By: Mathew Alderson
During the Beijing International Film Festival last month, several Hollywood executives and film producers expressed interest in the Australian producer offset and asked me whether their films might qualify for it. Though these sorts of inquiries tend to arise in connection with official Chinese co-productions, they also come up in connection with Hollywood projects with no immediate China connection.
In this post I will look at the Australian producer offset generally. There are significant exceptions to the rules in the case of an official Chinese co-production so I will look at the producer offset from the standpoint of an official Chinese co-production in a subsequent post.
Under the Australian producer offset, 40% of the production costs of certain feature films can be recovered by the producer, in cash, from the Australian Taxation Office. The producer offset is claimed in the production company’s annual tax return filed in Australia for the year in which the film was completed.
There are two major criteria for the producer offset: the film must have “significant Australian content” and the production costs must be a “qualifying Australian production expenditure” (QAPE). As we are about to see, it is possible for a film with substantial Hollywood involvement to satisfy the producer offset criteria, but there are a lot of moving parts.
Significant Australian Content
To qualify, the film must have “significant Australian content.” This usually requires substantial Australian involvement in development and a substantial Australian creative contribution during production.
Screen Australia decides whether a film has significant Australian content by applying a points test. Screen Australia considers “significant” to mean “important,” “notable,” or “of consequence.” Factors to be taken into account include:
- the subject matter of the film
- where the film is made
- the nationalities and places of residence of the people involved in production
- the details of the production expenditure.
No single factor is determinative.
Residency of cast and crew is considered using Australian tax law principles. A person generally qualifies as an Australian resident if they have been in Australia continuously or intermittently for more than one half of the tax year. In considering nationalities and places of residence, particular attention is paid to the producer, writer, director, key cast and department heads.
Screen Australia may also consider factors like the following:
- the extent to which the film originated in Australia
- the extent of Australian creative control
- the extent of Australian copyright ownership
- the “length of association with Australia,” which is the extent to which an Australian producer, writer or director has been involved.
Qualifying Australian Production Expenditure
QAPE is also required to qualify for the producer offset. QAPE is expenditure on goods or services provided in Australia, expenditure for the use of land located in Australia, or expenditure on goods located in Australia at the time they are used. QAPE does not generally include development costs, distribution and promotion costs, or residuals and advances, but it can include the costs of an Australian lawyer on the film.
The QAPE must meet a certain monetary threshold, which is currently AUD 500,000 (about USD$500,000). In other words, you must spend at least this much on QAPE. QAPE can usually only be claimed for filming expenses not incurred in Australia when the subject matter of the film reasonably requires the film to be shot outside of Australia.
Who Can Apply for the Australian Producer Offset?
Only a company can apply for the producer offset and that company must have “carried out or made the arrangements necessary” for the production of the film. In other words, it must be the production company.
International co-productions or joint ventures can qualify even if they are not official co-productions and even if they do not have significant Australian content. A recent example is Happy Feet Two, a Warner Brothers, Village Roadshow, Kennedy Miller Mitchell production filmed in Australia.
The company must be an Australian resident or a foreign resident with a permanent establishment in Australia and an Australian Business Number or “ABN.” A permanent establishment is basically just a place, such as an office, through which business is conducted. Note that Australian companies are quick and easy to set up and they require only one Australian-resident director. A Special Purpose Vehicle or “SPV” — such as a company set up by the producers for producing the film — can qualify as the company that incurs QAPE.
Though the producer offset is often regarded simply as a means for funding one particular film, some producers see it as having potential to attract investment in the production company and its slate of projects. Mario Andreacchio, who produced and directed The Dragon Pearl, the first official Sino-Australian co-production, has substantial experience working with the producer offset. For Andreacchio, the important issue is what to do with the offset. According to Andreacchio, “sure, you can cash-flow it and put it in as part of the production company’s equity investment or you can even use it for publicity and advertising or sales costs, but the thing is that you are not necessarily investing in one film – you are investing in the production company and, potentially, all of its projects.” Andreacchio, who is now working on a slate of Sino-foreign co-productions, says that this latter point is often missed by producers and investors alike. “The producer offset does not necessarily need to be only used as an alternative stream of financing for individual projects; it can also be used as a way to build up a production company. When you start working with a slate of projects, the offset opens up more opportunities for your investors because they can get a spread over a number of your projects.”
In my next post, I will discuss how to get the Australian producer offset in the context of a China co-production.
