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Film Licensed Investment Company Bill 1998
Bills Digest No.221 1997-98
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal statu s. Other sources should be consulted to determine the subsequent official status of the Bill.
Film Licensed Investment Company Bill 1998
While the Australian film industry is often associated with major feature films, such as Shine and Babe, the industry also involves a number of other sec tors, the most important of which is independent television drama production. The latter group comprises mini-series, serials and telemovies. The latest statistics on the industry were released by the Australian Film Commission (AFC) in October 1997 and cover the two categories of production mentioned above for the 1996-97 financial year. The statistics do not cover inhouse production by Australian stations but do include productions by foreign companies in Australia. Findings of the AFC survey include:
â¢ 87 projects valued at $561 million were produced in 1996-97
â¢ of the 87 projects, 33 were mainly financed by the government, 23 were financed by overseas investors and 31 were financed by commercial broadcasters and private investors
â¢ the 87 projects invol ved 39 features, 10 mini-series, 23 series and serials and 15 telemovies
â¢ of the 39 feature films, there were 34 Australian titles valued at $130 million and 5 foreign titles valued at $119 million and 13 were valued at less than $1 million and 12 at between $3 and $6 million (indicating the relatively low budgets for most Australian feature films)
â¢ in relation to feature films, finance was provided by private sources for 28% of projects, 42% were funded from government sources and foreign sources provided 30% of contributions
â¢ for independent TV drama, there were 48 programs, 40 of which were Australian (valued at $236 million) and 8 foreign projects (valued at $76 million)
â¢ sources of finance for Australian independent TV drama were: Australian private sources ($54 million), government ($47 million), foreign sources ($52 million) and Australian commercial broadcasters ($83 million)
â¢ sources of finance for total Australian budgets in 1996-97 were: government 28% (39% in 1995-96), commercial broadcasters and other private sources 47% (37% in 1995-96) and foreign 25% (24% in 1995-96).(1)
A recent report on the film industry found that that the industry employs more than 20 000 people; earns considerable export income; is a relatively small industry compris ing 0.3% of GDP in 1994-95; and that the industry would receive Commonwealth government assistance of more than $140 million in 1996-97.(2)
In addition to providing tax relief for investors in qualifying Australian productions (see below) the government provides substantial assistance to the industry through the Australian Film Finance Corporation Limited (FFC) which provided the government assistance referred to above. FFC was established in 1988 as a wholly government owned corporation to invest in feature films and independent drama and documentaries where there is private sector investment and the productions are entitled to deductions under Division 10BA of the Income Tax Assessment Act 1936 (ITAA), which will be described below.
FFC is financed by direct appropriation and revenue it earns on previous investments in the film industry. In 1996-97, FFC received a Commonwealth grant of $48.5 million. It was announced in the 1997-98 Budget that FFC would receive annual appropriations of $48 million a year until 2000-01. In 1996-97 FFC invested in 57 new projects and provided additional investment to 28 on-going projects. The 57 new projects involved:
â¢ 14 feature films to which the FFC contributed $33.7 million, and the private sector contributed $49.1 million
â¢ 4 adult TV dramas, to which the FFC contributed $8.3 million and the private sector $21.2 million
â¢ 4 children's dram as, to which the FFC contributed $8.1 million and the private sector $24.6 million
â¢ 35 documentaries, to which the FFC contributed $5.8 million and the private sector $8.6 million.(3)
FFC earnings over recent years have been $18.3 million in 1993-94, $25. 6 million in 1994-95, $19.3 million in 1995-96 and $22.5 million in 1996-97. Increased earnings in 1996-97 reflected FFC's investment in the successful film Shine.(4)
In addition to the FFC, Film Australia is involved in the production and distribution of programs and during 1996-97 was involved with the private sector in the production of 28 hours of programs under its National Interest Program as well as being involved in the production of 2 children's TV drama series. It was announced in the 1997-98 Budget that funding for Film Australia would be continued for an additional year, 1998-99, and $6.6 million was appropriated for this purpose (the funding agreement with Film Australia was due to expire at the end of 1997-98). The 1998-99 Budget confirmed that appropriations would continue at a similar level until 2001-02 with annual appropriations of $6.549 million per year.(5)
There are two main concessions available for taxpayers who invest in eligible Australian films. First, Division 1 0BA of the ITAA provides for a deduction where an Australian resident invests capital into the production of a film and as a result becomes the first owner of the copyright in the film or one of the first owners of the copyright in the film. To be an eligible Australian film, the film must be a feature film, telemovie, documentary or TV drama produced for exhibit in a cinema or on TV and be wholly or substantially made in Australia. If the film has a substantial non-Australian content, the Minister may refuse to certify that the film is substantially Australian. The following are excluded from the list of eligible films:
â¢ quizzes, panel games and variety programs
â¢ training films
â¢ films of public events.
