Film Licensed Investment Company Bill 1998 Taxation Laws Amendment (Film Licensed Investment Company) Bill 1998

Film Licensed Investment Company Bill 1998
Taxation Laws Amendment (Film Licensed Investment Company) Bill 1998

November 1998

Environment, Communications, Information Technology and the Arts Committee membership

1. Members

Senator A Eggleston, Chair (LP, WA)
Senator M Bishop, Deputy Chair (ALP, WA)
Senator L Allison (AD, VIC)
Senator the Hon N Bolkus (ALP, SA)
Senator R Lightfoot (LP, WA)
Senator M Payne (LP, NSW)

2. Substitute Members

Senator J Tierney (LP, NSW) to substitute for Senator Lightfoot for matters relating to Communications and the Arts

Senator N Stott Despoja (AD, SA) to substitute for Senator Allison for matters relating to Information Technology

3. Participating Members

Senator A Bartlett (AD, QLD)
Senator V Bourne (AD, NSW)
Senator B Brown (AG, TAS)
Senator G Campbell (ALP, NSW)
Senator K Carr (ALP, VIC)
Senator M Colston (IND, QLD)
Senator B Harradine (IND, TAS)
Senator M Lees (AD, SA)
Senator D Margetts (GWA, WA)
Senator N Stott Despoja (AD, SA)

4. Secretariat

Ms Roxane Le Guen, Secretary
Ms Tara Ducker, Research Officer
S1.57, Parliament House
Canberra ACT 2600
Ph 02 6277 3626
Fax 02 6277 5818
Email:

Film licensed investment company bill 1998
Taxation laws amendment (film licensed investment company) bill 1998

1 Background

The Australian Film Industry

The Federal government has played a major role in encouraging a broader base of private investment in Australian films since 1981 when Division 10BA of the Income Tax Assessment Act was introduced to provide taxation incentives for such investment. The Australian film industry is by nature a risky investment with approximately only one in ten Australian feature films returning their original investment. [1] Commonwealth assistance has therefore been essential to the development of the industry. This assistance includes both direct investment through the Australian Film Finance Corporation which was established in 1988 to invest in feature films and independent dramas and documentaries, [2] and taxation incentives to encourage private sector investment.

Current Taxation Concessions for the Film Industry

There are currently two taxation concessions available to investors in Australian film under the Income Tax Assessment Act 1936. Division 10BA of the Act provides for a deduction where an Australian resident invests capital into the production of a film. There are certain restrictions on the types of films that are eligible. [3] Division 10BA applies only to investments in individual films.

If a project is not allowable for the deduction under Division 10BA, the costs of the project may be written off over 2 years under Division 10B. This deduction is rare, as there are greater advantages under Division 10BA. [4]

Review of Commonwealth Assistance to the Film Industry

In January 1997, Mr David Gonski presented to the Government his Review of Commonwealth Assistance to the Film Industry. The review examined the current 10B and 10BA arrangements. [5] The review recommended that Film Licensed Investment Companies (FLIC) be established in a scheme which would offer private investors advantages over the existing 10B and 10BA arrangements. [6] According to the Department of Communications and the Arts:

The Government undertook extensive consultations with the film industry on the details of the Gonski review before providing a response.

The Government's response to the Gonski review is contained in the Bills that are the subject of the Committee's current inquiry.

2 The Bills

The Film Licensed Investment Company Bill 1998 provides for the establishment of a pilot scheme for the delivery of tax concessions to investors in the film industry by means of concessional investment in Film Licensed Investment Companies (FLIC). [7] The scheme is designed to run for 2 years until 30 June 2000 and will enable up to $40 million of concessional capital to be raised.

