3.1
This chapter explores the extent of support for the provisions of the Treasury Laws Amendment (2021 Measures No. 5) Bill 2021 (the bill) and examines specific concerns raised by participants during the inquiry. As no stakeholder comments were received on Schedules 2 or 3, this chapter focuses solely on the proposed Schedule 1 amendments.
3.2
The committee notes with disappointment the approach by the Department of Infrastructure, Transport, Regional Development and Communications (the department) to engaging with the inquiry process which could best be described as reluctant.
3.3
The lack of detail in the Explanatory Memorandum about the cost of, and rationale for, many of the proposed changes (with the exception of the increase to the Producer Offset rebate rate from 20 per cent to 30 per cent for all eligible content that are not feature films released in cinemas) was one of the reasons for the bill's referral for inquiry. In terms of understanding potential unintended consequences for industry stakeholders, the committee also requires an indication of what the cost may be to industry of proposed measures, not just the net cost to the Australian Government.
3.4
Despite this, the department not only failed to make a submission to the inquiry but was poorly prepared for its appearance at the public hearing—being unable to sufficiently explain the bill's likely impact on the sector or provide the committee with detailed policy costings. This was in spite of the committee signalling its interest in costing information via a request for information prior to the hearing. While recognising that this is a Treasury bill that amends taxation law, the department has responsibility for the policy settings associated with the Australian screen industry and should have had the relevant information at hand to answer the committee’s questions about the tax implications of the individual measures in Schedule 1 or, at the very least, ensured that relevant Treasury officials also attended the hearing.
3.5
The committee acknowledges the more comprehensive answers eventually provided by the department in response to questions taken on notice at the hearing but reiterates disappointment at the lack of professional cooperation which is expected from departments of the Australian Government with an inquiry being conducted by the Australian Senate.
General views on the bill
3.6
Overall, stakeholders support changes to screen production incentives that will allow them to create quality content and compete effectively in the global marketplace.
3.7
This sentiment was echoed in submissions to the current inquiry. In particular, Free TV Australia highlighted the impact on its members of increased production costs and competition from international streaming services. It argued that the amendments put forward in the bill were 'critical and essential to the ongoing provision of Australian stories on Australian screens'.
3.8
Stakeholders also supported specific provisions of the bill. For example, there was general support for the proposal to remove the 65 hour cap on claiming qualifying Australian production expenditure (QAPE) for drama series.
3.9
Similarly, a number of participants welcomed the proposal to maintain the existing 40 per cent Producer Offset for feature films.
3.10
There was also strong support for the proposal to increase the Producer Offset to 30 per cent for non-feature films. The Media, Entertainment and Arts Alliance (MEAA) said this would 'remove the unjustifiable divide in offsets available to feature films and other forms of production, especially television productions'. More broadly, Free TV Australia noted that the proposed increase would align the Producer Offset with international screen incentives and encourage investment in Australian content.
3.11
This view was shared by the Australia New Zealand Screen Association (ANZSA) which observed that the increase would make the Producer Offset one of the most competitive incentives in the world. According to ANZSA, this would increase investment in Australian productions, facilitate the online distribution of screen content, and allow Australian producers to more fully benefit from the global growth in video‑on‑demand services.
3.12
In addition to supporting the proposed increase, some submitters stressed the importance of its timely implementation given that projects have already been financed on the basis of the projected 30 per cent offset.
3.13
Support for the other elements of the bill was more mixed. For example, while stakeholders welcomed the Producer Offset rate increase, there was also widespread concern about the proposal to increase the QAPE threshold required to access the offset (from $500 000 to $1 million).
3.14
A number of participants cautioned that the proposed threshold increase would have a disproportionate impact on the documentary sector. According to the Australian Screen Industry Guilds and Associations (ASIGA), the change would potentially 'wipe out' production of many documentaries given their low average production cost:
…the average cost per hour for single documentary is under $600 000 with an average documentary duration of just over an hour … Award-winning documentaries such as Backtrack Boys, Gurrumul, Ghosthunter and In My Blood It Runs would not have been able to be made if the proposed increase in QAPE threshold had been in place.
3.15
Concern for the documentary sector was also heightened by the perceived cumulative impact of the amendments, including those that would remove the Gallipoli clause and cap the amount of copyright and development expenditure that can be claimed as QAPE. The Documentary Australia Foundation (DAF) outlined 'the unintended consequences of a one-size-fits-all approach' that treated documentary and drama the same way. Similarly, Beyond International Limited concluded that, taken together, the changes would apply 'restrictions and thresholds more suited to high budget scripted drama'.
3.16
A higher QAPE threshold was also seen as a barrier to the production of low-budget narrative films which provide a development pipeline for industry talent and often tell 'diverse and unique Australian stories':
Low budget films allow emerging creatives to sharpen their skills and develop their careers. In some cases, they may end up generating wildly successful and internationally-recognised franchises such as George Miller’s Mad Max (1976). This film was made on a budget of $200 000 and – adjusted for inflation – would not have qualified for the proposed offset.
3.17
These concerns were not shared by the department. While it acknowledged a 'small number' of productions would be affected by the changes, the department argued that this did not mean they would not proceed. Instead, the department expected that the industry would adapt to the new settings in order to create content. It also noted that Screen Australia would continue to monitor levels of documentary production in order to assess the impact of the amendments.
3.18
There was also significant opposition to the proposed increase in the QAPE threshold for the Post, Digital and Visual Effects (PDV) Offset from $500 000 to $1 million. Participants were principally concerned about the potential for the higher threshold to consolidate PDV work within a handful of large, multinational companies at the expense of small to medium-sized Australian businesses—with subsequent impacts on employment, export opportunities, career pathways and the development of future talent.
3.19
Contrary to this view, the department observed that the higher threshold would serve to attract larger projects to Australia which would offer greater opportunities for employment and skill development. It also pointed to the complementary role played by the Location Offset, Location Incentive and Producer Offset in attracting PDV work to Australia.
