Do you know how long the tax law considers intellectual property (such as copyrights and patents) lasts. The answer to the question is 25 years. (You can look it up at section 124 U(1) (b) of the 1936 Assessment Act)

The intellectual property provisions are capital allowances which allow the owner to depreciate the property over the 25 years.

So to calculate the deduction under section 124 M, we would divide the residual value by 25. A film usually has a life of a few years so section 124U could not be said to recognise the reality of the film industry's working environment

(Can you think of a 25-year-old film currently being exhibited at a cinema? Ignore 'Casablanca' and 'Gone With the Wind' for the purposes of this exercise)

In view of this, and the resurgence of the Australian film industry in the 1970's, it was decided to modify division 10B to shorten the deemed effective life of Australian films to 2 years.

Refer to section 124 UA(1)

The effective life of an Australian film shall be deemed to commence at the start of the year in which it is first used to produce assessable income

Like section 124U, section 124 UA deals with two situations -

Refer section 124 UA (1) (a)

year 1 - unit first used ... .

Year 2 - the next succeeding year

But that's not all ... .

If the specified period terminated in the year the unit was first used then the effective life is one year.

Work through section 124 UA (1) (b) to confirm this

What is the maximum effective life of an Australian film?

(hint - see section 124UA)

This measure was announced in 1977 so it applied to Australian film first used to produce income on 22/11/77 or later - refer section 124UA(4)

Note also that the owner can elect to have a 25 year write - off period if this is desired - section 124 UA (2) & (3)

Refer to the definition in section 124K

an Australian film is one ...

It is the appropriate Minister who certifies that a film meets these tests

Which of the following factors would NOT be taken into account by the Minister in deciding the Australian content of a film (refer section 124 K (1a))

(1) subject matter of film

(2) place film made

(3) nationality/residence of backers or those taking part in making the film

(4) origin of the idea for the film and the idea behind the script

Refer section 124 K(1a) - answer = 4

The origin of the idea is not relevant to the minister's determination - refer Willaura PL v Minister for Home affairs (84 ATC 4415) if you are interested. In that case the fact that the original idea for the Australian film, 'The Return of Captain Invincible' was an English stage play musical called 'Zap', was irrelevant to the determination of Australian content.

Note that a film made in pursuance of certain government to government agreements may also qualify - refer section 124 K(1)(b).

The 100% write off is offered as an alternative to the concession studied above which allows the cost of an Australian film to be written off over 2 years under division 10B

The investor can either

Because the 2 year write-off of cost of Australian films under division 10B did not encourage the amount of investment in the film industry which had been expected - two new measures were introduced-these were

You will probably find the legislation rather complicated - this reflects the government's determination to ensure the tax incentives resulted in good films rather than tax avoidance schemes and unfinished film projects.

This is best illustrated by the timing of the deductions - which varies according to which provision applied at the time the investment was made in which year is deduction allowed

We will concern ourselves with the current state of the law to avoid complicating the issues unnecessarily. Should you have dealings with claims for pre 13/1/83 investments, you will have to refer to section 124 ZAF.

The deduction was originally 150% of the sum invested, but this has been reduced over the years in to smaller amounts finishing at 100% where the contract was entered into after 25/5/88 - Refer CCH Master Tax Guide paragraph 20-350 for details.

Section 124 ZAFA allows a deduction for contributions towards the cost of producing Australian films in the year in which the investment was made.

If a contribution of $1000 was made after 25/5/88 what is the maximum deduction, which could be, allowed?

The deduction is actually granted by section 124 ZAFA - we will examine it now, clause by clause, referring to other sections as required.

Section 124 ZAFA (1) (a)

Notice that the section applies to post 13/1/83 contracts - earlier contracts are subject to section 124 ZAF.

Division 10BA has its own definitions section - refer to section 124 ZAA for the definition of a qualifying Australian film

Notice that the film must be both an

Notice that the requirements that the film be made in Australia and have significant Australian content are the same in both definitions-refer 124 ZAA

 Section 124 ZAD states the factors which are taken into account in ascertaining the Australian content - they are the same but for one exception-what is it?

 Details of production expenditure are taken into account-section 124 ZAD (e)

Section 124 ZAA (4) & (5) say what is, and what is not, an eligible film.

Refer to them to answer these questions

Which of the following would not be an eligible film - section 124 ZAA (4)

1.Feature film for cinema exhibition

2.Telemovie for broadcast on TV

3.Documentary film

4.TV drama mini series

5.Episodes of ongoing comedy series

enter 1,2,3,4 or 5

Refer definition of eligible film

Which of the following would be an eligible film (section 124 ZAA(5)?

1.Advertising program

2.Discussion program

3.Quiz program

4.Panel program

5.Film of public sporting event

6.Episode of on-going drama show

7.Training film

8.Documentary film

section 124 ZAFA (1)(b) requires that at the time when the moneys were expended:

Section 124 ZAB (1&2) allow a person to make a written application to the Minister for the Arts for a provisional certificate.

If the minister is satisfied that it will be a qualifying Australian film then he can grant a provisional certificate to the appropriate person (usually to producer) - section 124 ZAB(3)

Armed with the provisional certificate the producer can then go about raising money for the film on the basis that contributions should qualify for the deduction - note 'should'-there could still be some slips twixt cup and lip. The provisional certificate can be revoked (sections 124 ZAB (5), and 6-8 )

The Minister has been known to change his mind after issuing a provisional certificate and refuse the final certificate. (This happened with the film 'Return of Captain Invincible'- though the investors had the minister's decision overturned by the court.)

Refer to section 124 ZAFA (1)(c)

As we have mentioned, the government is determined that these provisions result in money flowing to the film industry to finance quality films.

