Producer Offset: clearing the confusion

Kylie Parker has seen many productions become tangled in the bureaucracy between professional services firms, Government bodies and the Taxation Office. It’s time to clear the confusion.

At the recent SPAA Conference, the talk around the pool centred around having an idea and needing to obtain just a bit more finance before starting production, and discussion about whether or not it is better to cash flow the tax rebate using money from financial institutions, state film bodies or private investors.
The statistics from Screen Australia reveal that since its inception in July 2007 to 31 December 2008, 192 production companies have been issued with provisional certificates and 15 final certificates have been issued with a total determined QAPE of $28,144,329. The proportionately low number of final certificates issued suggests that producers (and some financiers) may still be finding it difficult to effectively convert the offset into real finance.
So what is the process, and how can a Producer  whose background is not in finance be certain they are not lining the pockets of financiers charging high rates of compounding interest, or accountants and lawyers creating monopolies around their knowledge?

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TressCox Lawyers partner Clare Mirabello represents both leading and up-and-coming film and television producers, as well as financiers. Mirabello believes that the most crucial element is for producers to understand the detail of how the offset actually works, as well as what they can get out of it.
In particular, producers need to ensure that the corporate structure they have in place works with the offset and their proposed financing. It is a good idea to think about this early in the process rather than later. For a number of reasons, it is likely that a new company  or special purpose vehicle (SPV) will need to be incorporated, but this is not always the case. Sit down with your lawyer and accountant and draw yourself a diagram of what your structure will be.
Ask yourself the following questions:
• Which company will own the rights ?
• Which one will make the film and claim the offset?
• Which one will take out loans and provide security?
• Which company will have ongoing obligations to collect receipts and report to investors?

Once you have the structure and responsibilities clear in your head, it will make the process easier. Your structure should also suit your own business plan and it may be that you will change how you structure the finance on a project by project basis.
Although it is very tempting to leave the details of expenditure to the accountants, if you understand what type of expenditure is or isn’t ‘QAPEable’ (expenditure that you can claim your rebate on), you can increase the amounts that you will receive. For example,  although the fees you pay your lawyer for helping you to document your finance are not included as QAPE, the legal costs involved in acquiring and procuring Australian copyright material for use in the film (for example, the script, rights and any underlying works,  stock footage and music) are. You can include legal costs you have incurred during the development process, for example in preparing writers’ agreements, option agreements, etc, so keep a record of these. You can also claim lawyer’s fees for contracts which are  integral to the production, such as contracting cast and crew.
hile considering cast and crew remember that residuals are not ‘QAPEable’ unless they are paid ‘up front’. Under the current SPAA/MEAA arrangements it is possible to ‘pre-pay’ a substantial amount of the residuals up front.
hen planning your schedule, keep in mind that you can claim publicity and promotion expenditure as QAPE provided that the expenditure creates copyright that is held by an Australian resident (given that the SPV will have to be an Australian resident to claim the  offset, this shouldn’t be too difficult) and the expenditure must be incurred during production of the film or program. In many respects the offset does not change the role of a producer when seeking finance – it remains a case of sorting out all of the pieces in the jigsaw, but the offset adds a new piece which means some of the other pieces may need to change a bit.
One such issue surrounds the timing of the offset cash refund. Given the legislation has linked the refund to the tax return, productions that finish at the very start of the year will be required to wait close to a year to finalise and lodge the tax return.
The Australian Taxation Office on 19 November 2008 replied unfavourably to an industry submission from SPAA requesting alternate timing arrangements around the payment of the offset. An available option for productions wanting to obtain the offset sooner  rather than at the end of a financial year is to use a special purpose vehicle and liquidate it on completion of the film. Whilst this is not without associated risks, should the entity have any additional taxable activity with the right advice, this is a viable option to avoid  ongoing finance costs.
The ATO is correct in its application of the law as it now stands, but a simple change of the legislation to include the offset in the relevant Business Activity Statement when the final certificate is issued would assist the industry and ensure the incentives are provided to those for which it was intended – the producers.
Another issue is the accounting for the ‘QAPEable items’, so it is important to have a production accountant that is able to record accurately your production expenditure. The Production Accounting firm TPH’s Eclipse accounting program provides all the reporting requirements necessary for calculation and lodgement of the application, as well as forecasting tools to monitor and project the amount of the claim.
Actual production expenditure can vary significantly from initial estimates, and it may be that certain expenditures such as VFX or post-production are ultimately made to a foreign company, thus affecting the amount of qualifying expenditure.

It is important that the  ualifying expenditure is being tracked so that there are no surprises at the end of the project, when the rebate may be less than anticipated, or worse still, the production no longer reaches the qualifying expenditure levels.
Screen Australia has been established with a goal “to develop, produce, promote, distribute and provide access to diverse Australian programs, and support the development of the Australian screen production industry, so that Australian screen content is accessible  nationally and internationally.” The Producer Offset and Coproduction Branch staff at Screen Australia are available to respond to questions from producers around the offset, but they encourage people to read the guidelines and the ‘Producer Offset At a Glance’  document before calling.
In addition, the Producer Offset and Co-production mailing list (separate from the regular Screen Australia mailing list) often deals with common issues and mistakes made in the context of applications for Producer Offset provisional and final certificates. You can sign  up to this list at www.screenaustralia.gov.au/producer_offset.

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