3.20
The department also described the extensive consultation process that informed the proposed measures, including an options consultation paper that attracted 345 written submissions and virtual roundtables involving 51 stakeholders. A number of stakeholders acknowledged the consultation undertaken in relation to media reforms and indicated they were pleased to have contributed to the process. However, some noted that industry feedback had not been taken into account in finalising the proposed amendments, while others expressed concern that the bill included changes not previously canvassed during consultations.
3.21
In response, the department explained that the proposed amendments reflected not only the information collected during consultations, but also the need to deliver fit for purpose policy settings, ensure public funding targets content with a pathway to audience, and support the sector to compete in a modern digital environment. The department noted that the options paper had highlighted that the eligibility threshold would need to be refined across the Australian Screen Production Incentive and that some content would need to be supported through other mechanisms as a result. It explained that:
Submissions to the options paper were asked to consider the settings for minimum spend, qualifying spend and pathway to audience to appropriately target support. Views varied between removing thresholds, and maintaining and increasing them, depending on the types of reforms the stakeholder was proposing.
3.22
The department also emphasised that it would continue to work with Screen Australia to monitor the impact of the changes in the bill and would conduct a review of their impact within 18 months.
3.23
Overall, support for the passage of the bill was mixed. While some stakeholders supported its passage in part, others called for the deferral or modification of the more controversial aspects of the bill. However, other participants such as ANZSA strongly supported the bill in its current form and recommended it be passed 'as soon as possible'. Similarly, Free TV Australia stressed that Schedule 1 of the bill was:
…of central and critical importance to the Free TV industry and failing to incorporate the proposed changes will substantially undermine and negatively affect the sustainability of the industry.
Comments on specific aspects of the bill
The Producer Offset rate
Increasing the Producer Offset rate for non-feature films to 30 per cent
3.24
The bill would increase the Producer Offset rate to 30 per cent across all types of eligible films that are not feature films released in cinemas. Films eligible for the offset would include:
…single episode television shows, a television series, a documentary, or any other film production that is not released in cinemas but is otherwise distributed to the Australian public.
3.25
Stakeholders were overwhelmingly positive about the increase to the Producer Offset rate which would remove the disparity in offsets available to feature films and other productions. For example, the Australian Broadcasting Corporation (ABC) welcomed the change and said it would 'have a positive impact on Australian productions'. Free TV Australia supported this view and suggested that encouraging investment in Australian content and productions was particularly important against a backdrop of rising production costs and ongoing challenges to broadcaster revenue.
3.26
A few submissions also highlighted the importance of the proposed increase to ensuring Australia's competitiveness on the global stage. For example, ANZSA observed that—unlike the current offset rate of 20 per cent—the increase would make Australia's Producer Offset one of the most internationally competitive incentives. This, it argued, would support an increase in online content distribution and drive investment in Australian productions.
3.27
Many participants stressed the importance of timely implementation of this measure—particularly as some producers have been factoring in the new rate since it was announced in September 2020. As an example, Beyond International Limited (Beyond International) cited its decision to co-finance a scripted television series 'on the forecast availability of a 30 per cent rate of Producer Offset'.
3.28
At the same time, Screen Producers Australia (SPA) noted that the gap between the announcement of the measure and its implementation had also generated uncertainty for the industry which had 'played out in terms of limits on lending and financing'. The SPA contended that failure to pass this measure would result in:
…significant financial implications for these productions and production businesses. Most would be left with a 10 per cent gap in their finance, which on a multimillion dollar production could potentially be an insurmountable obstacle, putting productions at real risk of collapse.
3.29
The Australian Directors' Guild (the Directors Guild) cautioned that any delay to implementation could exacerbate the ongoing effects of the COVID-19 pandemic on the screen production industry:
Given the significant negative impact on the entertainment sector from the pandemic and as producers have already budgeted and financed based on the proposed increase, there is a genuine risk to further industry contraction if this measure is delayed.
Maintaining the Producer Offset rate at 40 per cent for feature films
3.30
As with the proposed rate increase for non-feature films, there was also strong support for maintaining the Producer Offset for feature films at 40 per cent. SPA acknowledged the 'constructive engagement between government and industry' which led to this decision and asserted it would 'help safeguard Australia's rich tradition of storytelling through film and … local Australian jobs and businesses'.
3.31
Although supportive, some participants sought reassurance about the intended operation of the associated 'commercial release' amendment. This amendment would introduce a requirement for feature films seeking the 40 per cent offset to be 'commercially distributed in Australian cinemas'.
3.32
The ASIGA raised concerns that this change had not been canvassed during consultation with industry and cautioned that narrowing the eligibility for the 40 per cent offset could lead to market contraction. The ABC also requested clarification of its operation in relation to feature documentaries which could seek to access the 40 per cent offset but would be unlikely to meet requirements for a 'very broad commercial release'.
3.33
In response, the department explained that productions with access to a higher Producer Offset rate should seek to have a 'genuinely wide, commercial and public release' and earn a significant proportion of their revenue from the Australian theatrical box office.
Increasing qualifying Australian production expenditure thresholds
3.34
The bill would increase the QAPE threshold needed to qualify for the Producer Offset from $500 000 to $1 million for all feature length content. The term 'feature length content' refers to:
…any screen production, including a documentary that is more than 60 minutes in length or a production that is at least 45 minutes in length and in a large format (productions made for IMAX cinemas). This includes feature films and feature length documentaries.
3.35
For non-feature length content—screen productions less than 60 minutes long or a large format production less than 45 minutes long—the QAPE threshold needed to qualify for the Producer Offset would remain unchanged at $500 000.
3.36
The bill would also increase the QAPE threshold needed to qualify for the PDV Offset from $500 000 to $1 million.
3.37
The department explained that the changes to the Producer Offset threshold would better reflect audience expectations and viewing behaviour by supporting high-quality productions across all delivery platforms. Similarly, it advised the committee that changes to the PDV Offset threshold would allow Australian companies to attract larger PDV projects that offer greater employment and skills development opportunities.
Producer Offset threshold increase
3.38
Multiple stakeholders opposed the proposed increase in the QAPE threshold for feature length content, with most citing particular concerns about the potential impact on low-budget films and documentaries.
