Edited version of private advice

Authorisation Number: 1051868629980

Date of advice: 6 September 2021

Ruling

Subject: GST and film investment

Question

Under the arrangement described, are the funds invested (also known as, the Investment) by Private Investors in the production and marketing of the Film by you subject to GST?

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise.

Answer

No. Under the arrangement described, the funds invested (also known as, the Investment) by Private Investors in your production and marketing of the Film are not subject to GST.

However, the 'additional benefits' that you provide to Private Investors under two particular Investment Agreements are considered taxable. Therefore, to the extent that the Investment under those two particular Investment Agreements represent consideration for such additional benefits, the Investment will be subject to GST. Please refer to the Reasons for Decision section for further details.

Relevant facts and circumstances

•                    You are a screen production company producing a feature film (the Film). You are therefore the Producer of the Film and you are the owner of the intellectual property (IP) of the Film.

•                    To date, there are several individuals/businesses (each referred to as a Private Investor and collectively Private Investors) who have each separately entered into an agreement (Investment Agreement) with you to invest funds for you to apply towards the production and marketing costs of the Film. The invested funds are referred to in the Investment Agreements as the Private Investor's "Investment". Investments by Private Investors are made upon the terms of each Investment Agreement entered into with you.

•        The Investment invested by Private Investors are not in the nature of loans and neither are they in the nature of consideration for an interest in equity.

•                    Under the Investment Agreements the Private Investors are entitled to recoup their Investment from collected Gross Receipts of the Film worldwide in accordance with a recoupment schedule contained in an agreement for the film (disbursement agreement 1) for the rest of world, and an agreement (disbursement agreement 2) for the territory of Australasia. The two distribution agreements govern the administration of the collection and disbursement of collected Gross Receipts by specified contractual parties of the two disbursement agreements. Each Private Investor is a beneficiary to the two disbursement agreements.

•                    'Gross Receipts' is defined in the Investment Agreements.

•                    Under the Investment Agreements, the Producer's obligation to repay the Investment shall be limited recourse to the collected Gross Receipts of the Film.

•                    The Private Investor has no creative control or approval right of any kind in respect of the Film. The Private Investors have no day-to-day control over any aspects of the production of the Film.

•                    The Investment Agreements also provide that the Private Investor acknowledges and agrees that it will not own any Copyright in the Film (as defined in the Copyright Act 1968 (Cth)), and that Private Investors do not have and will not have an interest in any assets including the underlying and ancillary rights in and to the Film. Also, Private Investors are not entitled to assign, licence, charge or otherwise grant the Private Investor's rights and benefits to any third party without the prior written consent of the Producer.

•                    Investment Agreements requires Private Investors to pay the Investment directly to the Film's "Investment Account", and the Investment is applied by you solely towards the production and marketing costs of the Film.

•                    Private Investors each have a pro rata entitlement to the collected Gross Receipts of the Film based on the amount they have invested to total amount invested.

Additional information

•                    Two particular Investment Agreements make references to 'additional benefits' that will be provided to the Private Investor in those two particular agreements. The additional benefits are specified under those two Investment Agreements and are in the nature of tickets to the premier of the Film; site visit to the film set of the Film, and tickets to the after party or cast celebration of the Film.

You have agreed to make best efforts to provide these additional benefits to the Private Investors of the two particular Investment Agreements.

The Private Investors in the two particular Investor Agreements are Australian residents.

Other information

•                    Investments Agreements contain a Schedule A that set out, by way of example, how recoupment for Private Investor may be calculated depending on the level of Gross Receipts.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-5

A New Tax System (Goods and Services Tax) Regulations 1999 section 40-5.09

A New Tax System (Goods and Services Tax) Regulations 1999 subsection 40-5.09(3)

Reasons for decision

Mixed and composite supplies

Determining whether a supply is a mixed or composite is critical as it informs the extent to which a supply may be a taxable supply where the supply has taxable and non-taxable components.

The term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

The term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part.

Paragraph 92 of GSTR 2002/2 provides that:

92. Where a supply contains a part that is a taxable supply and another part that is a financial interest, the relevant facts will determine the treatment of the supply. If it is a composite supply, there will be no need to separate the part that is a financial interest from the taxable part, as one is so integral, ancillary or incidental to the other part of the supply that it cannot be separately identified. If on the facts it is a mixed supply then you will need to separate the parts of the supply.

By having regard to the essential character or features of the transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of a single thing.