If Division 10BA applies, a deduction equal to 100% of the expenditure towards the production of the film is allowed. Deductions are not allowed for expenditure that is not directly related to the production of the film, such as marketing. As well, the film must have been completed and used for income producing purposes within 2 years after the end of the financial year in which the funds are expended on the film. There is also a requirement that the Minister has certified that the expenditure is eligible for the deduction. Division 10BA also contains provisions designed to prevent the misuse of the deduction, including where prices have been inflated to increase the deduction and where the taxpayer's funds are not at risk.
If a project is not eligible for the immediate deduction available under Division 10BA, or the taxpayer elects that Division 10BA not apply, the costs of the project may be written off over 2 years under Division 10B. However, due to the greater advantages in claiming a deduction under Division 10BA (principally the full amount being claimed as a deduction immediately) the use of the Division 10B deduction is rare.
In August 1996 the Minister announced that a review of the Commonwealth's assistance to the film industry would be conducted and that Mr David Gonski would head the review body. Mr Gonski was a former Chairman of Film Australia and Chairman o f Hoyts Cinemas Limited. The terms of reference for the review included making recommendations on:
â¢ the efficiency and effectiveness of current assistance arrangements
â¢ the extent to which assistance promotes diversity and development in the industry
â¢ t he possibility of changing the Division 10BA arrangements to provide additional incentives for the industry
â¢ other options for the Commonwealth to provide assistance to the industry.(6)
In relation to Commonwealth assistance to the industry, the review fo und a number of difficulties with the application of Division 10BA, including:
â¢ funding of projects was often driven by financial factors rather than the assessment of the artistic and commercial potential of the film
â¢ while some very good films were mad e, the overall quality was considered very uneven
â¢ financial decisions were concentrated at the end of the financial year which lead to bunching of production activities.(7)
Overall, the review was in favour of continuing direct assistance (eg. through FF C) rather than increasing the indirect assistance available through tax concessions. The review noted that most private investment was dependent on government support and that direct assistance 'is seen as critical in both providing a production slate that can deliver the Commonwealth's cultural objectives, and a level of stability to a highly volatile industry'.(8)
The review also saw a continuing role for tax concessions, principally as a means of attracting private investment and so allowing increased budgets for Australian productions. It was considered that 'an appropriately designed and delivered tax concession' could:
â¢ encourage a higher level and broader base of private investment in the industry
â¢ increase the diversity of funding for films and TV
â¢ increase diversity as the FFC guidelines and funding constraints are such that it can only fund a limited range of budgets
â¢ if successful, reduce reliance on government support.(9)
The review considered a number of alternatives to the current Division 10BA and 10B concessions and recommended that a scheme of Film Licensed Investment Companies (FLIC) be established. It was envisaged that a limited number of licenses would be issued to companies with appropriate experience and that the licenses would require the companies to be committed to eligible projects and other requirements. The companies would raise a designated level of funds and subscribers to the companies would be eligible for a tax deduction greater than 100% (it was suggested that 120% may be an appropriate level subject to further expert advice). The review considered that FLIC would have the advantage over current Division 10BA and 10B deductions as:
â¢ it would be able to be capped so that the revenue loss to the government would be more cer tain
â¢ it would bring together those with expertise in film production and those with expertise in managing risk capital
â¢ it would be a more visible scheme in that the amount of benefit received would be more transparent
â¢ it would enable the government to efficiently target products that achieve the Commonwealth's cultural objectives
â¢ it is simple to administer
â¢ there would be minimal chance for abuse
â¢ it would enable a FLIC to develop a production 'slate' rather than operating on a project by project basis.(10)
As well as recommending the introduction of FLIC, the review recommended that the current Division 10BA and 10B deductions be abolished from 30 June 1997 and that FLIC be introduced and operating from 30 June 1988 (so as to enable concessions to be continuously available) and that FLIC be funded from the current cost of Division 10BA and 10B deductions.(11)
The Minister announced the government's response to the review on 15 November 1997. Principal measures relating to the funding of the industry announced included:
â¢ Film Australia's National Interest Program would continue until 2003 at current funding limits
â¢ FLIC would be introduced for a pilot period with a 100% deduction for investors and FLIC's would be able to raise $20 million per year for 2 years from 1998- 99
â¢ current Division 10BA and 10B tax concessions would continue to remain available.