The Taxation Laws Amendment (Film Licensed Investment Company) Bill 1998 amends the Income Tax Assessment Act 1997 to provide a tax deduction for funds spent on acquiring shares in Film Licensed Investment Companies during the 1998-98 and 1999-2000 financial years while the FLIC is licensed to raise share capital which will qualify for the deduction. [8]

3 The Committee's Inquiry

The Bills were referred to the then Senate Environment, Recreation, Communications and the Arts Legislation Committee on 27 May 1998 by the Selection of Bills Committee (Report No.7 of 1998). The Selection of Bills Committee flagged the following issues:

The Committee was required to report to the Senate by 11 August 1998. An Interim Report was tabled out of session on 11 August, as the Committee had not completed its inquiry by that date.

Following the prorogation of Parliament for the federal elections held on 3 October 1998, an amended version of the Bill was referred by the Senate on 12 November to the Senate Environment, Communications, Information Technology and the Arts Legislation Committee for report on 24 November 1998. An extension of time to 30 November 1998 became necessary because Senators were only appointed to the new Committee on 24 November 1998. The Committee was given the power to consider and use the records of the relevant committee appointed in the thirty-eighth Parliament. Clauses 24 and 25 of Part 2, Division 6 of the FLIC Bill introduced in the 39th Parliament differs from the earlier Bill in relation to the time over which the pilot scheme will operate.

The Committee received 10 submissions (one of which is confidential) and these are listed at Appendix 1. The closing date for submissions was 26 June 1998 by which date only 4 submissions had been received. On that basis the Committee decided not to hold a public hearing. A further 6 submissions were received subsequently.

4 Issues

Adequacy of the Level of Proposed Tax Deduction

The most commonly expressed concern (in 8 of the submissions received) related to the adequacy of the tax concessions for investors in FLIC shares. The proposed level of the tax deduction (100 per cent) and the capital gains tax concessions were both targeted. The majority referred to the fact that the Review of Commonwealth Assistance to the Film Industry conducted by David Gonski had recommended a minimum of 120 per cent concession. Many indicated their concern that rate of concession was inadequate because of the high risk nature of the film industry. The New South Wales Film and Television Office stated for example:

A FLIC with only a 100% tax concession, rather than the 120% recommended by Gonski, is an unattractive proposition to an investor in the high risk film industry [9]

Doubts were expressed in those eight submissions (all except the ones from the Australian Children's Television Foundation and the Department of Communications and the Arts) over the capacity of the FLIC scheme to attract increased investment if the tax concession was set at no more than 100 per cent [10]. The Screen Producers Association of Australia' for example noted in its submission that the FLIC tax concessions did not constitute an improvement on the existing system:

From a tax perspective, the difference between the result pursuant to Division 10BA and the FLIC legislation is non existent. [11]

The Department of Communications and the Arts argued that the Government had decided to keep the level of concession at 100 per cent since under Division 10BA it had proved sufficient to attract investors in the film industry. [12]

The Department of Communications and the Arts submission envisages the FLIC scheme to be attractive as it allows investors to spread their funds over a number of films, rather than risking them on one film. The Screen Producers Association of Australia also noted that this is as an advantage of the proposed scheme. [13]

Capital Gains Tax Provisions

Eight of the ten submissions received expressed concern about the Capital Gains Tax (CGT) provisions. The majority argued that with the application of a zero cost base, 100% of the sale price of shares would be subject to CGT and that this would act as a disincentive to investors. Submissions supported the CGT model recommended by David Gonski in his Review and considered that the variant as adopted in the Bills would prove less effective. In response to those submissions, DOCA argued that the capital gains tax treatment of FLIC shares is in line with budget measures announced by the government in the 1997-1998 Budget.

Maintenance of Current Provisions 10B and 10BA and Assessment of the FLIC Scheme

The Government has expressed a commitment to retaining the 10BA provisions during the trial of the pilot FLIC scheme to provide security for the industry. [14] There was general support for this approach in the majority of submissions. Some submissions including those from the Australian Screen Directors Association Limited (ASDA) and the NSW Film and Television Office argued that if the FLIC scheme proved successful, the provisions of Division 10BA and 10B should be maintained for a period of about 12 months to provide for a smooth transition. [15]

