Legalwise – 2 September 2015
Producer Offset: Key Issues in Administration
• So, the offset’s been operating now for 8 years.
• Given this time, I thought it pertinent to update you al on where we are
with key issues facing the Offset.
• Before I do, I want you to keep in mind some key questions that wil
contextualise what I’m going to say this morning.
• Answer them to yourself, and it’ll help with what fol ows:
o [SLIDE] What is the Offset for? What is its policy intent? What is it
meant to achieve?
o [SLIDE] Who takes the risk on the Offset? Who does industry
thinks takes the risk? Who – contractual y or legislatively –
actual y takes the risk?
o [SLIDE] What does the Government expect out of the Offset?
What does it expect to get back for providing al that money?
What is its ROI?
o [SLIDE] How broad are SA’s responsibilities? Where do they start
and do they end? To whom do we act?
o [SLIDE] What is the role of the Provisional Certificate? What does
it mean – legal y ? How much can you rely on it?
• First some stats, because I love stats [SLIDE]: to 30 June 2015, we’ve
issued:
o 899 final certificates, covering $3.751 mil ion of QAPE and wel
over $1 bil ion of Offset.
o This sounds like a lot, but it’s leveraged the best part of
$4.5 bil ion of production budgets.
o Docos are the lion’s share – 464 certificates, with 240 to TV/other,
and 195 to features.
o Features, unsurprisingly, are most of the spend and offset.
• We’ve also done
o 464 provisionals for docs, 395 for features and 255 to TV and
other (total of 1114).
o The discrepancy tel s us that features are – again, unsurprisingly –
more speculative and go into production relatively less frequently.
1 – Distribution
• This is despite the fact that features attract a 40% Offset, compared to
the 20% for other formats.
• The reasons for this are wel known, and I’m not going into it now, but it
leads me to our first issue: Distribution
• This is a bit of a misnomer, because the decision we actual y have to
make – the decision that defines whether a film receives a 40% Offset is
a two-fold question for us:
o [SLIDE] Is it a feature film or not? (s.376-60)
o [SLIDE] Is it made for release to the public in cinemas (s.376-
65(2)(b)(i)) or something else?
• Now, leaving aside the question of whether this is the most appropriate
way for the legislation to be phrased, and clearly in the current
environment there is an argument that it is not, it is what we have.
• At the point at which an application for a
final certificate comes in, the
decision is probably fairly easy
• Our issue is that we are tasked with making that decision in the context
of a
provisional certificate – a speculative project with minimal
attachments and an (at best) loose finance plan.
• Obviously, this decision is important to al ow financing, but the funny
thing is that we actual y legal y
can’t do what the industry thinks we do –
bind ourselves.
• We must make a ‘final certificate’ decision on the basis of the
information in front of us.
• The only mention of provisional certificates in the Act are in the
provision al owing us to the make the Rules.
• So, technical y at least, al bets are off. In reality, it’s only in the most
egregious of cases that we’d make a different decision, but industry
doesn’t seem to realise that we
can – in fact that we
should.
• So, how do we make decisions:
o We look at everything from the finance plan to the budget, the
attachments to the contracting, the deliverables to the marketing
plan. We’ll also take into account whether the distributor is at
arm’s length to the producer.
o But, the identity and the track record of the distributor is always
going to be vital, and whether there is any financial commitment
made by a third party on the basis of the film being a feature film
is also very important.
o Effectively what we’re looking at is whether there is a genuine
pathway to the cinema audience: Can the distributor get in on
screens? Can it get people to the film once it’s there?
o And this is ALWAYS done on a case-by-case basis. There is no ‘list’
of distributors, if only because the decision is broader than the
identity of the distributor
• I hear a lot of people say ‘oh, but this distributor says they’re OK with
you’. They aren’t – I can’t make this point clearly enough: we make our
decision on the basis of the application and the film in front of us. No
distributor is ‘OK’ because we must, inherently, be looking at the film
and the application on a case-by-case basis.
• And while we’re on the matter, we have no requirement for a
distribution agreement to specify a 6 screen, 3 capital city release. This
was an example, and an example only. Because everything is case by
case, there is no point putting such a provision in a distribution
agreement: it’s not proof of anything. It’s just folklore.
• Sometimes at provisional, we do say ‘no, we aren’t satisfied that the film
is a feature film and made for distribution to the public in cinemas’.
Sometimes we have doubt. Sometimes we’ve said yes despite that
doubt and history ultimately shown us that we were right to have doubt
and we should have said ‘no’. But it doesn’t mean that the film isn’t a
feature film. It means that at that point in time, we couldn’t be satisfied.
• I suppose what I’m saying is that producers – and distributors –
shouldn’t take it as a personal slight if we aren’t satisfied.
• Obviously we know it makes it hard to cashflow, but I’l leave this issue
with a question for you to ponder:
• If no one in the industry, financiers or the lenders are wil ing to take any
risk on the project being a feature film, why should the taxpayer – and
the taxpayer is who my team represents?