Low budget films
3.39
Stakeholders argued that excluding low budget films from accessing the Producer Offset could have a detrimental impact on innovation and the development of new talent. For example, Felix Media claimed that the higher threshold would disadvantage entry-level filmmakers and independent start-up film companies 'where lower budgets are often the beginning of careers as well as the crucible for innovation.'
3.40
This opinion was shared by the Australian Production Design Guild (APDG) which noted the importance of low budget films in nurturing new talent:
Many emerging designers develop skills on low-budget productions, if these productions no longer exist due to being unable to access the Producer Offset, it will have great impact on the future of the industry. Many of Australia’s Oscar, BAFTA and AACTA award-winning designers begin their careers on low-budget films and documentaries.
3.41
In addition, stakeholders rejected the idea that low budget films were synonymous with low quality. For example, the Australian Directors' Guild argued that low budget features had produced some of Australia's most memorable films over the last decade including Ruin, Strange Colours, Toomelah and Jirga. Mr Matthew Deaner, Chief Executive Officer, Screen Producers Australia, agreed and argued that:
…you can't necessarily say that a more expensive project is necessarily better quality. Instead, what you see is that projects that are sometimes more innovative, that come from different businesses out of the blue, can be incredibly high quality, and they return better as a business model because they don't have to raise as much money to start with.
3.42
Mr Deaner also highlighted the importance of lower budget productions to the Australia's screen production pipeline:
It's really important to have a pipeline of development of different types and budget ranges that are supported by our country and in our industry, because that all develops into, essentially, higher-level budgets.
3.43
Some submissions also questioned the assumption that low budget films could not be commercially successful. The Australian Writers' Guild (the Writers' Guild) cited the Mad Max film franchise as an example and noted that—while the original movie would not have qualified for the Producer Offset under the proposed threshold—the latest instalment in the franchise will support more than 850 local jobs and inject approximately $350 million into the economy.
Documentaries
3.44
The most significant area of concern in relation to the proposed threshold change was its potentially disproportionate impact on feature documentaries which are often made over a long timeframe and on a smaller budget than drama productions. Concerns for the documentary sector were particularly acute due to the perceived cumulative impact of the threshold increase, the proposed changes to the Gallipoli clause, and the treatment of copyright and development expenses.
3.45
In addition to having longer timeframes and lower budgets than drama productions, many submitters also attested to the unique place of documentaries in Australia's cultural landscape, including their importance in presenting Australian stories and voices both to Australian and international audiences.
3.46
According to the DAF, the average budget for a documentary is $618 000, with only nine per cent having a budget in excess of $1 million. This compares with 77 per cent of feature films that have a budget of more than $1 million. As a result, the DAF argued that applying the proposed $1 million threshold uniformly across both drama and documentaries would be 'crippling' for the sector. It cited two award-winning documentaries, Backtrack Boys and In My Blood it Runs, that would not have been made under the increased Producer Offset threshold.
3.47
The SPA provided a similar assessment about the typical cost of feature documentaries (around $700 000 to $800 000) and argued that the higher threshold would be inconsistent with standard industry practice for the documentary genre. To illustrate the impact of the proposed threshold increase, the SPA described its effect on two individual documentary makers. For one, the loss of the Producer Offset would make three projects in active development unviable, 'with a cost of 75 jobs and a loss of $300k in export dollars'. The second documentary maker reported that:
Based on their 2019 FY slate - four projects with revenue of $11.3m creating 63 jobs would not meet the threshold.
Based on their 2020 FY slate - six projects with revenue of $7.3m creating 80 jobs + post finishing personnel would not meet the threshold.
3.48
This was further supported by the personal experiences of a number of individual submitters, who highlighted both the lower cost of documentary production and the likely impact of the higher QAPE threshold.
3.49
Dr Mitzi Goldman, Chief Executive Officer, DAF, suggested that the cumulative impact on documentaries of the proposed changes was the result of their one-size-fits-all application which did not account for the specificity of the documentary genre. WildBear Entertainment also raised concerns about uniform treatment of documentaries and drama and suggested that, while easier to administer, this approach would have a negative impact on documentaries. This sentiment was shared by Yarra Bank Films which observed that:
…the proposed changes will in effect kill my business model and company and I fear I am not alone. I’m sure this is not the intention of the proposed changes. But it will be the unfortunate consequence. I fear for the future of our Australia industry if these changes become legislation.
3.50
The DAF further argued that the financial savings generated by the lower threshold would be negligible as feature documentaries had received only seven per cent of the total Producer Offset distributed over the last five years (equating to $9 million per year).
3.51
While some stakeholders opposed any change to the existing threshold, the Writers' Guild proposed that an additional requirement could be inserted requiring qualifying projects have a distribution agreement in place. As an alternative, the SPA suggested lowering the threshold to $800 000 for feature length documentaries.
3.52
In response to concerns about the impact of the threshold increase on low budget films—including documentaries—the department emphasised that the increase was designed to direct taxpayers' support toward incentivising 'projects of scale that can compete for domestic and global audiences'.
3.53
While the department recognised that quality stories can be told on low budgets in any genre, it contended that the majority of films would be above the $1 million threshold, as would the 'vast majority which find a significant audience'. Broadly, the department contended that:
Higher budgets generally indicate higher production values, an ability to attract experienced key creatives (for example, Director or Director of Photography) and to attract an A-list cast. Higher budgets also indicate that the marketplace has determined the project is worth investing in and is likely to reach an audience.
3.54
While the department recognised that the threshold increase would result in some productions no longer being eligible for the Producer Offset, it suggested that these types of productions would still be made as the industry adapted to create content within the new settings. This could include productions becoming more ambitious with a higher budget, or shifting to:
…meet the growing demand from audiences and distribution platforms for shorter form series content which may be eligible for the increased 30 per cent rebate.