The discussions at paragraphs 45 to 59A of Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8), which are not reproduced here, provide guiding principles to determine whether the parts of a supply are separately identifiable and retain their own identity, or are integral, ancillary, or incidental to the dominant part. Those paragraphs recognise that determining this is a matter of fact and degree.

In this case, Investment Agreements between you and Private Investors demonstrate that the Investment provided by Private Investors are consideration for the right to recoup their Investment from collected Gross Receipts of the Film worldwide. However, there are two particular Investment Agreements under which Investment is provided for the right to recoup Investment from collected Gross Receipts of the Film worldwide and also additional benefits specified under those two Investment Agreements. The principles underpinning whether a supply is mixed or composite are relevant to your supply of rights to recoup Investment from collected Gross Receipts and the additional benefits under those two particular Investment Agreements. Such additional benefits are in the nature of tickets to the premier of the Film; site visit to the film set of the Film, and tickets to the after party or cast celebration of the Film.

Investment Agreements you enter into with Private Investors demonstrate that the dominant part of the supply for which Investments are made is that of the right to recoup their Investment from collected Gross Receipts. The question is then whether the supply of other things (such as the additional benefits under the two particular Investment Agreements) are parts that are separately identifiable or are they integral, ancillary, or incidental to the dominant part such that you are only making one composite supply of a single thing.

We note that it is not a requirement on your part to supply additional benefits as those listed to any Private Investor who enters into an Investment Agreement.

In applying the principles at paragraphs 45 to 59A of GSTR 2001/8, our view is that the additional benefits component is not so dominated by the right to recoup Investment from collected Gross Receipts component so as to lose separate identity leaving the right to recoup Investment from collected Gross Receipts as the only supply.

In our view, the additional benefits component requires individual recognition as a separate part due to its separate character and purpose. This component cannot be said to be one that is provided merely as a means of better enjoying the right to recoup Investment from collected Gross Receipts. This is also supported by the fact there is not a requirement on your part to supply the additional benefits to any Private Investor who enters into an Investment Agreement.

For completeness, the ATO adopts a de minimis rule at paragraph 60 of GSTR 2001/8 which provides that:

60. As a means of minimising compliance costs, you may treat something (or things taken together) as being integral, ancillary or incidental if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of:

•                    $3.00; or

•                    20% of the consideration of the total supply.

You may be able treat your supply as a composite supply if the above is met. If the above is not applicable, an apportionment of the consideration for the mixed supply will thus be required. Paragraphs 92 to 113 of GSTR 2001/8 provide some guiding principles for reasonable methods of apportioning the consideration.

Taxable supplies

Section 9-5 provides that you make a taxable supply if you make the supply for consideration, in the course or furtherance of an enterprise that you carry on, the supply is connected with the indirect tax zone, and you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this case, the Investment provided by Private Investors are consideration for the right to recoup their Investment from collected Gross Receipts of the Film worldwide. However, there are two particular Investment Agreements under which Investment is provided for the right to recoup Investment from collected Gross Receipts of the Film worldwide and also additional benefits which we consider to be two separately identifiable components of a mixed supply. In either case, whether you make one composite supply, or a mixed supply consisting of various components, the supply would still be for consideration. Furthermore, your supply is made in the course or furtherance of an enterprise that you carry on; is connected with the indirect tax zone, and you are registered for GST. As such, your supply satisfies the requirements under section 9-5 and would be classified as taxable (but not to the extent that it would be treated as input taxed or GST-free).

Input taxed supplies and your supply of a right to recoup Investment from collected Gross Receipts of the Film

Section 40-5 provides that financial supplies are input taxed and that these supplies have the meaning given by the GST Regulations.

Under subsection 40-5.09(1) of the GST Regulations, the provision, acquisition or disposal of an interest mentioned in subsection 40-5.09(3) or 40-5.09(4) is a financial supply if the provision, acquisition or disposal is:

•                    for consideration,

•                    in the course or furtherance of an enterprise and

•                    connected with Australia; and

the supplier is:

•                    registered or required to be registered for GST and

•                    a financial supply provider in relation to supply of the interest.

Item 10 in the table in subsection 40-5.09(3) of the GST Regulations includes an interest in or under securities. Securities are defined in the GST Regulations to take the meaning provided in subsection 92(1) of the Corporations Act 2001 (Corporations Act).