Regarding the dual operation of FLIC and the current deductions available, the Minister stated: 'However, in recognition of industry concern that change be introduced in a considered manner, the Government will retain the current 10B and 10BA tax provisions, to provide a 'safety net' for the industry during the FLIC pilot period'.(12)
When the Minister announced the FLIC decision industry reaction was generally supportive, with, for example, the head of the Australian Film and Television School being reported as commenting that the decision was 'a pretty darn good outcome' and the chair of the Australian Film Commission reportedly stating that it was 'very intelligent….because it's a workable solution'.(13) However, there were also concerns that the measure would not be of benefit to film makers and in particular independent film makers. The concern was that FLIC would benefit investors by enabling investors to invest in a FLIC and minimise their risks as they would be spread over a number of projects rather than a single investment. This would enable the FLIC to control the investment in films and the fear is that they would favour the large, established film makers.(14) There have also been concerns expressed since the Bill was introduced and at the rate of the tax deduction 100% rather than the suggested 120%. The executive director of the Australian Film Directors' Association is reported as stating 'FLICS was a good idea, but that good idea has been shrunk until it doesn't look like it's going to work. It looks very much like a white elephant….'.(15)
The explanatory memorandum to the Bill estimates that if FLICs are able to raise the $40 million in concessional capital over two years and this represents additional funding for the industry the cost to revenue will be 'around $20 million over those two years'. If the operation of FLICs results in lower deductions under Divisions 10BA and 10B the amount of revenue loss will be lower than the government estimate.
While not directly relevant to FLIC, the recent High Court decision in Project Blue Sky(16) has caused great concern in the Australian film industry. In addition to the assistance measures described ab ove, the Australian TV film industry also receives benefits from rules requiring a certain minimum of Australian produced programs to be screened. Basically, the local content rule requires that 50% of the programs broadcast between 6 am and midnight be Australian programs (this increased to 55% from the beginning of 1998). Australian program is defined to include:
â¢ programs for which a certificate under Division 10BA is in force
â¢ a program made under an agreement between the Australian government and a f oreign government
â¢ the producer is an Australian, the director or writer are Australian, at least 50% of the leading actors are Australian, for a drama at least 75% of the major supporting cast are Australian and the program is produced in Australia (for news current affairs and sport production may be done overseas if it would be impracticable to do otherwise).
Project Blue Sky, a New Zealand consortium, argued that the Australian content rules were invalid under the terms of the Australia New Zealand C loser Economic Relations Trade Agreement. Articles 4 and 5 of that agreement provide that each country is to allow access rights in its markets that are no less favourable than offered to members of the State. A single judge of the Federal Court initially allowed Project Blue Sky's application. The decision was overruled on appeal to the Full Federal Court and leave was then granted for an appeal to the High Court.
The High Court reinstated the initial decision and allowed Project Blue Sky's application, largely on the ground that the Australian Broadcasting Authority had gone beyond its powers when enforcing the content rule in relation to New Zealand programs. Doubts were also raised as to whether other treaties could have the same effect in overruling the local content rules. The industry fears that any influx of New Zealand programs, if this occurs, may be sufficient to reduce the margins available to Australian producers to a degree that would have a significant impact on the industry and have called for legislation to reimpose the local content rule. There has been no definitive government response at this stage.(17)
Part 2 of the Bill provides for the establishment of a pilot FLIC scheme. The Minister must determine rules relating to applications to be a FLIC ( clause 9 ), and must determine criteria relating to whether a licence should be granted, the number of licenses to be granted under the pilot scheme and the amount of concessional capital to be raised (ie. the amount that the company may issue subject to the 100% deduction)( clause 10 ).