3.55
The department also noted that lower budget productions could also seek financing via other avenues if there was an audience for the proposed content. Dr Stephen Arnott, Deputy Secretary, Department of Infrastructure, Transport, Regional Development and Communications, pointed out that Screen Australia will receive $33 million in additional funding 'to target and support high-quality and culturally important Australian content that has a demonstrated and appropriate pathway to market'. Dr Arnott indicated that this would include supporting documentaries that involved filming overseas, as well as those that did not meet the increased QAPE threshold.
3.56
The availability of extra support for good content was underlined by Mr Graeme Mason, Chief Executive Officer, Screen Australia who noted that it had already played a role in funding the documentaries that had been held up by industry as examples of productions that would be at risk, and highlighted that its additional funding would be used to meet any need for direct funding:
This funding is to target quality and culturally important Australian screen content, supporting producers to find a pathway to audiences, resulting in positive audience engagement. Some titles were raised in submissions, including the documentaries Backtrack Boys, Firestarter, Gurrumul, In My Blood It Runs and The Surgery Ship, and dramas Jirga and Toomelah. I'm very proud to say that Screen Australia directly funded all of them.
3.57
While emphasising it would be looking at how best to support such projects going forward, Screen Australia also acknowledged that it was yet to develop guidelines for administering the additional funding.
3.58
The department also argued that seeking a higher investment from Screen Australia would be a 'better mechanism' for supporting low budget productions as funding the offset until the rebate is paid can be challenging for small production companies. The department contended this would 'also reduce the burden on production companies needing to apply through two different processes at different times of the production cycle'.
PDV Offset threshold increase
3.59
Several participants observed that the COVID-19 pandemic had created unique opportunities for the Australian PDV sector as a result of new remote working arrangements. According to New Holland Creative:
The international market has adopted the new world order of doing remote reviews, which effectively puts us front and centre to be as relevant as international players as ever before. Coupled with technology that allows us to present globally, the Australian post-production community can finally stand shoulder to shoulder with any global vendor.
3.60
Blackbird VFX, a family-owned PDV business, also pointed to the combination of government incentives and the COVID-19 pandemic as the drivers which have allowed the company to 'double its scale in terms of employment and infrastructure since pre COVID times'.
3.61
A number of these stakeholders also raised concerns about the potential impact of the increased QAPE threshold for the PDV Offset, particularly on small to medium sized Australian businesses which would struggle meet the higher threshold. According to the APDG, this reflected the nature of global post-production work:
A lot of post-production work in Australia comes from overseas companies, who very rarely contract a full production to one post-production company, but rather split it between multiple companies, making a $1[million] threshold unviable.
3.62
However, the department clarified that it is a production's total Australian PDV spend—not the value of an individual package of work undertaken by a PDV company—that needs to meet the QAPE threshold. Accordingly, the department noted that:
…smaller VFX companies can bid and secure work under the QAPE threshold and still benefit from the PDV Offset as the total spend in Australia on that production is what is required to meet the qualifying threshold.
3.63
United States based production company, Blumhouse Productions, confirmed that the proposed increase would affect its ability to bring PDV work to Australia:
This change would have a devastating effect on the future movies we plan to bring to Australia as often our budgets exist somewhere between [the] $500 000 and $1 000 000 range. With this new threshold, we simply would not qualify and would not be able to bring our movies there to work with our trusted Australian partners.
3.64
Even when there are projects worth over $1 million on offer, Australian businesses are not always able to complete for this business. For example, Ausfilm contended that of its 26 PDV business members, only eight companies—five of which are foreign or part‑foreign owned—would routinely be able to bid for projects over $1 million. This argument was supported by Ms Nerissa Kavanagh, Managing Director, Blackbird VFX, who explained:
The reality is that the majority of projects that we bid internationally are in that sweet spot between $500 000 and $1 million. Going up to a threshold of $1 million puts us out of that conversation and puts us out of the game. I can speak on behalf of most of the businesses; small to medium-sized, locally owned and Australian owned businesses would all be in that same position.
3.65
Consequently, a number of submitters were concerned that this proposed amendment would concentrate PDV work within a handful of large, multinational firms. The Australian Post and VFX Alliance (APVA) cautioned that:
…increasing the offset threshold to $1 million risks forfeiting all of this work offshore and handing what remains in Australia back to the few large internationally owned firms - leaving Australian-owned companies unable to compete.
3.66
These concerns were echoed by both Screen Queensland and the SA Film Corporation which have both implemented complementary state-based PDV incentives to encourage growth in the sector. The SA Film Corporation noted that in 2019–20, PDV expenditure in South Australia represented 18 per cent of the total PDV spend in Australia and generated more than $56 million. It stressed that increasing the threshold could inhibit growth and prevent the emergence of new PDV companies. Similarly, Screen Queensland advised that the change would disproportionately impact the Queensland PDV industry, which consists primarily of small to medium enterprises. It also noted that the increase could be viewed as inconsistent with the new 30 per cent games offset threshold of $500 000:
The global games industry is much larger and more viable than the Australian PDV industry. It would seem inequitable to disproportionately support the games industry with a lower qualifying threshold of $500,000, while requiring a higher qualifying threshold for PDV expenditure.
3.67
Whilst SPA acknowledged the policy intent of incentivising higher budget productions, it argued that the resulting ‘loss in investment, employment, training and skills transfer and content production’ would far outweigh the intended benefits. Mr Matthew Deaner, Chief Executive Officer, SPA, cited the potential impact on one of his members in terms of employment:
I've got one member that said over the last three years there were 15 projects that would not have happened if this was at $1 million...That's 150 jobs that would have been lost...
3.68
Mr Scott Howard, Chief Operating Officer, Endemol Shine Australia, also emphasised the importance of small productions to Australia's PDV talent pipeline:
…they're a really important part of the ecosystem of the industry. They're important for training people. They're important for the nature of the content itself. Not every production has to be big. Some really important ones are a lot smaller, but they're really important for the industry generally. If we were to cut those out, that would be an incredibly difficult thing for the industry to swallow, and it would adversely impact that training ground for individuals. We're already short of postproduction operatives generally within Australia. We need to bring on more people. We need smaller productions in that ecosystem.
