Australia: When does a company INCUR expenditure for the purposes of the producer offset?

The Administrative Appeals Tribunal (Tribunal) recently handed down its decision in Creation Ministries International Ltd v Screen Australia [2015] AATA 250.

The case provides a reminder of the importance of carefully structuring the relationships and contracts between companies in respect of a project accessing, and seeking to maximise the "qualifying Australia production expenditure" for, the producer offset. The case also provides guidance to producers on the way that certain corporate, financial and contracting structures are likely to be interpreted by both Screen Australia and the Tribunal for producer offset applications.

The case is also relevant for applications to the Ministry for the Arts for the location offset or the PDV offset.

Background

The applicant, Creation Ministries International Ltd (Creation Ministries), is a not-for-profit corporation which promotes the truth and authority of the Bible. In 2009 Creation Ministries released a film about the impact of the life and work of Charles Darwin entitled "The Voyage that Shook the World" (Film). Due to concerns about the public perception of a religious entity producing a film about Charles Darwin, Creation Ministries set up a separate company, Fathom Media Pty Ltd (Fathom Media), to be the public face of the production of the Film.

In November 2010, Creation Ministries applied to the respondent, Screen Australia, for a final certificate for the producer offset. Creation Ministries claimed to have incurred "qualifying Australian production expenditure" (QAPE) totalling $780,069. In May 2014, Screen Australia determined the QAPE to be $452,518. Of the balance, $47,463 was held not to be QAPE for reasons not in issue in these proceedings and $288,008 was held not to be QAPE as, according to Screen Australia, it was not incurred by Creation Ministries but by Fathom Media.

The issue in these proceedings was whether Creation Ministries "incurred" (as that term is used in section 376-125 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)) expenditure of $288,008.

Did Creation Ministries or Fathom Media incur the production expenditure?

In 2008, Creation Ministries and Fathom Media entered into an agreement concerning the financing and production of the Film (2008 Agreement). Creation Ministries relied on this agreement to argue to the Tribunal that it incurred the production expenditure. Some of the relevant provisions of the 2008 Agreement which were relied on by Creation Ministries were:

• Creation Ministries "is to be solely responsible for any and all costs and outgoings associated with the Film and the Project, as well as all costs of operating and maintaining FM for this purpose."
• Creation Ministries indemnifies Fathom Media "from any and all expenses and liabilities incurred as a result of their involvement in the Film or the Project."
• Fathom Media grants Creation Ministries "the right to control and access FM's accounts and determine the transfer of monies in and out of those accounts."
• All decisions concerning the Film "whether production, marketing, promotion, accounting, or any other area shall be at the behest and discretion of CMI."

Creation Ministries argued that although the expenditure in question was ostensibly incurred by Fathom Media, in reality it was incurred by Creation Ministries. Creation Ministries pointed to section 376-65 of the ITAA 1997, which provides that Screen Australia is required to issue a certificate to a company in relation to the producer offset if it is satisfied that the company "either carried out, or made the arrangements for the carrying out of, all the activities that were necessary for the making of the film." Creation Ministries also pointed to section 376-125 of the ITAA 1997 (Cth), which defines production expenditure as expenditure that the company incurs "to the extent to which it is incurred in, or in relation to, the making of the film." Creation Ministries argued that the wording of these sections allows a broad interpretation, meaning that expenditure could be incurred directly or indirectly.

The Tribunal disagreed and held that Creation Ministries' argument failed on the facts. The Tribunal held that Creation Ministries and Fathom Media did not act in accordance with the terms of the 2008 Agreement and that the relationship was really that of lender and borrower. The payments made by Creation Ministries to Fathom Media were treated as loans in the accounts and the company minutes of Fathom Media.

In addition, the Tribunal was not persuaded by Creation Ministries' analysis of sections 376-125 and 376-65 of the ITAA 1997. According to the Tribunal, the critical element of the statutory scheme is the definition of "production expenditure" as expenditure which "'the company incurs' [emphasis added]". The Tribunal held that the legislation applies to the company which actually incurs the expenditure, and as Fathom Media was the company which was contracting with suppliers and other third parties, it was incurring the expenditure.

Creation Ministries did not incur the expenditure merely by lending Fathom Media sufficient funds to discharge the contractual debts that Fathom Media incurred.

Accordingly, the decision of Screen Australia was held to have been correct and was affirmed by the Tribunal.

Holding Redlich advises producers and financiers on the eligibility of projects for the producer offset, the location offset and the PDV offset. We also advise on all other aspects of production and finance. Please contact us if you have any questions about this case or if we can assist you with your current project.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.