not meet the requirements of Division 10BA, any deductions you claimed for it will be amended to nil. You will receive a notice of amended assessment for the relevant years disallowing the deductions. The Commissioner of Taxation can amend assessments disallowing claims under Division 10BA at any time.

Providing the stringent criteria are met, Division 10BA of the ITAA 1936 could only provide you with a maximum deduction of 100% of the capital expenditure incurred in producing your film. This is not an offset or rebate. Simply, if you meet all requirements and all of your expenditure qualifies, you could only receive 30% (company tax rate) of this back through your assessment.

The following is an example which describes the effect of deductions and offsets:

A company's gross income for the 2007-08 income year was $32,000.

$500 Deduction

The company's taxable income would be:

= $32,000 - $500
= $31,500

The tax on this would be:

$31,500 x 30%
= $9,450 tax payable

$500 Offset

The company's taxable income would be:

= $32,000

The tax on this would be:

$32,000 x 30%
= $9,600

However, as you have a $500 tax offset, your tax would be:

= $9,600 - $500
= $9,100 tax payable

You provided information on expenses in the income years ended:

30 June 2006

30 June 2007

30 June 2008

30 June 2009.

These amounts were reflected in the company's profit and loss account and deductions already claimed. Section 8-10 of the ITAA 1997 says if two or more provisions of the ITAA 1997 allow you deductions in respect of the same amount (whether for the same income year or different income years), you can deduct only under the provision that is most appropriate. You cannot get a second deduction on the same amounts. The equivalent provision in the ITAA 1936 is section 82 (withdrawn).

Some of the company's expenditure would also be outside of the two year rule specified in section 124ZAFA of the ITAA 1936 so you would not be able to get a deduction for the full amounts. As the film is yet not complete, further amounts may be made ineligible until the film is completed and earning assessable income. Also, as the company's main business activity is not film production, you would need to apportion the expenses in relation to film production and other business activities.

In summary, there are no offsets or rebates available to the company in respect of a 10BA certificate. A deduction may be available under Division 10BA of the ITAA 1936, however, the company's deductions would need to be amended to nil. Also, you may be eligible for an offset under Division 376 of the Income Tax Assessment Act 1997 (ITAA 1997) (see further issues for you to consider).

Question 2

You provided information on expenses in the income years ended:

30 June 2006

30 June 2007

30 June 2008

30 June 2009.

These amounts were reflected in the company profit and loss account and deductions already claimed.

As explained in Question 1, you cannot get a second deduction on the same amounts, even if using another provision of law.

Simply changing the provision with which you are claiming a deduction will not affect the company's assessment. In this regard, whether you claim the deduction under section 8-1 of the ITAA 1997 or, if eligible, as a capital expenditure incurred in producing an Australian film under Division 10BA of the ITAA 1936, any deduction will only reduce the amount of income you pay tax on, not the amount of tax payable as with offsets (see example in Question 1).

In summary, as a deduction was already claimed for expenses, the outstanding liability will not be offset or reduced through a 10BA provision certificate, pursuant to section 124ZAB of the ITAA 1936.