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 adequacy of the level of the proposed tax deduction
- Whether the capital gains tax provisions could act as a disincentive
to investment and
- Whether the scheme would be effective in attracting more investment
in Australian films.
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
- Department of Communications and the Arts
- 9a Department of Communications and the Arts
- 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