As we explained in a recent article, Division 376 of the Income Tax Assessment Act provides for refundable tax offsets, designed to support and develop the Australian screen media industry by providing concessional tax treatment for Australian production expenditure. There are three offsets available – the producer offset, the location offset, and the post, digital and visual effects (PDV) offset.
The amount of offset available is calculated by reference to the producer’s qualifying Australian production expenditure (or QAPE). This generally means the production expenditure that is incurred or reasonably attributable to goods and services provided in Australia, the use of land in Australia, or the use of goods in Australia (s 376-145). In addition to this ‘general test’, there are a number of specific rules and exclusions for determining QAPE (set out in subdivision 376-C). Screen Australia is the film authority that is responsible for issuing a certificate for the producer offset and determining the total amount of QAPE.
In a case decided by the Administrative Appeals Tribunal, Quirky Mama Productions Pty Ltd (Subject to Deed of Company Arrangement) and Screen Australia (Taxation) [2023] AATA 3089, the Producer and Screen Australia had vastly differing views on the amount of QAPE incurred in producing the film, Occupation: Rainfall. Simpsons acted for Screen Australia, whose position on QAPE was accepted by the Tribunal, resulting in a QAPE determination of approximately $10 million (rather than the approximately $30 million claimed by the Producer).
There are a number of important rules to apply in determining QAPE. The Quirky Mama decision serves as an important reminder and illustration of a few of those rules.
Contingent expenses
To qualify as QAPE, the expenditure must be incurred by the production company. While expenditure may be ‘incurred’ even though payment has not yet been made, the AAT found that an outgoing will not be incurred in the relevant sense if liability to pay is subject to a contingency.
In the Quirky Mama case, a number of parties agreed to ‘reinvest’ or stake some of their fees on the outcome of the application for QAPE and the success of the film. Under the payment terms, a “Reinvestment Amount” was to be ‘recouped’ from QAPE (i.e. any funds received via the producer offset), sales or profit. The Tribunal Member found that these amounts were not “incurred” because a condition precedent to the payment liability had not been satisfied – namely, the availability of funds from QAPE, sales or profit.
Deferred payments
The calculation of QAPE excludes certain expenditures, including deferments (amounts payable out of the receipts, earnings or profits from the film) and profit participation (amounts dependent on commercial success, or on the receipts, earning or profits from the film) (s 376-135). The Tribunal Member indicated that the Reinvestment Amount, even if it had been incurred, would still have been excluded from QAPE by reason of being a deferment or profit participation.
Goods and services provided in Australia
To qualify as QAPE, expenditure must have a sufficient connection to goods and services or land in Australia (s 376-145). A number of the expenses in question concerned offshore VFX sub-contractors that had been engaged by an Australian head-contractor. The Tribunal Member found that those expenses did not form part of QAPE. It was not enough that the head contractor was located in Australia – the sub-contractors did not form part of the Australian film industry which the offset was intended to promote.
Calculating QAPE and financing films is complex. It is important for film producers to carefully consider eligibility for offsets and the producer’s qualifying expenditure both at the outset and as finances and circumstances change.
The decision is available here: Quirky Mama Productions Pty Ltd (Subject to Deed of Company Arrangement) and Screen Australia (Taxation) [2023] AATA 3089.