2 – Incurred expenditure
• It’s useful to point out how legislatively something becomes QAPE,
because people tend not to think about it this way:
o 1 – It must be INCURRED
o 2 – in the MAKING OF THE FILM , and not an exclusion
o 3 – Goods or services PROVIDED IN AUSTRALIA
o 4 - Or an INCLUSION (e.g. Gal ipoli Clause)
• I always like to bring things back to first principles: In this case, it has to
be QAPE, but to do that, it has to be [SLIDE] Q (not excluded), [SLIDE] A
(in Australia or an inclusion), [SLIDE] P (Making of the film) and [SLIDE] E
(incurred by the company). It’s not a word, it’s an acronym, and a certain
line-item has to meet each word in the acronym
• To put it another way, they are a series of nested tests:
o 1 – it must be
Expenditure o 2 – it must be
Production expenditure
o 3 – it must be
Australian production expenditure
o 4 – it must be
Qualifying Australian production expenditure.
• In any event, I’m going to talk about the ‘E’.
• Subsection 376-125(1) [SLIDE]: “A company’s production expenditure on
a film is expenditure that the company incurs”
• So what does that mean?
• That, as I’ve discovered over the last 8 years is an extremely complex
question with a number of High Court decisions.
• Basical y, the money doesn’t actual y have to have been paid out, but it
must be a debt – a liability – which is not contingent.
• To be a bit of a bush lawyer, I’d say you’d have to be able to sue for it.
• This question comes up al the time:
o ABC ‘in-kind’ services and facilities.
o Producers re-investing their fees into the finance plan
o ‘sweat equity’
o Debts not paid because of cash-flow issues
o Debts to be paid out of the Offset.
• The common factor with al of these is that the payee is almost always
an interested party – either because they’re taking a slice of equity in
lieu of a cash payment, or they are the producer or someone else in a
position of control over the project.
• This raises a number of questions for us, which take up so much of our
time as to make them the dominant part of administering the Offset:
o Is it actual y incurred?
o Is it contingent on something?
o How do we make that decision?
o Is the arrangement at arm’s length?
o Is it a deferment?
o Is it al made up?
o Is it time to open a bottle of wine?
• We can’t ignore these questions, because we operate under tax law, so
have a responsibility to Government and to the taxpayer, but applicants
seem to think that we’re coming after them in some unfair way.
• Let’s use an example, and this is real (it’s happened twice under the ‘old’
QAPE rules)
o A project is conceived as a lower-budget project, with a budget
under $1m.
o At some point, the producers realise that if the spend is over
$1 mil ion, they can qualify for a 40% Offset
o Suddenly the budget goes up and the people ‘paid’ extra money
are al key creatives or companies associated with the production
itself.
o No extra money changes hand, just more equity is shared.
o However, the key creatives and key companies already own al the
equity, so that makes no real difference to anything.
o Or, it’s just carried as a debt by the SPV, with no realistic method
of payment – it could be sued over, but they’re al principals of the
SPV, so that won’t happen.
o The increased rates aren’t an issue because the rates in the
original budget were very low.
• In both cases, our decision was that the ‘increased’ payments weren’t at
arm’s length because an arm’s length producer would not have agreed
to pay the additional fees because they didn’t have to.
• When we’re making a decision like this, we look – again at everything:
o The original contractual arrangements
o Any variations to contract
o Invoices
o GLs
o How the payments are treated by both sides (exp and income)
o GST treatment – BASs
o Our own knowledge
• And we’l come to a decision.
• Now, this is al working on the assumption that we have that information
to work with. Often we don’t, and it’s the decision is always more
difficult when that happens
o So, you, as lawyers, please – get to your clients early and make
sure the project is set up properly. One of the biggest reasons for
a slow assessment is because things aren’t documented properly
and often, that’s a reinvestment structure
• A couple of pointers to remember
o If a payment is contingent on receipt of the Offset, it is not
incurred until the Offset is definitely going to be received.
That is the point at which Graeme signs the final certificate,
so it cannot be QAPE as it’s not incurred until that.
This means you can’t ‘cashflow your own offset’ unless it’s
set up as a proper loan
o As soon as any question like this arises, it WILL slow down the
assessment. It isn’t worth the bother
o In lower-budget projects, SA no longer has a PIA. PLEASE make
sure that there is a principal financing agreement that captures
the investment structure of the film, and everyone who needs to
is a party to that.
3 – Footage
• Next hot-button issue is exploitation of pre-existing footage.
• This one is relatively new and it involves larger factual production
companies licensing ‘stock’ footage from interested parties for use in an
Offset project. The licence price is QAPE
• [SLIDE] This is under item 2 in the table in s.376-150(1).
• In theory, this should be straightforward, but recently, what we’re
seeing is the purchase of pre-existing footage that was shot for projects
which have already accessed the Offset.
o In some cases, this is genuine ‘stock’ footage which is being recut
together to access the Offset again
o In other cases, it’s footage being utilised in a subsequent season
of a series or a spin-off: a ‘flashback’, if you like.
• This is not QAPE.
