Tax Breaks: now that's an incentive

Tax Breaks for Investors in Aussie Film & TV Projects - Now that's an incentive

By Simon Etherington, former Arts Law Legal Officer and Liz Coleman, Volunteer
with assistance from Nina Stevenson

This article explains the different tax incentives that may encourage companies and private individuals to invest in a film. First published in ART+law July, 2002. This system was updated in 2007 un the Australian Screen Production Incentive Scheme. See HERE for more information on the new incentives.

As first published in ART+law, June 2002

Many filmmakers know that finding private investors can be as necessary as scoring government funding when you are trying to get a film or television project off the ground.  There are many reasons why companies and private individuals would consider investing in a film.  One possible incentive is the income tax break offered by Divisions 10BA and 10B of the Income Tax Assessment Act 1936 (Cth).[i]

Divisions 10BA and 10B were introduced in 1980 for the purpose of encouraging private investment in the Australian film industry.  Simply put, if a film production satisfies the requirements of 10BA or 10B and therefore receives certification, its investors are able to receive a tax deduction.

It is usually a film’s producer who applies for 10BA or 10B certification. However, these two different schemes will be appropriate for different projects and different investors. If you would like to know how this applies to your particular situation, please contact either DCITA, ATO or Arts Law.

Division 10BA

The 10BA scheme provides investors with a tax write-off of 100% of their investment in a film in the tax year in which the investment is made.

For example, investor A invests $50 000 in a 10BA certified project in January 2002. Investor A can deduct $50 000 from their ‘taxable income’ in the 2001 – 2002 financial year provided the film is used by the copyright owner for producing assessable income prior to 30 June 2004.

It should be noted however, that there are safeguard provisions of the Income Tax Assessment Act that limit or remove the deduction where, for example, the investor’s contributions are not at risk (s124ZAM) and where the transaction is not at arm’s length (s124ZAJ).

Which films are eligible?

To be eligible for a certificate, a project must:

1. fall within one of the categories of productions allowed under the scheme; and
2. be wholly or substantially Australian, or be an official co-production, and have ‘significant Australian content’.

The categories of projects allowed under 10BA include feature films, documentaries, mini-series and telemovies produced wholly or substantially for exhibition to the public in cinemas or on television. Definitions of each category are in the Fact Sheet on DCITA’s website (see http://www.dcita.gov.au/text_welcome.html). The application forms are also available at this site.

How Australian is “Australian”?

DCITA looks at several factors to determine whether the production is “wholly or substantially Australian” and has the “significant Australian content” required to be eligible for certification.  The Department will look at matters like:

1. who has creative control and the subject matter of the film,
2. where the film is made,
3. who is employed to work on the film (both cast and crew),
4. copyright ownership,
5. owners of companies involved in the production and
6. any other matters that DCITA considers relevant.
   

Now animaniacs qualify too

In March 2001, half-hour animated telemovies became eligible for Division 10BA certification. So did animated mini-series for adults (30 minutes an episode), for children (15 minutes an episode) and large-format (IMAX), 45-minute feature films.

What is the process to apply for the tax breaks?

You need to apply to have your film certified as a ‘qualifying Australian film’. The certification process requires obtaining a provisional certificate and then a final certificate. Generally, filmmakers apply for the provisional certificate early in the production process. This will assist in securing investment and funding for the project.

To get the provisional certificate, applicants are required to provide:

• Budget;
• Script or synopsis; and
• List of intended cast and crew.

Once fundraising commences for a 10BA certified project, an appropriate person (usually the producer) must notify the ATO within one month of the end of that financial year.  Lastly, you have to apply for the final certificate within six months of completing the project to secure the investors’ deductions. Applying for the final certificate involves providing a final budget, script and video copy of the film, as well as a related statutory declaration.

Division 10B

As is the case with Division 10BA, Division 10B allows a 100% tax deduction to initial investors.  Also, 10B films must be assessed as wholly or substantially made in Australia and qualifying films are subsequently issued with a certificate, as is the case under the 10BA scheme. 

However there are five differences between the 10BA and 10B schemes. Firstly, Division 10B tax concessions apply to a greater number of categories than are available under 10BA. If a project is not eligible under the requirements for 10BA it may still be eligible under the 10B scheme. 10B projects can include feature films, documentaries, mini-series, series, short dramas, multimedia formats such as CD-ROMs, plus promotional, variety, educational and training material as well as large-format programs.

Secondly, whereas the 10BA scheme can apply in the tax year the expenditure is first incurred, a deduction under 10B is only allowable once the film is completed and is producing income.

Thirdly, under the 10B scheme the investor may elect that the deduction is spread out over two financial years starting when the film starts producing income, or that the deductions are spread out over the effective life of the copyright. For example, investor B invests $50 000 in a CD-ROM project eligible under 10B in January 2002. The project is completed in March 2003. Investor B can choose to reduce their taxable income by $25 000 in the 2002-2003 financial year and by $25 000 in the 2003-2004 financial year.

Fourthly, only projects certified under 10BA are also eligible for direct investment from the Film Finance Corporation.

Finally, division 10B only applies only to investors who are Australian residents who expend money to acquire an interest in the initial copyright of the film, whereas both Australian residents and non-residents may apply for 10B even where they were not investors in the initial copyright, but have since acquired an interest in the copyright in the film.

10BA, 10B and the Corporations Act

Some films that are offering tax deduction investment schemes must be registered with the Australian Securities and Investment Commission, for example, schemes with more than 20 participants. Registering such a scheme requires a lot of administration and documentation, including obtaining a public license. Films offering investment schemes that seek registration must have a minimum value of $50 000 in assets.

Information about registration is available from the consumer section of the Australian Securities and Investment Commission website at http://fido.asic.gov.au (go to ‘Consumer Alerts’ and look under the headings ‘Investment Management Schemes’ and ‘Tax driven investments including rural and film schemes’).

Irrespective of whether a scheme must be registered or not, caution must be exercised in any statement made by a fundraiser to potential investors. For example, “hype” can be regarded as false or misleading if appropriate risk factors aren’t disclosed.

10BA, 10B and the Tax Office Product Ruling System

The Australian Tax Office can make Product Rulings on film and TV projects that are offering tax benefit schemes. That is, you can ask the ATO to confirm that your film does qualify for the tax break you are promising investors. The ATO can be held to their Ruling later, so this gives investors a considerable amount of comfort.

Obviously, the Ruling doesn’t guarantee the success of the film, only whether the project is capable under the Income Tax Assessment Act of providing the tax benefits being offered. Product Rulings are published on the ATO website.

The person promoting the scheme to investors can apply for the Product Ruling and applications have to be in writing. The checklist of information to be supplied for an application and other application information is available from the ATO website at http://www.ato.gov.au. Product Rulings can take several months to obtain and usually require the assistance of a lawyer or an accountant experienced in the area.

Thank you to Morris Averrill of Energee Entertainment and Nina Stephenson of Stephenson Court for their comments.