Foreign Ownership

A number of submissions raised concerns about the foreign ownership provisions of the Film Licensed Investment Company Bill 1998. Clause 27 of the FLIC Bill proposes to prohibit foreign ownership of more than 33% of a FLIC. More specifically, clause 15 of the Bill requires Australian based management and control and for the chair and all directors to be Australian citizens. Southern Star Group submitted that if these requirements are met, then majority Australian ownership should be sufficient without the prescribed percentage applying. They argued that otherwise, Australian publicly listed companies would be excluded since their level of Australian ownership are not controllable and tend to vary over time. [16] The Screen Producers Association also saw this as a problem:

The limits on foreign ownership of shares may be a problem for public companies that are not in a position to control their share register. The emphasis needs to be upon Australian management and control more than upon ownership, which in any event should be majority Australian. [17]

DOCA pointed out in its supplementary submission that the aim of clause 15 was to ensure that “the FLIC is not subject to predominantly foreign influence and control”. [18]

Capping of Concessional Capital

Along with two other organisations, [19] the Australian Screen Directors Association Limited argued that the capping of the tax concession at $20 million per year limits the potential for the film industry to expand. [20] The Department of Communications and the Arts justified the decision to cap the level of tax concessions available over the 2-year trial period arguing that it will act as a necessary disincentive for the over-inflation of film production budgets.

Full Allocation of Concessional Capital

The Australian Children's Television Foundation submitted that the entire allocation of $40 million from the Government should be available for investment over the 2 year trial period. It argued that if the Minister exercised his right not to allocate the full amount of concessional capital in any one application round (where applications received do not meet certain criteria—Part 2, Division 4, Clause 14) advertisements or notices should be placed advising either pre-existing FLICs or prospective FLICs that that unallocated capital is still available. In the Committee's view, Clause 11(2), Part 2, Division 3 of the Bill should allay the fears expressed by the Foundation in its submission. However, the Committee's view is that advertisements in the press calling for a second round of applications should make it clear that there is unallocated capital from the previous round still available.

Exclusion of Commercial and National Broadcasters

The Federation of Australian Commercial Television Stations (FACTS) saw the restrictions on the types of films in which a FLIC is allowed to invest as a greater disincentive than the actual level of concession. It argued strongly against clause 25 of the Bill which prevents a FLIC from investing in a film developed or produced by commercial (or national) broadcasters. [21] Of particular concern to FACTS is the exclusion of films `developed' by a commercial or national broadcaster. It argued that television networks often act as advisers to independent producers and that this would be sufficient to exclude a film from the scheme. FACTS requested that the Bill be amended to allow a FLIC to invest in such productions.

In its supplementary submission, the Department of Communications and the Arts rejected FACTS arguments pointing out that:

Clause 25 of the FLIC Bill does not preclude a FLIC from investing in a film, which has been produced by an independent production company for television as stated in the FACTS submission. If a network takes a minor role by suggesting changes to a script or cast approval, this does not constitute the development of a production. The FLIC Bill does exclude a FLIC from investing in a project, which has been developed by a broadcaster, but does not exclude co-investment with a FLIC in a production. A FLIC can invest in a production that has a broadcaster or a pay television program supplier attached or in which a broadcaster has agreed to pay a licence fee to broadcast. [22]

The Committee notes that the Explanatory Memoranda to the FLIC Bill states that the intent purpose of excluding films developed by a broadcaster is to `encourage the development of a broader based Australian film industry', and to ensure `assistance is primarily directed to the independent production sector.' [23] The submission from FACTS argued that if the types of films FLIC may invest in are broadened the scheme [24]may be more attractive to investors. FACTS also suggested broadening the types of films that would qualify under the scheme to include long running television series.

The Committee supports the intention of broadening the type of investor in the Australian film industry and it believes that it is also important to allow potential investors and new film makers to tap into existing expertise.

Administrative Costs and Time frame for the Pilot Scheme

The New South Wales Film and Television Office perceives greater administrative costs in the FLIC scheme than the current 10BA scheme, including application, compliance and reporting costs. [25] However, DoCA argued that the new scheme would provide for greater transparency and accountability than the 10BA scheme.