Paragraph 92(1)(c) of the Corporations Act provides that 'interests in a managed investment scheme' (MIS) are securities for the purposes of that Act. Section 9 of the Corporations Act provides that 'interest' in an MIS means a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not); 'benefit' includes any benefit, whether by way of payment of cash or otherwise; and 'managed investment scheme' means:

a)            a scheme that has the following features:

(i)            people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);

(ii)           any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);

(iii)         the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

The statutory requirements above are also discussed in ATO Interpretative Decision ATO ID 2010/129 GST and agriculture: managed investment scheme - supply of an interest in the managed investment scheme (ATO ID 2010/129) which although concerns an agricultural managed investment scheme the principles to which are equally applicable to this case, and is a source of the ATO's view on the GST treatment of supplies of interests in an MIS.

In this case:

•                    the Private Investors under your investment arrangement contribute money to acquire rights to the benefits produced by the Film;

•                    the benefits acquired are rights to receive a proportionate distribution of Gross Receipts under the investment arrangement in accordance with contractual documents of the arrangement;

•                    Investments are pooled for use for the common enterprise of producing the Film; and

•                    Private Investors have no day-to-day control over any aspects of the production of the Film.

Therefore, your supply of a right to recoup Investment from collected Gross Receipts of the Film is the provision of an interest in or under a security for the purposes of item 10 in the table in subsection 40-5.09(3) of the GST Regulations.

The terms under which Investment amounts are paid by Investors to you are set out in the respective Investment Agreements entered into with you.

Where the other requirements of subsection 40-5.09(1) of the GST Regulations are satisfied, the provision of the interest in the item 10 security by you is an input taxed financial supply if the Investment is consideration for the provision of that interest.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (paragraphs 64-72), Goods and Services Tax Ruling GSTR 2000/11 Goods and services tax: grants of financial assistance (paragraphs 76-81) and Goods and Services Tax Ruling GSTR 2009/3 Goods and services tax: cancellation fees (paragraphs 98-99) contain the ATO's views on determining whether a payment is consideration for a supply. The relevant principles repeated in these paragraphs are that in determining whether a payment is consideration under subsection 9-15(1), the test is whether there is a sufficient nexus between the supply and the payment made; in determining whether a sufficient nexus exists, regard needs to be had to the true character of the transaction; an arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made; and whether there is a sufficient nexus is an objective test.

The Investment Agreements provide that Private Investors will receive a proportionate amount of distribution of Gross Receipts; and makes it clear that Private Investors will not own any copyright in the Film and that Private Investors do not have and will not have an interest in any assets including the underlying and ancillary rights in and to the Film. What Private Investors acquire is the right to a share in the net proceeds of the Film.

On an objective determination, having regard to the true character of this transaction and all the circumstances mentioned above, the Private Investors' contributions (Investment) have a sufficient nexus to the provision of the interest in the item 10 security.

Consequently, to the extent that an Investment by a Private Investor is for the right to receive a proportionate distribution of Gross Receipts, the Investment will be consideration for the supply of an interest in a security. Given that your supply of the interest in the security meets the remaining conditions set out in subsection 40-5.09(1) of the GST Regulations, the supply is an input taxed financial supply and is therefore not subject to GST.

As stated above, your supply of the 'additional benefits' component under the two particular Investment Agreements is to be treated separately from your supply of the right to receive a proportionate distribution of Gross Receipts component for GST purposes. The additional benefits are not of the character of an interest in a security and is not an input taxed financial supply.

For completeness, as mentioned above, a supply can also be treated as not subject to GST to the extent that it is GST-free. The relevant legislative provision for consideration would be section 38-190 of Subdivision 38-E which concerns supplies of things, other than goods or real property, for consumption outside the indirect tax zone. The policy intent of the provisions within Subdivision 38-E is to tax the supply of goods and services and other things that are consumed in Australia. GST is a tax on consumption in Australia. Generally, things that are not for consumption in Australia, such as exports, are GST-free. However, section 38-190 is not considered applicable in this case as the recipient under the two particular Investment Agreements are Australian residents and the nature of the additional benefits demonstrates that its supply is for consumption in Australia. As such, the supply of the additional benefits is not input taxed or GST-free and is therefore taxable.

In conclusion, under your investment arrangement described, the Investment by Private Investors in your production and marketing of the Film are not subject to GST. The exception to this treatment is in respect of the additional benefits that you provide to Private Investors under two particular Investment Agreements which are considered taxable. Therefore, to the extent that the Investment under those two particular Investment Agreements represent consideration for such additional benefits, the Investment will be subject to GST. As stated above, paragraphs 92 to 113 of GSTR 2001/8 provide some guiding principles for reasonable methods of apportioning the consideration where apportionment is required.