• It’s a principal of the Offset that you only get one offset once for one
film: this is why the 3 Offsets are mutual y exclusive under the legislation
[SLIDE].
• On this basis, Screen Australia wil deduct from QAPE any expenditure
on footage acquired from a related company the shooting of which
already attracted the Offset.
• In short, you can’t double-dip.
• I suppose the take-away from this is that the Offset isn’t there to enable
a company to exploit its library; it’s there to encourage new production.
• So, the Offset won’t reward you for simply reusing something again.
• Arguably, this is an arm’s length issue, too. If, for example, a production
company is to use footage previously shot as a flash-back or similar, an
arm’s length producer wouldn’t charge for that licence. It makes no
sense. The arm’s length producer would gift the licence because the two
entities are effectively the same.
5 – Arm’s length issues: Arrangement
• And that brings me to arm’s length.
• Those of you who are paying attention would have noticed that both the
incurred expenditure question and the stock footage issue are intimately
associated with the arm’s length test.
• If you haven’t checked the legislation recently, and I can’t imagine why
you wouldn’t have, this is what it says [SLIDE]
• We hear from applicants al the time that they expect the arm’s length
test is focussed just on the rate charged – i.e. if the rate charged is to
market, then it’s fine.
• That’s not what the test says.
• The crucial word is ‘Arrangement’. [SLIDE] We aren’t solely testing
whether the
rate is at arm’s length, we’re testing whether the
arrangement is – now that includes the rate, but it’s much broader than
that.
• We also have to test any transaction which is directly or indirectly
connected with the expenditure.
• So, basical y, the thing to keep in mind is that we expect the parties to
deal with each other at arm’s length, and if they don’t, we MUST
determine the QAPE attributable to that arrangement to be the amount
that would have been incurred if the parties
had been dealing at arm’s
length.
• Again, since I like to go back to first principals, keep in mind what the
point of the arm’s length principal is: You can’t inflate QAPE.
• Quite simple, real y.
• My take away here is that the smell test is very important. If something
smells wrong to us, we’re going to dig into it, and if there’s anything
that’s not above board, we have a responsibility to the taxpayer to make
sure that the Government isn’t being ripped off.
• So, if you’re thinking about setting up some complex corporate structure
– and obviously none of you would – just to amp up the QAPE a bit, we
wil utilise the arm’s length principal and deduct whatever is outside of
the norm from your QAPE claim – and that takes time.
o [Egs – unfunded overages, Bradley locations, donated services,
mark-ups]
• The other thing to note here is that we can’t look at this at Provisional,
firstly because as I’ve pointed out earlier, al bets are off at final,
o But also because there isn’t enough detail at that stage – al we
have is a number on a page.
• So whenever we put a QAPE number on the schedule to the provisional
certificate, it comes with the proviso that arm’s length hasn’t been
looked at.
4 – ‘Marketing’ expenditure
• Just before I finish, I have one more thing: we often hear people talking
about marketing spend that is QAPE [SLIDE].
o Marketing spend isn’t QAPE: it’s not ‘production expenditure’
• What can be QAPE is this [slide]. It’s very limited, and it’s just the
creation of materials.
o It’s aimed at trailer, poster, EPK, stil s etc. It wasn’t designed for
additional shortform content to ‘expand the world’ of the film.
o It wasn’t designed to al ow ‘multiplatform content’ to qualify for
the Offset.
• Keep in mind that there is always a point at which marketing materials
stop being that, and start being their own content. We’re seeing this sort
of stuff creep up and we are starting to non-QAPE a lot of associated
online video content.
• To be QAPE it must be for publicising or otherwise promoting
the film,
not something else, and it can’t amount to a piece of content in and of
itself.
4 – Wrap up
• So, wrapping up, I think there are a few threads here:
• [SLIDE] Everything is done on a case-by-case basis, that’s how the
legislation works
• [SLIDE] Final assessments are their own beast. We aren’t bound by what
happened at provisional – we can’t be.
• [SLIDE] The offset isn’t the producer’s money, it’s the taxpayers, and we
are protecting them.
o The offset isn’t there to pay producers’ overheads, al ow them to
exploit their libraries or increase their fees
o It’s there to stimulate production.
• [SLIDE] The Government expects a return on its investment of the offset
and it doesn’t expect people to pul the piss. We’ve been there before,
and 10BA was taken away.
o So, expenditure has to be real. The offset doesn’t just accrue
because a producer wants it to, the Government kicks in 20% or
40% of every dol ar which is spent. If money isn’t spent, the
Government doesn’t get its return, so that’s not right
• You guys, as the legal advisors are crucial to maintaining the Offset’s
integrity, and [SLIDE] the industry has to police itself.
o Keep in mind that everything out of the ordinary slows down an
assessment and that means loans wil be out for longer.
o Make sure your clients know that. Trying something on because it
seems like a good way of ‘maximising’ the Offset wil probably
backfire.
• Oh, and we’re finalising a page 1 rewrite of the Offset Guidelines which
we hope to get out shortly, so keep an eye out.