3.69
Stakeholders also raised concerns about the lack of consultation with the industry and the evidence underpinning the increased threshold for the PDV Offset. For example, Mr Marcus Bolton, Chair, APVA asserted that:
…the post and visual effects sector was not consulted prior to this bill being rolled out. And I think I can speak for many other guilds in saying that nobody saw it coming. We're all for reform and for things to be made better, and we also understand that things have to be paid for, but there are no metrics, there's no science and there's no cleverness around this. It was an arbitrary bill that seemed to come out of Treasury to say, 'We're just going to change stuff.' You can see from all the guilds and the amount of submissions here, and in hearing from international clients such as Blumhouse, the detrimental effect this will have on the industry. The growth of our sector and the ability to train—the pathways for educators to be able to give careers—are all going to get cut off at the knees.
3.70
As a result, several stakeholders advocated for retaining the current $500 000 threshold. However, if a threshold increase were to proceed, SPA proposed a more modest rise to $600 000.
3.71
In response, Dr Stephen Arnott, Department of Infrastructure, Transport, Regional Development and Communications, argued that the increased threshold, combined with the reputation of the Australian PDV industry, would help to attract larger projects that could provide greater employment and skills development opportunities:
At the moment, they could just say, 'We can do $700 000, $500 000' and just allocate that to Australia and allocate some of the other elsewhere, whereas what this will do is say, 'Instead of $750 000, to get the offset you'll need to allocate a million or more.' So it does incentivise those firms to think about allocating additional work to Australia to meet the threshold and to receive the tax benefit…
3.72
The department also stressed the importance of the additional PDV work that would arise from the Location Offset, Location Incentive, and increased Producer Offset rate. The department drew particular attention to the $400 million expansion of the Location Incentive which will attract approximately $3 billion in foreign expenditure and create 8 000 new job opportunities for Australians each year. Given the requirement that projects supported by the Location Offset must undertake PDV work in Australia, the department argued that the expansion would also generate work for the Australian PDV industry and would allow the sector to strengthen its networks with international studios. It also pointed to the importance of 'a consistent and growing amount of location shooting over a long period of time' to the success of PDV hubs such as London, Montreal and Vancouver.
3.73
While the department acknowledged stakeholder concerns about the potential impact on smaller PDV companies, it reported that these concerns did not correlate with its analysis of applications for the PDV Offset. The department explained that its analysis of 2017–18 to 2019–20 data showed an average of 107 certificates were issued each financial year under the PDV Offset (77 for domestic productions and 30 for international productions). It estimated that up to 28 productions might be impacted by the threshold change (22 of which would be domestic productions and six of which would be international productions). In terms of the 22 domestic productions, the department emphasised that:
this did not mean the productions would not be made or that PDV work would decrease as a result;
productions falling below the $1 million threshold were 'lower budget light entertainment / infotainment and factual type programs' that are likely to continue regardless of the threshold changes as they experience less market failure than other genres and are more easily monetised;
some of the productions that would fall below the threshold have demonstrated that they can be made without the PDV Offset as they were made for many years without Australian Government support;
the seven companies that would predominantly be affected by the threshold increase are large companies that 'undertake a rage of production work across a large slate of content of various formats' and would all be major beneficiaries of the increased Producer Offset rebate; and
this PDV work is often undertaken in house, meaning that if a company chose not to create some content on the basis of the increased threshold, its employees would likely be retained to work across the company's other content.
3.74
In relation to the six international productions, the department advised that the historical data showed:
on average, four are 'lower budget light entertainment / infotainment and factual type programs', with three of the companies involved in this work using the Australian arm of their international company to undertake the PDV work—noting there is one PDV company that attracts this work to Australia by engaging directly with an overseas production;
the (up to) two productions per year that might fall under the increased threshold are international live-action features where the PDV work is undertaken by Australia's larger companies; and
there is scope for these productions to bring larger packages of work to Australia as Australia’s main competitors, such as the UK and Canada, are at capacity.
3.75
The department also reflected that as a result of more substantial international PDV work coming to Australia, smaller companies would have more opportunities to bid for work as the larger packages of work would require more service providers. In addition, where smaller parcels of work were on offer, the department indicated that it was in discussions with Ausfilm about 'packaging works from a number of companies to make it attractive for those very few productions that might fall under the $1 million threshold'.
Eligibility and integrity changes
3.76
The bill would make a number of changes to remove or cap the ability of producers to claim certain costs as QAPE, including:
expenditure incurred overseas;
general business overheads; and
re-versioning expenditure.
3.77
The bill would also remove the commercial hour cap for a drama series and seasons of a drama series.
Expenditure incurred overseas (the Gallipoli clause)
3.78
The Gallipoli clause allows companies to count expenditure incurred overseas as QAPE for the purposes of the Producer Offset. The bill would remove this clause in order to incentivise production within Australia and promote job growth in the industry.
3.79
The Directors' Guild argued that removal of this clause would affect the international reach and appeal of productions requiring substantial overseas components—such as the critically acclaimed feature film, Lion, and the documentary, Surgery Ship. The Directors' Guild also noted that without international elements, some productions would be unable to secure co-production finance. This position was supported by SPA which claimed that the inclusion of international elements in Australian films was often critical to attracting financial support from international investors. It argued that:
…removal of the clause will create financing challenges for many local productions that have an overseas element, meaning they will not be viable.
3.80
Felix Media concurred with this view and cited the example of its documentary, Sherpa, which was filmed entirely in Nepal but was directed by an Australian, Jen Peedom, supported by an Australian documentary crew. Screened on the Discovery Channel in 160 countries, Sherpa was also nominated for a BAFTA and is one of the highest grossing theatrical documentaries in Australia. According to Felix Media, Sherpa could not have been made without offshore QAPE as part of its finance plan.
3.81
A number of participants also contended that the proposed removal of the Gallipoli clause could discourage, rather than encourage, the employment of Australian production crews. This was seen as a particular issue for documentaries, which, unlike some feature dramas, 'need to be filmed in the locations where the stories occur' in order to maintain their veracity.