To ensure this happened, section 124 ZAF(1) allowed the deduction only in the year in which the copyright was used to produce assessable income, with a view to ensuring that only bona fide productions were eligible.

Unfortunately, this put pressure on producers to complete films in less than 12 months, thereby ensuring the allowance of the deduction in the year of investment by the backer, and this was hardly conducive to the production of a quality product.

After a great deal of lobbying by the industry, section 124 ZAFA was introduced to enable the investor to obtain his tax concession in the year he invested the money in the production. However, certain safeguards were inserted to ensure that deductions were allowed only for films which would be finished and that deductions which had been allowed could be 'taken back' if the contributions were returned to the investors.

The declaration must contain the following assurances and information

Refer to section 124 ZAFA (1) (d)  (We will take the straight forward case of funds contributed to a film after 30/6/83 - with no underwriting agreement concluded before 23/8/83)

Production contract = agreement in which people agree to expend money on the production of a film

Underwriting contract = agreement in which people agree (conditionally) to expend money on the production of a film (- the condition is that they will do so if the producer can not find enough investors to fund the film)

Under section 124 ZAFA(2),the investors lose their deductions. You will notice that the taxpayer has 24 months after the end of the financial year in which he made the investment to do 2 things-what are they?

If he does not meet these two requirements, then the deduction is deemed not to be (or have been) allowable.

Section 124 ZAFA(3) says,

If a taxpayer dies, then the deduction will be allowed if:

If the Commissioner did not know that the film had not been completed in the 24 month period required by section 124 ZAFA(2) - then he could not adjust the deductions previously allowed - so why not keep him in the dark?

Refer section 124 ZADB

If the person who lodged the section 124 ZADA declaration becomes satisfied that the film will not be, or is unlikely to be completed before the end of the 24 month period, then he must notify the Commissioner of this opinion.

Why not invest more than required to make the film ... Get the deduction ... then have the excess contributions returned? - refer section 124 ZAG (2)

where

but has not been dealt with ... In the prescribed manner then ... That amount (referred to as the relevant amount) shall be taken not to have been expended by the taxpayer (on the film)

To cut a long story short ... When it is spent on producing the film.

You can follow through the other ways yourself if you are interested.

Section 221 ZM to ZX govern the use of funds withdrawn from the film account where they are not dealt with in the prescribed manner.

Section 221 ZN requires 80% of the amount to be refunded to the investor to be deducted and remitted to the Commissioner within 21 days, to provide a credit for payment of the tax on the amended assessment that will be issued.

(The figure for companies is 61% of the intended refund.)

You can read these provisions yourself if you are interested.

Note that section 124 ZAGA allows the Commissioner to anticipate the effect of section 124 ZAFA(2)-(film not finished in 2 years)- and zag (money not used in producing the film)- to disallow the deduction.

Section 124 ZAG has another function.

The deduction applies only to amounts expended in producing the film.

The Commissioner takes the view that costs associated with packaging or marketing, brokers fees and interest incurred are not production costs.

Why not invest the money, ... Get the deduction ... Then sell the interest in the film? - refer section 124 ZAL

If the taxpayer assigns (sells) part or all of the interest in the copyright that will come into existence when the film is completed, the Commissioner can reduce the deduction accordingly.

Suppose you wish to speculate on real estate. To do this you get a producer to make a film about people in a gold coast tower block. Offer the division 10B deduction to investors who provide the money to purchase the property as well as sundry film making equipment then sell off the property at a profit after the film is finished.

Any problems with that scheme? Refer section 124 ZAK.

Where an amount expended in making a film has been used to acquire assets and the assets are ...

the Commissioner can reduce the deduction accordingly.

The moral of all this is ...

Check the contract to see if the investment will be used to ... .

Many agreements undertake that such expenses shall be met from other funds available to the producer.

Why not get the producer to fudge the accounts so the film appears to cost more than it did to make? Refer section 124 ZAJ

Section 124 ZAJ allows the Commissioner to reduce the deduction where the producer has paid excessive prices to a person supplying goods or services to him, and there is reason to believe that this was because they were not dealing with each other at arms length

Budget for production of film

total costs = $1,000,000

funds available

amount to be raised = $300,000

put yourself into the shoes of a producer trying to raise the $300,000 necessary to begin work.

Using non-recourse loan finance to solve the problem

If you could find a taxpayer in the top tax bracket (60% marginal rate) with surplus funds, you could entice him to invest them in the following way

Offer the taxpayer a loan of $300,000 to be repaid only out of film profits if he will add $300,000 of his own, and invest $600,000 in the film. (The Film-Commission grant could be used as loan funds.)

Another condition of the loan is that the borrower will have to wait until all other investors have received their share of the profits before he receives anything.

Budget for production of film

total costs = $1,000,000

funds available

You now have the funds necessary to start work on the film.

But why did the investor throw away $300,000 of his own money on a film project with only a slight chance of recouping his investment?

The investor has a tax deduction worth ...

$600,000 X 100% x 60%(tax rate) = $360,000 for which he has paid only $300,000.

This is just one example of a non recourse loan - there are many variations

The obvious advantage is that the money borrowed to invest in the film is not at risk - the lender only has recourse to the film profits to obtain repayment - good idea? -not really! refer section 124 ZAM (1).

Section 124 ZAM(1) (a)&(b) identify the type and amount of expenditure which must be 'at risk' - the expenditure on the film prior to the application of the other safeguard measures.

Two measures are taken into account in determining the amount of the investment 'at risk'-they are found in section 124 ZAM(2)&(3) - what are they?

Section 124 ZAM (2) & (3)

The following measures would not reduce the investment 'at risk':