Is the Australian VFX industry on borrowed time?

VFXWith foreign tax subsidies under scrutiny in the US, is Australia’s VFX industry in danger of losing its biggest clients? Lee Zachariah investigates.

The rise and rise of Australian visual effects houses happened so quickly, we almost didn’t notice.

Without taking anything away from the talent and business savvy of firms such as Deluxe, Cutting Edge and Fuel VFX, there’s little doubt that the fraught state of affairs in the US has played a big part in this. Only two weeks before winning an Oscar for the Life of Pi’s visual effects, American VFX house Rhythm & Hues filed for bankruptcy, unable to compete in the very marketplace in which it had established itself as a leader. Soon after this, an anonymous blogger and self-described “VFX pro” by the name of VFX Soldier used crowd-sourced funds to commission a Washington DC law firm to look into foreign tax subsidies. With today’s technology, sending VFX work overseas to cheaper firms seems like the logical choice for an industry increasingly reliant on post-production trickery and there are added benefits for those wishing to do this. Like many other countries, Australia offers a rebate on any post-production and visual effects made in Australia. At a Federal level, the rebate is 30 per cent, with various states offering their own incentives on top of that figure.

In layman’s terms, that means any post-production work completed in Australia for overseas companies gets 30 per cent of its tax back – a percentage that can increase based on the state the work is completed in.

Blogger VFX Soldier wants the US Federal government to legislate against these sorts of international non-US incentives, a plan that could mean a major reduction in the work our VFX houses get from abroad.

Jason Bath, Fuel VFX executive producer says: “In that particular example the US would essentially need to say that if you’ve used an incentive overseas, the service, as it’s imported back into America, has a tariff.”

Tony Clark from Adelaide VFX company Rising Sun Pictures says: “You’d have to wonder about the likelihood of something like that going through when it means substantial pushback from the recipients of those subsidies in the form of major movie studios, plus major pushback from the states that are also issuing those subsidies. So it would be a significant outcome if it were to come through. Those sorts of projects take a very long time to go through. We expect to be spending 10 years bringing a case like that together.”

Simon Rosenthal, head of VFX for Deluxe Asia Pacific, adds: “This has been an ongoing charge by the US industry. We’ve got to monitor it and see how it plays out. I can’t see it happening in the near future; there’s a lot to be done for these rebates to be removed. From a business perspective, there’s very little we can control about it. There’s very little we can do about it, but we need to make hay while the sun shines, and we need to continue to grow as a business providing an unparalleled quality service back to the US so that they’ll continue to use us.”

Nearly all of the Australian VFX houses Encore spoke to estimate that around 90 per cent of their work comes from the US (with the remaining percentage almost exclusively Australian). It is clear that the Australian VFX industry relies heavily on Hollywood, but it’s increasingly work that they must fight other countries for. The battle of incentives is an ongoing arms race.

Fuel VFX’s Bath says: “Over time, certain provinces of Canada have increased their incentives which is having an effect not just in Australia, but all around the world. So it’s a constantly shifting thing. Nobody wants to play the incentive race to the bottom and actually do work for free. If we’re comparable to Canada, it’s easier for them to go to Canada than Australia, and that’s where relationships kick in.”

Based on Australia’s track record for delivering top notch VFX work, Down Under is also becoming an option for American production houses wanting to set up offices. When California’s Luma Pictures, a VFX company that worked on The Avengers and X-Men: First Class, decided to open a new studio outside of the US, they had several options.

Vincent Cirelli, Luma’s vice president and VFX supervisor, says: “Outside of the US, the primary VFX hubs, at least in western culture, are Canada, the UK and Australia. We decided against Canada because it’s a very saturated market. We decided against the UK because we had been advised there was a very cliquey type culture. That brought us to Australia. We chose Melbourne due to the fact that it lends more culturally with the types of areas we’ve made home in the US. We’re very much into collective ‘artsy’ types of regions in the US. Our LA facility is in Santa Monica. We felt like Melbourne had the same sort of vibe.”

Luma opened its Melbourne office in October last year and its VFX slate is now divided evenly between Melbourne and its Santa Monica headquarters, regardless of whether the production is shot in the US such as GI Joe: Retaliation or the Australian-filmed I, Frankenstein both of which Luma has worked on.

Cirelli says that although they make the most of the rebates on offer for work completed in Australia, taking them away would do little to affect their business. He says: “We’d split the work between the facilities with or without a rebate, because we carry a staff-based model. So no matter what, we carry people from project to project. We’ve been weathering the very slim margins of the VFX industry for quite some time so ultimately it doesn’t change our position in that we’re still executing as efficiently as we possibly can. Rebates are added bonuses, but losing those don’t put us in jeopardy.”

Felix Crawshaw, the executive producer of long form at Cutting Edge, says that Australia’s reputation in the US is strong for reasons beyond the rebate, and this fact should be acknowledged. He says: “However Australian VFX companies can’t be complacent.” Crawshaw is more positive about the future than he has been for the past five years. “With our dollar slowly moving south, Australia is becoming more financially attractive,” he says.

Rising Sun’s Clark says: “Australia has made a good name for itself as a producer of quality work for very effective prices.”

“And it’s not just the subsidies that do that. We’ve got a group of artists in Australia who are of a very high quality who are doing very good work in an environment where we have an exchange rate that’s in our advantage. And we’ve got a lot of talent and relationships that have been built up over the years. We’re very well considered globally.”

Clark also points out that most work required for US productions used to be performed in California so that studios could look over the shoulders of artists. But with so much VFX work needed today, it wouldn’t be possible to monitor it all even if it was based purely in California making Australia an even more viable option.

Local VFX houses remain upbeat about the situation.

Deluxe’s Rosenthal says: “What happens with rebates and incentives is, for all intents and purposes, beyond our control. It’s a question of continuing to prove your worth. And that’s at a financial level, a creative level, a communicative level and a collaborative level. If you do that then you really should be able to succeed independent of whatever happens over the next two or three years. It’s a tough business, and a highly competitive business. You’ve got to carve a niche for yourself in the market and play to your strengths. And therein lies the challenge of the business.”

Encore Issue 30This first appeared in the weekly edition of Encore available for iPad and Android tablets. Visit encore.com.au for a preview of the app or click below to download.


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