The Directors' Guild agreed and stated that:
…removal of this clause could have the unintended effect of disincentivising the employment of Australian crew on international locations with a likelihood that producers would look to employ cheaper foreign crews for international story elements. This is counter to the intended effects of the change, which is to provide greater employment opportunities for Australians.
3.82
However, other submitters contended that the impact of the proposed measure was not confined to documentaries. The Writers' Guild claimed that without the Gallipoli clause drama features such as Balibo, Mao's Last Dancer and Gallipoli would not have been made. The Writers' Guild also observed that:
…the cost of recreating an international location in Australia—for example the busy streets of Calcutta for Lion—may be prohibitively expensive for some productions.
3.83
While some submitters argued for the retention of the Gallipoli clause, others proposed alternative approaches. For example, Beyond International and WildBear Entertainment requested that foreign expenditure remain claimable as QAPE where a genuine location-specific reason exists. SPA, ASIGA and the Writers' Guild proposed a modified Gallipoli clause that would only permit claims from productions that employ the services of Australian residents to film international elements. According to ASIGA, this would 'protect employment of Australians and the flow of wages back into the Australian economy'.
3.84
In response, the department pointed to advances in technology which mean that the need to film in overseas locations is diminishing. It also highlighted the benefits that would flow from encouraging more Australian-based production, including broad economic benefits as well as the creation of additional employment and skills development opportunities.
The department stressed that this would not prevent productions filming overseas but would 'encourage them to look to make it in Australia first'.
3.85
In addition, the department noted that affected productions would still have access to the higher Producer Offset rate for television content, as well as additional support via Screen Australia that will 'support the creation of content that uses locations other than Australia for its production'.
Copyright expenditure
3.86
At present, all expenditure incurred in acquiring Australian copyright, or a licence in relation to copyright, for use in a film can be counted as QAPE for the purposes of calculating an income tax offset. The bill would cap the amount of this expenditure that can be counted as QAPE at 30 per cent of a film's total production expenditure.
3.87
Multiple stakeholders raised concerns about the proposed change, particularly in relation to documentaries which can rely heavily—and in some cases, solely—on archival material. For example, SBS argued that the cap would negatively affect productions focused on social commentary, historical documentaries, as well as adaptations of high profile work.
3.88
Similarly, the Directors' Guild claimed the cap would have a disproportionate effect on musical documentaries, which can be heavily dependent on archival material and music. APRA AMOCS & AGSC supported this view and cautioned that the cap, in combination with other proposed Schedule 1 amendments, could:
…have unintended consequences on the production of homegrown documentaries and could all but eliminate the production of music and other documentaries with arts, historical and political stories which rely on archival and copyright material for storytelling. This will not only dramatically cut the number of documentaries supported but will hit the hard won earnings of local screen composers and songwriters.
3.89
Some participants attempted to quantify the potential impact of the measure. For example, Beyond International claimed that the impact of the cap on its feature documentary revenue would be 'a loss of approximately $20 million for the current financial year and the loss of more than 100 freelance production jobs'. SPA reported that, at one production company, five current projects would not have been financed if the proposed cap was in place. Another company reported to SPA that, under the proposed arrangements, two of its five productions would have been ineligible for the Producer Offset.
3.90
Participants also pointed to the importance of Australian copyright material to telling 'authentic Australian stories'. Beyond International predicted that the proposal would restrict some of these stories being told:
Documentary series that celebrate Australian history, that celebrate our sporting stars, musicians, actors, writers, politicians, and our scientific achievements as well as those that celebrate Australia’s cultural history would all be affected by this change to the legislation and as a result would be unlikely to be told.
3.91
While some stakeholders, such as the DAF, argued for the retention of the existing arrangements, others such as SPA suggested lifting the proposed cap to 50 per cent. APRA AMCOS & AGSC supported a 50 per cent cap and submitted that:
Carve-outs protecting local documentaries and use of copyright material must be included in the amendments if the local sector is to remain supported by the measures.
3.92
In response to these concerns, the department clarified that copyright would be capped at 30 per cent of total production expenditure, not 30 per cent of the copyright costs. According to the department, total production expenditure includes:
…wages for executive producers, producers and directors, pre-production activities, postproduction work including sound/editing/colour grading/graphics and titles. Some also include shoot costs for recording introductions from presenters...
3.93
Accordingly, and contrary to stakeholder concerns, the department argued that productions involving mostly archive footage would generally be able to claim all copyrighted material and still remain under the 30 per cent cap.
3.94
Overall, the department estimated that this measure would impact only a small number of productions per year. It cited historical data that showed the type of productions that exceeded the 30 per cent cap were 'best of' productions or very low budget factual television series. The department emphasised that the data did not support the claim that 'documentary feature film productions that utilise archive footage or pre-existing music would be ineligible as a result of this change'. The department also pointed out that the additional funding for Screen Australia would be available to support the small number of productions of cultural significance that might be impacted by the proposed change.
3.95
In addition, the department clarified that costs associated with new intellectual property, such as the composition of new music, would not be captured by the provision. As a result, rather than stifling the production of Australian stories, the department contended that capping the amount of copyright expenditure claimable as QAPE would encourage the creation of new Australian content and stories.
Development expenditure
3.96
Development expenditure on a film as well as remuneration for the writer, director, producers and principal cast (known as 'above the line' expenditure) can be counted as QAPE. Currently, there is no cap on the amount of development expenditure that can be claimed as QAPE where a film is a documentary. For all other films, the amount of development expenditure claimable as QAPE is capped at 20 per cent of a company's total film expenditure. The bill would amend the Income Tax Assessment Act 1997 to apply the 20 per cent cap to documentary production.
3.97
Several submitters raised concerns about the proposed change. SPA cautioned that, along with other proposed Schedule 1 changes, the introduction of a cap on claimable development expenditure would have a disproportionate impact on documentary makers. The ABC shared this view and suggested the proposed change failed to account for differences between drama and documentary in terms of budgets and team structures:
Often in documentary productions, producers and directors will be attributed to above the line budget and assume several roles (such as crew or editing roles) throughout a long production timeframe. The result will be significant for documentary productions, where the weighting of above- and below-the-line budgets can vary significantly from drama productions.