The Australian Film Finance Corporation and the Australian Film Commission noted that by the time the legislative process has been completed and the selection committee set up to decide how many FLIC licences are to be granted, the time frame for the operation of the pilot scheme will be somewhat less than two years. [26]

Although the deadline for the raising of concessional capital is June 2000, Clauses 24 and 25 (Part 2, Division 6) of the Bill allows for the capital raised under the scheme to be invested until June 2002 and films produced under the scheme have until 30 April 2003.to receive their final certificate under section 124ZAC of the Income Tax Assessment Act 1936.

Conclusion

The Committee has considered the Film Licensed Investment Company Bill 1998 and the Taxation Laws Amendment (Film Licensed Investment Company) Bill 1998. The Committee notes that the Department of Communications and the Arts recognises that an evaluation of the FLIC scheme will only be possible at the end of the two year pilot program. [27] The Committee believes that such an evaluation needs to be carried out at that time to test the effectiveness of the scheme.

Recommendation 1

The Committee recommends that the Bill proceed.

Senator Alan Eggleston

Chairman

 

1998 MINORITY REPORT BY SENATOR BISHOP AND SENATOR BOLKUS

We were appointed to this committee only late on 24 November 1998. As we have not had an opportunity to consider the evidence of this inquiry we reserve our position on the legislation.

Senator Nick Bolkus Senator Mark Bishop

Labor Senator for South Australia Labor Senator for Western Australia

26 October 1998

MINORITY REPORT BY SENATOR LYN ALLISON

The Australian Democrats reserve the right to make further comments on this legislation in the Chamber.

Senator Lyn Allison

Australian Democrats Senator for Victoria

26 October 1998

APPENDIX 1

LIST OF SUBMISSIONS

1 The Australian Children's Television Foundation

2 New South Wales Film and Television Office

3 Southern Star Entertainment

4 CONFIDENTIAL

5 Australian Writers' Guild

6 Australian Screen Directors Association Limited

7 Screen Producers Association of Australia

8 Australian Film Finance Corporation Limited and Australian Film Commission

  1. Department of Communications and the Arts
  2. 9a Department of Communications and the Arts
  3. Federation of Australian Commercial Television Stations

 

Footnotes

[1] Gonski, D. Review of Commonwealth Assistance to the Film Industry, p.36

[2] Bills Digest, p.2

[3] Bills Digest, pp.3-4

[4] Bills Digest, p.4

[5] Bills Digest, p.4

[6] Bills Digest, p.5

[7] Film Licensed Investment Company Bill 1998, Explanatory Memorandum, p. 2

[8] Taxation Laws Amendment (Film Licensed investment Company) Bill 1998, Explanatory Memorandum, p.1

[9] New South Wales Film and Television Office, Submission No 2

[10] Australian Writers Guild, Submission No 5, p.2 and others

[11] Screen Producers Association of Australia, Submission No 7, p.5

[12] Department of Communications and the Arts, Submission No 9, p.5

[13] Screen Producers Association, Submission No 7, p.2

[14] House of Representatives Hansard, Second Reading Speech, Mr Warwick Smith, MP, p. 3228, 14 May 1998

[15] Australian Screen Directors Association LTD, Submission No 6 and New South Wales Film and Television Office, Submission No 2

[16] Southern Star Group, Submission No 3

[17] Screen Producers Association, Submission No 7

[18]

[19] New South Wales Film and Television Office, Sub. No.2 & Screen Producers Association, Sub No. 7

[20] Australian Screen Directors Association Limited, Submission No.6; p.2

[21] Federation of Australian Commercial Television Stations, Submission No 10, p.3

[22] Department of Communications and the Arts, Supplementary Submission (No 9a) , p.2

[23] Explanatory Memoranda, pp.2-3 and 21.

[24] Federation of Australian Commercial Television Stations, Submission No 10, p3

[25] NSWFTO Submission No 2, p.1

[26] Australian Film Finance Corporation and the Australian Film Commission, Submission No.8, p. 3

[27] Department of Communications and the Arts, Submission No 10, p. 10

 

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