Proposed Division 4 deals with the granting of a FLIC license. The Minister is to determine the number of licenses to be issued and the amount of concessional capital that each FLIC may raise. The total amount of capital that may be issued by FLIC is limited to $40 million raised before 30 June 2000 ( clause 14 ).
An applicant company may only be granted a license to be a FLIC if:
â¢ the company is registered under the Corporations Law
â¢ the company has not commenced business or borrowing
â¢ the central management and all directors of the company are Australian citizens
â¢ the company's shares are to be fully paid up and of one class ( clause 15 ).
Clause 18 provides that when granting a licence ( clause 16 formally gives the Minister power to grant a licence), the Minister has to have regard to recommendations of the Selection Advisory Panel ( clause 9 provides that the Minister must establish such a Panel to advise on applications for licences).
A licence is to have effect until it is either revoked or until 30 June 1999 ( clause 20 ).
Clause 22 allows the Minister to determine conditions that apply to FLICs. It may be noted that the Minister is not obliged to make such a determination but if such a determination is made it will be subject to disallowance by either House of Parliament.
Additional obligatory conditions are imposed by clauses 23 to 28 and include that a FLIC:
â¢ must not raise more capital than the approved amount
â¢ must not issue debentures or convertible bonds
â¢ is not to borrow money during 1998-99 except for short term purposes to meet administrative costs
â¢ does not raise non-concessional capital before 1 July 2000
â¢ invest funds only in provisionally certified films (this will be a film certified under the relevant provision of the ITAA)
â¢ not be a licensed broadcaster, the ABC, SBS or an associate of these grou ps
â¢ have received final certification under the ITAA
â¢ must not have an unacceptable level of either foreign or individual ownership (basically ownership by such a person or their associates that exceeds a stake of 33% or more of the FLIC is unacceptable)
â¢ not transfer its licence to another person and maintain a separate bank account for it's concessional capital.
Proposed Division 7 deals with situation where a FLIC may be breach of it's licence. If the Minister suspects that there is a breach, the FLIC is to be notified of the suspicion and the FLIC may make a submission in regard to the matter. If such a submission is made, the Minister is to have regard to it ( clauses 29 and 31 ). If the Minister is satisfied that there has been a breach of the conditions, the Minister may:
â¢ take no action
â¢ revoke the licence and/or
â¢ determine that concessional tax status is to be removed from the shares during the licence period (this may allow retrospective loss of tax concessions claimed by shareholders, and all owed, prior to the determination being made - proposed section 375-865 of the Income Tax Assessment Act 1997 , refer to the Digest for the Taxation Laws Amendment (Film Licensed Investment Company) Bill 1997).
FLICs are to satisfy the reporting requirements determined by the Minister ( clause 34 ) and it will be an offence for a person to provide false or misleading information in an application, a report or when requested to supply information ( clause 35 ). A FLIC is also to provide the Commissioner of Taxation with information regarding whether there has been a breach of a condition and information necessary for the tax concession to be administered ( clause 36 ).
A transfer of a FLIC licence will be void ( clause 38 ).
Part 3 of the Bill makes it an offence for a person, or persons, to acquire shares that would result in unacceptable levels of individual or foreign ownership of the FLIC ( clause 40 ) or to carry out a scheme for the sole or dominant purposes of avoiding the ownership requirements ( clause 41 ).
- Australian Film Commission, National survey of feature film and independent TV drama production in 1996-97, October 1997.
- Review of Commonwealth Assistance to the Film Industry (the Gonski Report), January 1997, 14.
- Australian Film Finance Corpora tion Limited, Annual Report 1996-97, 21.
- Ibid., 27.
- Portfolio Budget Statement , Communications and the Arts, 69.
- Minister for Communications and the Arts, Press Release , 23 August 1996.
- Review of Commonwealth assistance to the film industry, 40.
- Ibid., 41.
- Ibid., 42.
- Minister for Communications, the Information Economy and the Arts, Press Release , 15 November 1997.
- The Age , 15 November 1997.
- The Australian Financial Review , 16 May 1998.
- Project Blue Sky v Australian Broadcasting Authority , 28 April 1998.
- See Sydney Morning Herald , 2 May 1998, 41.
1 June 1998
Bills Digest Service
Information and Research Services
This paper has been prepared for general distribution to Senators and Members of the Australian Parl iament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document. IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.