3.98
SPA supported this argument and argued that the current arrangements should be left in place given that above the line costs typically comprised a higher proportion of lower budget productions. SBS also supported the current arrangements and cautioned that the cap could be a 'disincentive to Australian productions to develop productions to "best practice" standards'.
3.99
However, the department noted that the amendment would serve to harmonise the treatment of development expenditure across all films 'and encourage expenditure to be directed towards quality onscreen'. It stated this was appropriate given the increased support which would be provided through the Producer Offset. In addition, the department advised that the change would not 'reduce what people can be paid or how much a production spends on its development costs', rather it would mean that costs over the 20 per cent cap would not be claimable under the Producer Offset.
General business overheads
3.100
The bill would remove the current ability for companies to count a proportion of business overheads incurred while filming as QAPE for the purposes of the Location Offset, PDV Offset and Producer Offset.
3.101
This proposed amendment was opposed by some participants. SPA highlighted the importance of the current arrangements to production business sustainability, particularly for smaller production companies that are more likely to be located outside Sydney. It argued that the ability to include business overheads:
…enabled production companies to charge a production company fee, a vital element of ensuring sustainability given the lumpy nature of production income and the years-long timeframe for development of projects (undertaken with no fees). The elimination of overheads from QAPE will likely mean producers will not be able to include a production company fee in a budget, and as a result, producers will not be able to derive a sustainable income for what is a high-risk expenditure of time and resources.
3.102
Similarly, SBS argued that the general business overheads should continue to be allowed to count towards a company's QAPE as they were 'reasonably incurred' as part of the development and production process and allowed companies to 'recover unfunded research and development investment'.
3.103
In response, the department argued that this amendment was designed to more directly support 'core production expenditure', rather than overheads such as rent, utilities, office artwork, carpet cleaning and executive bonuses. While acknowledging that some applicants could see a reduction in the amount they could claim under the offsets, it considered that this 'could be mitigated through directing expenditure towards onscreen production costs'.
3.104
However, the department also stressed that the change would not prevent costs such as rent, electricity, phone charges and office stationary from being claimed if it was demonstrated they were directly related to the production.
Re-versioning expenditure
3.105
Currently, companies are able to claim expenditure on unlimited re-versions of the first version of a film as QAPE for the purposes of the Producer Offset.
The bill would limit this eligibility to only one re-version of the first version of a film. The re-version would need to occur prior to the end of the income year in which the film is completed.
3.106
A number of stakeholders raised concerns that the industry had not been consulted about the proposed change. For example, the ASIGA indicated it could not support the proposal without further detail given that 'international finance often comes with a requirement for local producers to finance and create international versions'. The ABC also raised concerns about the potential impact on feature documentary commissions where different cuts (such as theatrical release and broadcast versions) can be required. Accordingly, it requested clarification about whether the change would exclude 'the same version of the film or different delivery materials'.
3.107
Similarly, the ANZSA called for clarification that the proposed amendment would not apply to sequels and prequels.
3.108
In addition to requests for clarification, SBS expressed concern that the change could impede financing for projects that revisit or revise older productions, which it described as a 'growing trend' particularly in scripted content.
Commercial hour cap
3.109
Currently, a television series, or season of a series, cannot count production expenditure incurred as QAPE past the episode that contains its 65th commercial hour. The bill would remove this cap for a drama series and seasons of a drama series.
3.110
There was significant stakeholder support for this proposed amendment. Free TV Australia observed that removing the 65 hour cap would encourage ongoing production of successful drama titles. This was supported by Mr Scott Howard, Chief Operating Officer, Endemol Shine Australia, who indicated that the 65 hour cap was one of the reasons behind the cancellation of the popular television series, Offspring.
3.111
However, some submitters also called for removal of the cap in relation to documentary series, as well as drama series. For example, Electric Pictures argued that the rationale for removing the cap for drama series should also apply to documentary series. They argued that it was:
…inequitable that the same treatment is not afforded [to] long running documentary series. It unfairly punishes factual producers for success in what is an extremely competitive market.
3.112
SBS supported this contention and stated that removing the 65 hour cap for documentaries would also 'better support the documentary production sector, which is essential to telling important Australian factual stories'.
3.113
In response, the department highlighted the need to support greater investment in longer drama series, as very few series continued production after reaching the 65 commercial hour cap. In addition, it explained that removal of the cap would allow broadcasters, content partners, funding bodies and investors to capitalise on their investment for popular longer series. Conversely, the department stressed that there was no evidence that the cap needed to be removed for documentary series as many continued to be made for some time after passing the 65 commercial hour cap.
Committee view
3.114
The committee would like to extend its thanks to all stakeholders for their participation in this inquiry, as well as their continued engagement with the process of reforming Australia's screen production incentive settings to better meet the needs of a changing industry landscape. However, the committee again notes that departments have an obligation to engage professionally and effectively with Senate committee inquiry processes, providing detailed and timely advice on the rationale, and costings associated with, proposed legislative changes.
3.115
The committee notes that the Australian Government provides significant financial support to the screen industry, with more than $530 million provided in 2020–21. Indeed, the measures to be implemented by Schedule 1 of the bill would increase the financial support provided by the Australian Government to the screen industry by a further $75 million over the forward estimates.
3.116
The committee also understands that the financial support provided by the Australian Government needs to be effectively targeted. Hence, the committee recognises the need for policy settings to evolve over time to ensure the industry can take advantage of opportunities presented by the growth of digital services in the global marketplace.
3.117
That said, the committee notes that elements of the proposed changes caught many stakeholders by surprise. It is disappointing that while extensive consultation occurred on the strategic direction of the overall package, some of its specific measures were first flagged to industry only when the draft legislation was released in May 2021. The committee notes the department's commitment to review the impact of the reforms within 18 months.
3.118
The committee appreciates that the screen industry is composed of a heterogeneous set of stakeholders and, as a result, the effects of the various measures contained within Schedule 1 are likely to impact individuals and organisations differently. Accordingly, the overall impact of the reforms on the screen industry is complex and, as may be expected, support for the various elements in Schedule 1 is mixed.
3.119
The committee understands the widespread support for increasing the Producer Offset for non-feature films and notes that production decisions have already been made on the assumption that the increase would apply from 1 July 2021 as announced in the Federal Budget 2020–21.
3.120
Similarly, the committee acknowledges the generally positive stakeholder views on removing the 65 hour cap for drama series on claiming qualifying Australian production expenditure. While some stakeholders argued for the cap to be removed from other genres, the committee considers there is insufficient evidence to support such action at this time.
3.121
The committee notes the concerns raised regarding the potentially negative impacts of higher offset thresholds on specific parts of the industry, such as documentaries and low-budget films. However, the committee notes that the threshold remains unchanged at $500 000 for shorter form productions (up to 60 minutes for non-feature length content).
3.122
The committee also notes that an additional $33 million is being provided to Screen Australia to support high quality and culturally important projects that have a demonstrated and appropriate pathway to market. Where documentary and low budget films no longer qualify for other incentives, the additional allocation to Screen Australia will ensure that government funding remains available for eligible projects (as demonstrated in the exemplar projects raised by witnesses). While this funding will help to support smaller productions as they transition to the new arrangements, the committee notes that the current lack of information about its administration—including the absence of funding guidelines—has created uncertainty within the industry. Screen Australia should, as a matter of priority, begin working closely with industry to develop fit for purpose guidelines that will deliver on the stated intention of supporting smaller productions during the transition period.
3.123
The committee notes the concerns by documentary producers regarding the cap on copyright expenses and how this uniquely affects documentary producers who often require archival material. The department makes the point clearly that the proposed cap is calculated on 30 per cent of the total production costs as opposed to solely the cost of copyright material.
The committee notes the department's evidence that the majority of documentaries would be able to claim 100 per cent of actual copyright costs within this 30 per cent cap. It also acknowledges the industry's concerns that for this genre, a change of this magnitude is excessive and notes their support for a 50 per cent cap as a compromise position. Given the planned review within 18 months, an initial 50 per cent cap could be reviewed for any unintended consequences with—in the absence of demonstrated negative impact on the sector—a further step to 30 per cent after two years.
3.124
The committee also heard concerns from some witnesses that the proposed changes to the post, digital and visual effects (PDV) threshold could result in significant unintended consequences. It was noted that many small and medium enterprises view the current threshold as enabling them to secure PDV work which helps develop the skills and talent of many young professionals. Both large and small PDV enterprises expressed the view that this talent development pipeline would be put at risk if the threshold was raised to $1 million. The committee notes that the threshold applies not to individual contracts for PDV but to the production PDV value overall which does in fact leave open options for smaller companies to bid to provide elements of the work for a given production.
3.125
Data provided by the department in response to questions on notice indicated that small to medium sized PDV businesses are not likely to be adversely affected to the extent feared by stakeholders. That said, the committee is concerned that while transition support is directly available to other stakeholders through the $33 million to Screen Australia, PDV stakeholders are still potentially exposed to unintended consequences. While welcoming the department’s commitment to review the impacts of the measures within 18 months, the committee notes that more can be done to strengthen the current requirements attached to location incentives in relation to the use of Australian companies for PDV work.
3.126
The department provided evidence that:
Opportunities for Australia’s post, digital and visual effects houses will continue to be available and increase as a result of the work undertaken on productions that are secured to Australia through the Location Incentive. It is a requirement for productions receiving the Location Incentive to use the services of at least one Australian PDV provider. [emphasis added]
3.127
The committee notes that proponents are only held to account for meeting a contract value target which they self-nominate. The committee further notes that this could involve as little as one small to medium sized enterprise, with no enforceable floor on the value of the contracted work (financially or technically in terms of developing Australian capacity and new intellectual property), and is not aware of any requirement of public reporting for these outcomes.
3.128
The committee considers that the department should consult with industry on specific measures to strengthen these requirements in terms of the actual value of work awarded to Australian PDV providers. This could include measures such as a percentage of the total PDV budget for the production, specific targets in terms of the nature of work contracted (including where appropriate, adoption of Australian intellectual property related to PDV technology and techniques) and a suitable audit, enforcement and reporting framework. Where practicable, the department should also develop measures to apply similar requirements to any other Australian Screen Production Incentives to ensure that taxpayer funds support development of Australian capability and capacity in the PDV sector.
3.129
On balance, the committee notes the strong support from industry for the reforms to the Australian Screen Production Incentive proposed in Schedule 1 to provide certainty to productions that are already factoring in the increased Producer Offset of 30 per cent. The committee recognises that ongoing reforms are necessary to support the continued production of high-quality works that contribute to Australia’s cultural identity in a rapidly changing digital environment. Indeed, the committee believes that increased government support that encourages Australian-based production will drive employment and build skills within the screen industry as it rebuilds from the COVID-19 pandemic. Given that the starting date for the measures in Schedule 1 has passed and businesses have made investment decision in 'good faith', the committee believes that these measures should be passed quickly to give the industry certainty. Accordingly, subject to a staggered copyright cap for documentaries and commitment to adopting measures to strengthen the PDV sector, the committee considers that the Senate should pass the bill.
3.130
The committee recommends that Screen Australia, as a matter of priority, work closely with industry to develop and release guidelines for the administration of the additional $33 million in funding that will support high quality and culturally important projects during the transition to the new arrangements.
3.131
The committee recommends that the Australian Government set the copyright cap for documentaries at 50 per cent for two years from 1 July 2021 and then reduce it to 30 per cent thereafter if the 18 month review of the Australian Screen Production Incentive reforms does not identify a significant impact on the sector.
3.132
The committee recommends that the Department of Infrastructure, Transport, Regional Development and Communications consult with industry on specific measures to strengthen Australian Screen Production Incentive requirements to ensure the maximum practicable value of work is actually awarded to competitive Australian PDV providers.
3.133
The committee recommends that the bill be passed.
Senator the Hon David Fawcett
Chair